Business expenses explained for the self employed

Here’s the thing. There is something almost comical about the complexities and nuances of the world of business expenses. Even the most seasoned sole traders will find themselves shaking their heads in bemusement from time to time when it comes to fully understanding what they can claim, and what HMRC will slap a big fat “NO” on.

At Finmo, we tend to go by the philosophy that it’s not as much about memorising an extensive list of the things you can and can’t claim. Rather, it’s about getting into the mindset of the people who make the rules. 

In this article, we hope to help you get a little more familiar with HMRC’s way of thinking, so that when it comes to understanding what you can write off, you’ve got a better idea of the logic behind the rules (and a better chance of getting things right). Here’s what we’ll cover:

What can you claim as a business expense?

Here’s what HMRC says on the matter of what you can claim as a business expense:

You can claim something as a business expense if that thing is used wholly and exclusively for your trade (your business). 

In simpler speak: if an expense also benefits you personally, you can’t claim it. Or at least not all of it, but we’ll get to that in a minute.

Example of a “wholly and exclusive” expense

A good example of an expense that is wholly and exclusively used for business purposes is rented office space. Say, for example, you rent an office in the city as a freelancer because you don’t like working from home, or you need a professional front to your business. There’s very little chance you’ll use this space for personal purposes, so it’s pretty clear-cut that this is a business expense without any grey area. 

Example of an expense that’s not quite “wholly and exclusive”

On the other hand, if you work in the entertainment industry and need to hit the gym to keep in good shape as part of your job, you wouldn’t be able to claim your gym membership as a business expense. This is because you technically get plenty of personal benefits from staying in shape too. Essentially, a gym membership is too much of a grey area for HMRC to class as a legitimate business expense.

Expense Can I claim it?
Office rent Yes
Co-working space Yes
Laptop for work Yes
Phone for work Yes
Antivirus, office software Yes
Paper & pens for work Yes
Printing Yes
PPE for construction work If your contractor isn’t providing you with it, then yes
Special Uniforms If your contractor isn’t providing you with it, then yes
Business Suit No

When you accidentally benefit from a business expense

Not all business expenses are boring, right? Say for example you have to fly off to the Caribbean for a work trip. There’s bound to be a teensy tiny chance that you end up enjoying this business trip, or at least a decent chunk of it.

This is where another of HMRC’s notoriously glamorous terms comes into play. An “Incidental Benefit” describes a scenario where a business expense naturally incurs some sort of personal benefit (basically by accident), but where the expense was technically solely for business purposes and so can be claimed. The difference between this and the gym membership is that you can prove that the trip was solely for business purposes, whereas it’s basically impossible to prove that you wouldn’t go to the gym anyway even if you didn’t need to for work.

Dividing costs: things that are for personal and business use

As a sole trader, you may spend money on things that you use in both a business and professional capacity. For example, if you work out of a home office, it’s fair to say that some of your rent is technically a business expense. But as your rent is not wholly and exclusively for business, you’ll need to divide this up proportionately. 

Which brings us onto…

Working from home – what can you claim?

If you work from home in any capacity, you can claim a range of business expenses in relation to this. These include percentages of your:

  • Heating bill
  • Electricity bill
  • Council Tax
  • Mortgage interest or rent (you can’t claim your full mortgage repayments)
  • Internet and phone bills

When trying to understand this, it’s useful to look at another term that HMRC uses a lot when it comes to business expenses, which is: ‘reasonable’. For example, when writing off part of your home expenses because you work from home, it says: 

You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.”

How to calculate the home expenses you can write off

As HMRC suggests, there are certain formulas you can use to ‘reasonably’ calculate the percentage of your home expenses that you can write off.

One common way of doing this is to take the total sum of your household expenses, and multiply it by the dedicated space in your home used for work, multiplied by the percentage of time that space is used for work. Starting to feel a bit like you’re back in an algebra class? Don’t panic – here’s how it works in real terms:

Example of home expense v business expense calculation 

Joan has an extra room she uses for an office. 90% of the time, that extra room is used as an office for her self employed job, while 10% of the time it’s used when guests come over. The extra bedroom is one of five rooms (20% of the house) so Joan multiplies her monthly household expenses x 90% x 20%.

How to calculate what percentage of your phone bill you can claim

Calculating how much of your phone bill you can write off as a business expense is a little simpler than your home expenses. All you need to do is work out what percentage of the time you use your phone for work vs for personal use, and use this to calculate how much of your bill you can write off.

Tip:

A lot of smartphones these days calculate your ‘screen time’ for you which can help you see how much time you spend on each activity on your phone. For example, you may see that 30% of the time you spend on your phone is spent on your work email app over the course of a week, which could help with your final calculations.

(You may, on the other hand, see that you’ve only spent 10% of your time on your work emails, and 50% procrastinating on Instagram and Facebook, which technically means you can’t write as much of your phone bill off. Now if that’s not a good reason to say off Social while you work, we don’t know what is.)

Remember – HMRC is all about making sure your expense claims are ‘reasonable’. So it’s a good idea to put some time into assessing how much of your rent or phone bill realistically goes towards business activities.

When you file your taxes through Finmo, we’ll be there every step of the way to help you with these calculations, advising you on the best possible formula for your personal circumstances. 

Expense Can I claim it?
Home rent Yes, based on the percentage of how much of your home you use for work and for how long.
Home insurance Yes, based on the percentage of how much of your home you use for work and for how long.
Home utilities (electric bill, phone bill, etc.) Yes, based on the percentage of how much of your home you use for work and for how long.
Home repairs Yes, if they apply to the area of your home you use for work.
Interest on home mortgage payments Yes, although it might be better to use the flat home office allowance in this case.

What classes as a travel expense?

When looking at travel expenses,  it’s a good idea to first look at HMRC’s definition of your place of work:

Place of work: The place at which an employee works is a permanent workplace if he or she attends it regularly for the performance of the duties of the employment.

Temporary workplace: A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose.

Within this definition, travel is when you work from someplace that is not your permanent workplace.

Do you work from home and sometimes go into an office? Or do you work from an office and sometimes work from home? There is a huge difference in those two seemingly similar statements. The first, you write off travel and subsistence to and from an office and the second, you don’t. In both cases, you can write off the cost of your home office.

Expense Can I claim it?
Car insurance Yes, based on the percentage you use it for work
Fuel Yes, based on the percentage you use it for work
Parking fees Yes
Taxi fares Yes, for work trips
Personal Travel No
Parking Fines No
Travel from home to regular workplace No

What expenses can you claim during business travel?

Any expenses that occur when you’re on a business trip are called subsistence expenses.  These tend to include things like the cost of the actual travel (train tickets, car fuel, flight tickets etc.). They also include things like hotel costs, meals and even laundry during longer business trips. Remember though, these only apply when you’re working away from your usual workplace –  so in a temporary workplace. For example, if you were working at a client’s office in another city for the day, or were away on a week-long business trip to a different country. 

Expense Can I claim it?
Hotels for business trips Yes
Flights, train fares, taxis and car costs for business trips Yes
Laundry during a business trip Yes
Meals during a business trip Yes
Parking fines during a business trip No

Writing off entertainment expenses

Claiming for things like client lunches seems like a no-brainer in the world of business expenses. But there are some caveats. For example, you can only technically claim for your own meal, not that of the client you may or may not be ‘schmoozing’. So next time you’re about to declare: “I’ll get this one, you get the next one”, it’s worth bearing in mind that it’ll be better for you if you split the bill (your client will no doubt be able to write their half off their tax bill too – win-win).

Tip: There are quite a lot of caveats when it comes to what you can and can’t claim entertainment-wise, so for this kind of expense it’s best to speak with your dedicated Finmo rep.

Expense Can I claim it?
Meals with clients or suppliers Yes, but only for your own meal – not theirs.
Drinks with clients or suppliers No

Writing off general business running costs

There are usually many costs associated with running a business, from marketing activity through to the raw goods that go into production, to accountancy fees (including your Finmo fee) and business credit card fees. When you file your taxes with Finmo, we’ll be on hand to help you understand the more complex side of business expenses, and to make sure you claim  accurately and in a way that will save you money.

Expense Can I claim it?
Goods bought for resale Yes
Raw goods for production Yes
Subcontracting other people Yes
Finmo fee Yes
Accountant fees Yes
Business bank, credit card fees and overdraft fees Yes, if they’re for work
Interest payments on loans Yes, if they’re for work
Leasing payments Yes, if they’re for work
Business insurance Yes
The cost of troublesome customers Yes, if you’re using traditional accounting
Advertising and digital marketing Yes
Costs associated with building and running your business website Yes

What are simplified expenses?

Simplified expenses do what they say on the tin – they massively simplify the business expense claiming process by providing flat rates for everything so you don’t have to do your own calculations. But what that means is that you’ll often end up paying a lot more tax than you need to. 

Typically when you use simplified expenses, this won’t net much of an impact on your overall tax bill. 

Say, for example, you use a room in your home for your work as a massage therapist. Using the government’s simplified expenses – so a flat rate of around £10 a month for working from home – isn’t going to accurately cover the cost of running that room as a business premise. Or, say you have a work car that has high repair costs. The flat rate for a business vehicle could fall short of what you actually spend on it.

At Finmo we almost always tend to recommend going down the calculation root and filing your own expenses, as there are lots of ways our accountants can help you optimise your taxes so never pay more than you need to.

What is the £1000 trading allowance?

If you spend less than £1,000 on trading expenses in a business year, you could use the government’s £1,000 trading allowance to simplify your tax return and pay less tax. For example if you only incurred £600 worth of expenses over the year, you would save more money on your tax bill by using the £1,000 trading allowance. It’s important to note that while this is a simpler way of doing your taxes, once you decide to go down this route for the year you won’t be able to claim anything else, and so may miss out on opportunities to save on your tax bill.

And don’t forget – if you earn less than £1,000 inside income or self-employed income a year, you don’t need to worry about filing a tax return.

Finmo is here to help

The world of business expenses can feel like a minefield, which is why we’ve made it our mission to help you navigate it. No matter how much research you do, there’s always a good chance one of our accountants could spot areas for you to save money that you just didn’t see, or scout a red flag that could have gotten you into a sticky spot with HMRC. 

Want to chat?

We know the word of tax and business expenses can feel overwhelming. That’s why we’re offering a free 15-minute phone consultation with one of our experts to those who feel they need to pick the brains of someone in-the-know. 

To book yours, email us at support@finmo.co.uk