Understanding the Basics of Business Expenses

13 April, 2023 · 5 min read

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Congratulations on setting up your business! Now you’re probably wondering how business expenses work. We’ll walk you through some of the typical business expenses you can claim to reduce the amount of tax you pay on your profits.

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What are business expenses?
What can I claim as a business expense?
What are some other expenses I can claim?
Are capital expenses tax deductible?
What expenses can I claim when working from home?
What if I use an item for both personal and business, like my mobile phone?
This is all really complicated! Is there a simpler way?

What are business expenses?

Business expenses allowable expenses that are essential to the business. They are business costs which are not part of the business taxable profits, and therefore you don’t pay tax on them. The general rule is that expenses are costs incurred to the business with the purpose of operating your business.

What can I claim as a business expense?

There are a range of things you can claim as business expenses. Some are industry specific, whereas others are general across most businesses. You can find a detailed list of allowable expenses on the gov.uk website.

Here are some of the most common allowable expenses that apply to the majority of businesses:

Office costs, for example stationery, phone bills, rent etc
Travel costs, for example fuel, parking, train or bus fares
Clothing expenses, for example uniforms
Staff costs, for example salaries or subcontractor costs
Things you buy to sell on, for example stock or raw materials
Financial costs, for example insurance or bank charges
Costs of your business premises, for example heating, lighting, business rates
Advertising or marketing, for example website costs
Training courses related to your business, for example refresher courses

What are some other expenses I can claim?

Some of the other expenses you can claim include capital allowances, working from home expenses and simplified expenses.

Are capital expenses tax deductible?

You can claim capital expenses if you are using traditional accounting (also known as accrual or invoice accounting). Capital expenses apply when you buy something to keep for use in your business such as:

Equipment
Machinery
Business vehicles, for example cars, vans, lorries

If you are using cash accounting for your business then you would claim these as allowable expenses.

What expenses can I claim when working from home?

You may be able to claim a proportion of the costs you have incurred while working from home such as:

Heating
Electricity
Council tax
Mortgage interest or rent
Internet and telephone use

However you need to use a reasonable method of dividing the costs between personal and business usage, i.e. the number of rooms in your home you use for the business or the amount of time you spend working from home.

What if I use an item for both personal and business, like my mobile phone?

Using something other than your home for dual purpose means you have to still proportion the cost between both. For example you’d need to break your mobile phone calls down between personal and business, and only claim for the business usage. For example if 40% were business calls out of a £100 mobile phone bill, £40 is your allowable expense.

This is all really complicated! Is there a simpler way?

Simplified expenses can be used by either sole traders or business partnerships that have no companies as partners.

The types of expenses are based on a flat rate for business costs for some vehicles, working from home and living in your business premises.

To use simplified expenses you need to keep records of your business expenditure as you work.

For example, the business miles you use on your personal car or how many hours you work from home. At the end of the year, you then use flat rates supplied by HMRC to calculate your expenses. You can view the current flat rates on gov.uk.