Managing expenses is a core part of running a business - but understanding which costs are tax deductible is not always straightforward. Mistakes in this area can increase the risk of an enquiry, penalties and unexpected tax bills. Common problem areas include motor and travel costs, entertainment, training and misclassified personal expenses. HMRC has made it clear that mis‑classifying expenses is a major contributor to the small business tax gap, meaning increased focus on taxpayer compliance.
Why Correctly Classifying Expenses Matters
HMRC has recently increased compliance activity focused on small businesses, so those with fewer than 20 employees or turnover below £10 million. Research suggests many business owners still blur the boundaries between personal and business expenses.
The Basic Tax Test for Expenses
An expense is only deductible if it is incurred wholly and exclusively for the purposes of the trade. Expenses fall into business, private or mixed‑use categories.
Business Expenses: What’s Allowed
Expenses directly related to running the business are generally deductible, such as stock, wages and business supplies.
Private Expenses: What’s Not Allowed
Personal expenditure is not deductible for the business, with the actual tax treatment varying between sole traders and companies.
Mixed‑Use Expenses
Where expenses have both business and private elements, only the identifiable business portion is allowable. A reasonable and well‑documented apportionment method is essential.
We Can Help
Correct analysis and documentation of expenses is crucial. If you would like to read more on business expenses, take a look at February’s Topical Issues which provides more detail. Additionally, if you would like tailored advice, we are here to help.