A business of any kind can claim the costs that it incurs to generate its income. However, and contrary to popular opinion, it is not a free for all when it comes to claiming costs. Rules must be followed with the first one being very obvious.
Costs Rule One
The first, and main, rule on costs, and a question that should become second nature to you, is:
“Was the cost incurred wholly and exclusively for business purposes?”
In strict terms this means that the sole purpose for incurring the cost was for the business only. Hence there is no checklist of costs for you to trawl through to make sure that you are claiming for everything that you can in the accounts. You have to look at the actual outlays made – what did you really spend? In fact the very question of “what costs can I claim?” should be avoided. Generally, costs incurred are specific to your business and it will be obvious which ones can and should be recorded in the accounts. Be reasonable when it comes to business costs and don’t try to kid yourself that personal costs are really for business. That would only invite trouble from HMRC and it would be foolhardy to get on the wrong side of them.
Not to be used as a cost checklist, the following lists out the types of costs that a business may incur.
Cost of Sales
Cost of sales means the cost of the goods that you have acquired to make your sales. In a service business there may not be any cost of sales.
General examples of the type of costs of sales are:
- Trades and subcontractors would record the cost of any materials purchased
- Hairdressers would include shampoo and hair product costs here
- Retailers and ecommerce sites would include products bought to sell on
If you buy items to resale without being allocated to a specific customer order then these would generally be assigned as stock. Stock is not a cost in the accounts until the item is sold or unless it reduces in value or becomes worthless. So if you have stock left at the end of the year you will need to make an adjustment for these items to arrive at the “cost of goods sold” in the year being the amount of goods that you have purchased and sold onto customers. Stock left at the year end is carried forward to future years and matched against revenue when the items are sold (accountants call this the “matching concept”).
The Cost of Goods sold in your accounting year is calculated as:
- Value of opening stock brought forward from last year
- Plus
- Purchases made during the year
- Less
- Value of closing stock at the end of the year
- Equals
- The Cost of Goods Sold in the year
Travel and Motor
You should record any travel costs incurred for business trips such as train fares, parking or hotel costs. If you make business trips using your car, van or other vehiclethen by far the simplest thing to do for business journeys is to claim a mileage allowance especially if you are operating your business as a Limited Company. A sole trader can elect to use mileage rates under the simplified expenses rules.
Mileage
The mileage rate is a defined amount set by HMRC as 45p per mile for the first 10,000 miles in a tax year and 25p per mile for every mile over the 10,000. These rates have not changed for many years despite increases in fuel costs. Remember that a tax year runs from 6th April to 5th April each year which may be different to the accounting year for your company.
You need to keep a mileage log by tax year.
The mileage rate covers all running costs of the car. So you would not claim for any other associated car costs but you can claim for parking.
Avoid Company Cars
Unless you are thinking of purchasing a fully electric car then generally it is not advisable to buy a car in the name of the company. The reason for this is that you would be subject to a personal tax benefit in kind charge (i.e. you will pay income tax on the car) which is based on the carbon dioxide emissions and the list price of the car often meaning it is a significant amount. As well as this there is also likely to be an Employers National Insurance charge for the company to pay on the benefit in kind and certainly a company car means extra paperwork and administration.
Sole Trader Own Vehicle
If you are a sole trader and the vehicle is an integral part of your business e.g. if you are a courier or taxi driver it may be better to claim for the total cost of that vehicle making a deduction for private usage.
If you do not opt to claim mileage for your business trips then you can claim for things like car insurance, servicing, repairs, road tax and fuel.
But note – you claim mileage OR you claim the running costs less an allowance for personal use. It’s one or the other not both!
In addition you may be able to claim for the capital cost of the vehicle under the Capital Allowance rules although if you are thinking of doing this it is an area best left to an accountant to sort out.
Meals
The rules for claiming meals are slightly different for sole traders and Limited Companies.
Sole Trader
Generally for sole traders you cannot claim for meals including a lunch on the go as you would need to eat anyway regardless of if you are on business. However if you are staying away from home then you can claim for meals. If your business is what HMRC refer to as “itinerant” then you can claim for a “reasonable” cost of food and drink. Take itinerant to mean that you generally travel around going from one place to another not spending much time at any one place.
Limited Company
If you have to travel on business, you can also claim subsistence e.g. lunch or an evening meal incurred during the trip. These claims must be supported by a receipt (i.e. you must have actually incurred the cost) which shouldn’t be a problem if you are using a banking app – just take a photo of the receipt at the time and attach it in the app to the transaction.
If you are an employee of your own limited company then you can use the HMRC fixed subsistence rates, following the strict conditions set out. However do bear in mind that the cost of the meal (food and drink) should have been incurred after starting any journey and the flat rates cannot just be claimed without there being some outlay on a meal. HMRC could ask you for evidence to show that the conditions were met. Therefore, whilst subsistence rates are available it is generally best practice for a one person business to stick to the amounts actually incurred.
If you do stay away from home you can claim £5 per night without receipts for incidentals (£10 for a night abroad).
Overseas trips
If your business takes you abroad, you can claim all the costs of flights, hotels, food etc. The costs that you can claim are not affected if you spend a small or incidental amount of time doing some sightseeingat the end of a trip. So, you can claim all the costs for a 4 day visit to a trade show in Las Vegas even if you have a morning trip to the Grand Canyon during your stay (but not the cost to go to the Grand Canyon) because the main purpose of the trip is business. However you cannot claim the cost of a two week holiday, just because you spent a morning in a meeting while there. You can only claim the direct costs of that meeting e.g. a taxi to get you there. In this case the main purpose of the visit was a holiday and not business.
HMRC will expect to see evidence of any meetings and business activities (such as email messages) to support your business trips. They are likely to be very cynical about overseas trips where no sales income resulted from your “meetings”.
Renting a property instead of staying in a hotel
If it is more cost effective and efficient to rent a property instead of staying in hotels for longer contracts, this will usually be allowable although it is best not to have any personal use of the rental property or spare rooms for friends or relations as this would mean it wasn’t wholly for business and HMRC could disallow this such as in the famous case of the actor Tim Healy where his accommodation costs were disallowed as he wanted a spare room to accommodate potential guests.
Commuting
Mileage can only be claimed for business travel from your business base to the location of your business visit which may be to a customer, a client, an exhibition, a business course or a business related event. If you secure a contract with a temporary workplace then, subject to certain rules, the travel costs (mileage and subsistence expenses supported by receipts) can be claimed. A temporary workplace is one where you attend to perform a task of limited duration or for a temporary purpose.
If you work from an office then the journey from your home to that office will not form part of your mileage claim. That journey is merely commuting.
Where is your business base?
If you have designated that your business base is your home and use that as the starting point for your business journey expenses claims then, to help establish it as your base, undertake as many business activities as you can there. If you permanently work at a single location, which is not your home, then HMRC will argue that this is your business base.
The best methodology is to take a reasonable and common sense approach here to avoid future scrutiny from HMRC who are not “stupid” when it comes to such points. They know the right questions to ask and will easily trip up the “inexperienced” when it comes to attempts to claim costs which simply do not fall within the spirit of the rules.
Limited Company the 24 month travel rule
If you travel to the same place on a regular basis then HMRC may view this as a permanent workplace. If this is the case then travel expenses to this workplace will not be an allowable and tax deductible expense. So you’ll have to pay for these out of your own pocket.
A permanent workplace is one where:
- The worker will spend, or be likely to spend, over 40% of working time and
- The worker attends or is likely to attend it over a period of more than 24 months
So if you have a 12 month contract that gets renewed for another 12 months at the same site you won’t be able to claim travel and subsistence after the end of the first 12 months because the site had become permanent – you knew you were going to be based there for 2 years at the point that the contract was renewed.
For all of this it is the journey which is important. A new contract at a different company but in the same area (HMRC use the City of London in an example) does not re-set the clock to zero on the 24 month rule. Similarly a change of location which means a significant change in the journey does re-set the clock even though it is for the same company.
It is certainly a confusing area and one which will need further scrutiny particularly for contractors and those working in the health service where strict rules do apply as a result of a court case. This is an area where, if in doubt, do get an expert opinion from a reputable accountant.
Use of home as office
If you rent an external space such as an office or hot deskthen these costs will be allowable in the accounts – just record them as Office Rent. If you use part of your home for your business you can make an expenses claim for a proportion of your household costs to be reimbursed by the business to you to cover the home costs that you incur for doing this.
For a sole trader, by far the easiest way of doing this is to use the Simplified Expenses rules covered in “Sole Trader Basics”.
A Limited Company can get a flat rate amount set out by HMRC of £6 per week (from 6th April 2020. For previous tax years the rate was £4 a week), which can be claimed without the need for receipts or supporting calculations.
If you do wish to claim more than £6 or the amount allowed via simplified expenses you will need to carry out a calculation supported by receipts for your household costs. The amount derived from the calculation can then be charged to your business (as a use of home as office cost) or your company (as a use of home as office rental). This is an area that can be scrutinised by HMRC where a large “use of home as office” claim has been made which does not stack up against the reality of how the business income is derived or the personal use of the home.
The claim for use of home as office would imply that substantial business activities do take place at your home. A laptop on the kitchen table for a few emails in the evening does not really count nor do vague explanations of “marketing” or “research” – imagine you’re standing in front of a very sceptical HMRC Inspector who will take a very dim view of flimsy claims for use of home as office. Do your use of home as office explanations and costs really stack up?
The use of home as office calculation
There’s no right or wrong answer to what your use of home as office calculation will look like as it will be based upon how you actually use your home. An accountant cannot provide you with your calculations as they will not know your household costs or the amount of your home that you use for work. Only you can come up with this calculation which will look something like this:
All Household Costs incurred – £total
X
Percentage of home used for work
=
Amount to claim for use of home as office
Household Costs
These can include costs such as:
- a proportion of mortgage interest (only the interest part not any of the capital repayment – you’ll get the split of this from your annual mortgage statement) or your monthly rental.
Note – Higher rate tax payers could have this element of the cost claimed treated in the same way as the Buy to Let mortgage interest meaning that Income Tax relief on all residential property finance costs is restricted to the basic rate of income tax. If you are claiming a proportion of mortgage interest and you are a higher rate tax payer then getting advice from your accountant is essential - council tax
- heat & light energy bills
- water if you can show some business use for water apart from tea and coffee
- insurance
- repair or re-decoration of the business space
- broadband unless there is a dedicated business connection
These must be the actual amounts incurred (not estimates) supported by the household bills.
Proportion of home used for work
The factors to be taken into account when calculating the proportion of your home used for work are:
• Area: what proportion in terms of area of the home is used for business purposes?
• Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
• Time: how long is it used for business purposes, as compared to any other use?
As an example if the house has eight rooms of equal square footage size including an office which you use for the business then it could be reasonable to say that (1/8th of the home, 12.5%, x 5 out of 7 days, 72%) 9% of the house was used for business, taking into account that the office would not be used all the time. So if you calculated your total annual running costs to be £3,000 then you can claim £270 a year as a business expense through your accounts.
Obviously this is just an example. There are no hard and fast rules for the calculation. It needs to meet your specific circumstances making reasonable assumptions that you can justify if the amount is ever queried by HMRC. The HMRC website has a number of interesting examples, although it is worth noting that they all result in relatively small claims.
It’s worth bearing in mind that the calculation would be different each year as your household costs change. So don’t forget to repeat the calculation at least annually to update your use of home as office claim.
Limited Company – Use of Home as Office Rental Agreement
A Limited Company would usually “rent” part of their house to their Limited Company. Given this a rental agreement, such as the one below tailored to your specific circumstances, would be put in place to keep the use of home as office as an arm’s length agreement between you and the Limited Company:
Rental Agreement
This agreement is made on ……………….. (insert date of agreement) between
(1) ……………….. (insert company name) (the “Company”) and
(2) ……………….. (insert owner name) (the “Property Owner”)
In respect of:
……………….. (insert address of property) (the “Property”)
It is agreed that:
1. The Property Owner owns the Property.
2. The Property includes accommodation and contains furniture (“The Home Office”) which is available for non-exclusive use by the Company and which it is envisaged shall be used by the Company from time to time.
3. It is agreed that in consideration of its use of the Home Office the company shall reimburse to the Property Owner such proportion of any expenses they incur in providing the Home Office as is fairly attributable to the use of the Home Office by the Company including (but without limitation) a proportion of mortgage interest, heating and lighting costs, maintenance and repair, such proportion as to be agreed between the parties from time to time having regard to the actual use made by the Company of the Home Office.
| Signed on behalf of the Company |
| Name (in capitals) |
| Position |
| Signed by the Property Owner |
| Date |
Use of home as office tax issues to avoid
Make sure that you’re not charging your company more than the business cost of the use of your home as office otherwise you may create a personal tax liability. Follow the rules above and you’ll be OK. There’s no need to put the rent calculated to the rules above on your self assessment as this income is directly offset by the costs from your calculation. So there is neither a profit or loss to report.
To avoid any future issues with Capital Gains Tax the golden rule is to not use any part of your house exclusively for your business and make sure that it is also used for some other purposes as well. For example as a TV room, to store personal papers, a computer games room etc.
If you stick to this then all of your house will be considered as your only or main residence. This means that if you sell your house, there will be no capital gains tax (CGT) to pay, as your only or main residence is exempt from CGT. The fact that you use the room mainly but not wholly for business doesn’t affect the exemption.
If you do have clients or customers visiting your home or deliveries of stock arriving then your local Council may wish to assess your property for business rates – contact them if in doubt. Similarly you may need to advise your insurance company, and take out additional insurances, if you do anything other than simply use your home as your office with no business visitors.
Other home office costs
You can also claim for specific office furniture – desk, office chair, filing cabinet etc – but not if it is ordinary household furniture. If you include such costs on the basis that you see clients at home and need to furnish a room accordingly, HMRC will expect to see details of how many and how often clients visit. Again be sensible here – a couple of client visits per year won’t allow you to claim for a sofa!
Other costs
This is not a definitive checklist, and should not be used as such, but depending on your business type the other costs that you may have incurred wholly and exclusively for your business could include:
- Postage and packaging
- Google Ad words
- Web development and maintenance
- Email and hosting
- Advertising
- Telephone
- Broadband / Network – if you work at home take off a proportion of the total cost for your private use for a sole trader or include in the use of home as office calculation for a Limited Company unless it is a dedicated business connection invoiced directly to the company
- Postage and Stationery
- General office expenses
- Professional journals and subscriptions
- Insurance e.g. professional indemnity, public liability etc
- Accountancy and Legal fees
- Bank charges and interest
- Premises costs
- Training to maintain or improve your skills in your chosen business area – as opposed to something which may be of benefit to you as an individual. Costs for the latter should not be paid through the limited company. As a rule of thumb, to be allowable for tax, the training should be work related
- A Limited Company can make contributions towards your pension scheme – seek the advice of an Independent Financial Advisor and discuss with your accountant if this is an effective way of remuneration and extracting money from your business. Remember that amounts paid into a pension are usually invested. So the value of your pension pot can go up or down
Mobile Phone
You can claim the cost of the business calls made from the phone. If you are on a package then you should make an allowance for the private calls made from your phone and claim for the rest of the costs incurred.
If you operate via a Limited Company then the mobile phone contract should be in the name of the company.
Clothing
HMRC do not allow general clothing to be claimed for in your accounts e.g. a business suit or dress. They say that clothes are needed for warmth and decency; so you’d have to wear something! You can however claim for uniforms (something with a company badge or logo permanently attached to it) or protective clothing such as safety boots.
Client Entertaining
Any amounts spent on entertaining clients cannot be claimed back in the accounts for tax purposes. Such costs can include amounts spent on client / customer eating, drinking and other hospitality for:
- business entertainment in the form of discussing a particular business project or building general business connections
- non-business entertainment for pure social reasons
Wages and Salaries
You can claim the costs of employing permanent, temporary and casual employees including Salaries, Wages, Bonuses, Pensions, Benefits, Employer’s NICs, Canteen expenses, Recruitment agency fees and Subcontract labour costs.
For a sole trader business the wages or salary paid to yourself are not allowable costs. However if you take on staff then their wages or salaries would be allowable.
For a Limited Company, unless you have other income earned elsewhere, you’ll likely pay yourself a monthly salary. This will usually be set at a low rate with the remainder of the money that you need to live on being extracted from the company by way of dividends. The amount of the salary is something that you would usually discuss with your accountant to ensure that it suits your needs and keeps your National Insurance credits topped up for benefits such as the state pension.
If you do take on staff or pay yourself a salary through your Limited Company then, subject to certain conditions, you will need to register as an Employer, operate a payroll system and make monthly returns to HMRC. This may be something to get an accountant or payroll specialist to help you with although having staff isn’t limited to just accounting. You will need to comply with all areas of Employment Law, including the employment contract, as well as potentially auto enrol your staff for a pension.
Special Rules for certain business types
Depending on your business type there could be special rules that apply.
For example there are special rules for Child Minders (see https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim52751 on the HMRC web site). If you are uncertain if special rules apply to your business type then contact your trade or professional body if you have one or ask an accountant.
Personal v Business for a sole trader
There will be some costs that you incur that also have a personal element to them. For example if you work from home then you may use broadband but you would also use that for private use.
If this is the situation then you would apportion the cost incurred between business and private usage on a reasonable basis. There are no hard and fast rules on what would be deemed to be a reasonable amount of personal use. The particular cost and personal usage would need to be assessed and a common sense, but justifiable if challenged by HMRC, amount determined based upon your specific circumstances.
For a Limited Company it is not always possible to apply this approach. Generally costs should be incurred by the company with invoices, receipts and contracts supporting that position.
Things to avoid
Unless you run a such a business then Gym or Golf club memberships cannot be claimed as a cost. This is the case even if you do business at the golf club – it’s just how the rules are. If a Limited Company does put these costs through the business then they will incur what is called a “Benefit in Kind” meaning that you will pay personal tax and the company will pay additional National Insurance on them.