Allowable Expenses: What the Self-Employed Can Actually Claim

The test is "wholly and exclusively for the business" — but that phrase does more work than most people realise, and it is where the money is either found or lost.

Illustration of allowable business expenses for self-employed people

Every allowable expense reduces your taxable profit, so at the basic rate each £100 correctly claimed is roughly £26 you keep once Income Tax and Class 4 National Insurance are counted. The question is which £100 counts.

The test

A cost is allowable if it was incurred wholly and exclusively for the purposes of the trade. That phrase is doing a lot of work. It is not "related to", and it is not "helpful for". A cost that serves a private purpose as well as a business one fails the test outright — unless the business part can be separated out.

Mixed costs are apportioned, not banned

This is where most claims are won or lost. A phone used for both purposes is not disallowed; the business share is allowable. The same goes for a car, a room at home, or broadband.

What HMRC expects is a reasonable basis you can explain: hours, mileage, floor area, or a usage sample. Any defensible method beats a round number chosen because it looked about right.

What is usually allowable

Stock, materials and direct costs of what you sell
Tools, equipment and software used in the trade
Business insurance, professional fees and subscriptions to relevant bodies
Accountancy and bookkeeping fees
Business travel and, with care, the running costs of a vehicle
Advertising, a website and the cost of finding customers
Bank charges and interest on genuine business borrowing

What is not

Client entertaining — specifically disallowed, however commercial the reason
Ordinary clothing — unless protective or a genuine uniform
Your own wages — a sole trader's drawings are not an expense
Fines — parking and speeding penalties are never allowable
The private share of anything mixed

The simplified route

For two common costs HMRC offers flat rates instead of working out the real figure. Vehicles can be claimed at 55p per business mile for the first 10,000 miles in the tax year and 25p a mile after that, for cars and goods vehicles. Working from home can be claimed monthly by hours: £10 for 25 to 50 hours, £18 for 51 to 100, and £26 for 101 or more.

Flat rates are simpler, not automatically better. They are worth comparing against the real figures once, properly, and then sticking with whichever wins for your circumstances.

Keep the evidence

Records must be kept for five years after the 31 January filing deadline for the year in question. The practical version of that rule is to capture each receipt when it happens rather than hunting for it two years later — an expense you cannot evidence is one you cannot safely claim.

Getting help with this

AJH Accountants handles self assessment for clients across the UK. We deal with HMRC, tell you what you can claim, and file on time, so nothing rests on you remembering a deadline. See how the service works, ask for a fixed-fee quote, or call the office on 01204 840303.

Originally published at ajhaccountant.co.uk/blog/allowable-expenses-self-employed-what-you-can-claim.