Ah, business expenses. The thing everyone thinks they understand… until HMRC comes knocking with questions about that “client lunch” that was actually a birthday meal with your mate Dave.
If you want to get your head around business expenses (what checks the yes box and what is not allowed), here’s a quick guide.
The golden rule: wholly and exclusively
To qualify for tax relief, an expense must be incurred wholly and exclusively for the purposes of your trade. That’s the phrase HMRC uses, and they mean it. This applies whether you’re paying Income Tax (sole traders and partnerships) or Corporation Tax (limited companies).
Here’s where it gets a bit nuanced, though:
If an expense has a personal element you can’t separate out, it fails the test for Income Tax purposes. For Corporation Tax, it might still qualify, but you’d need to declare a benefit in kind. If you can identify and split out the business element, you can claim that portion.
JVCA tip: Keep business and personal spending separate. As a sole trader, use a dedicated business bank account. As a limited company, don’t use the company account for personal bits, or put any personal spending into a separate director’s loan account. You’ll make your (and our) life a lot easier, plus it avoids HMRC scrutiny.
| Whether you need help setting up a business account, managing your books or filing your tax return, we can help with every step. Shoot us an email at [email protected] – we’d love to help. |
Private expenditure: the hard no
Private costs are never allowable as business expenses. That includes:
- Personal meals (even if you were “thinking about work”)
- Everyday clothing (even if you only wear it to the office)
- Family days out disguised as “team building”
Buying lunch with a friend and paying with your business card? Not allowable. It’s private, plain and simple.
The tricky bit: duality of purpose
Sometimes an expense genuinely has both a business and a personal motive, and you can’t separate them. In that case, none of it is allowable.
There’s legal precedent for this. The famous Mallalieu v Drummond case established that ordinary clothes worn for work aren’t deductible, even if you’d never dream of wearing them anywhere else. And Caillebotte v Quinn made clear that everyday meals don’t count as business expenses either.
The test isn’t whether the expense helped your business. It’s whether it was incurred wholly and exclusively for business purposes.
Mixed-use expenses: how to handle them
Some business expenses genuinely straddle the line, and here, the rules differ depending on your business structure.
For sole traders and partnerships (Income Tax): You claim the business portion only.
For limited companies (Corporation Tax): You can often claim the full expense, but then you may need to declare a benefit in kind for the private element.
Examples:
- Mobile phone: 65% business calls? Claim 65% of the bill (sole trader) or 100% (limited company) and it’s a tax-free BIK!
- Car: Claim business mileage using HMRC’s simplified expenses rates, or apportion running costs fairly. For a company car, claim the full costs but declare a benefit-in-kind to tax the individual.
JVCA tip 1: Simplified expenses can save you a lot of admin headaches for vehicles and working from home. Worth looking into.
JVCA tip 2: Sole traders should put the whole of the cost into their accounts and disallow the personal apportionment in the relevant box on their tax return.
| Want us to review your business expenses and make sure you’re claiming everything you’re entitled to…and nothing you’re not? Drop us an email at [email protected], we’d love to help. |
What about incidental benefits?
Here’s some good news. If you’re on a business trip and happen to enjoy a sunny view from your hotel room, that incidental benefit doesn’t disallow the expense. HMRC isn’t that petty.
But – and it’s a big but – if you tack a personal holiday onto a business trip, you’ve introduced a private purpose. At that point, you’ll need to apportion the costs or risk the whole thing being disallowed.
The entertainment trap
Client entertainment is never allowable for tax or VAT. No exceptions (well, almost, there are some narrow overseas rules, but they’re unlikely to apply to most of us). So that fancy dinner with a prospect? Not deductible. Sorry.
Staff entertainment is different, on the other hand. It can be allowable, but only if:
- It’s an annual event (like a Christmas party)
- It’s open to all staff
- It costs £150 per head or less
Go a penny over? The whole lot becomes taxable. Not just the excess, all of it.
For mixed events (staff and clients together), you’ll need to split the costs. You can only recover VAT on the staff portion.
HMRC’s risk areas
According to HMRC’s own toolkit, the most common problem areas for business expenses are:
- Poor record-keeping
- Personal bills put through the business
- Travel and subsistence claims
- Entertaining, gifts, subscriptions, and sponsorship
In other words: keep your receipts, note the business purpose, and don’t try to be clever.
Quick checklist when claiming expenses
Before claiming any expense, ask yourself:
- Is the expense wholly and exclusively for business?
- Can you provide evidence of the business purpose?
- Is it not in a blocked category (e.g., client entertainment)?
- If mixed-use, is your apportionment reasonable and documented?
- Have you checked the VAT recovery rules?
If you can tick all five, you’re in good shape! And just a final reminder before claiming expenses, always always always review your expenses monthly – don’t leave it all until year-end!
| Need clarity or a compliance health check? At JVCA, we make expense management simple and HMRC-proof by offering help with: Expense policy setup Quarterly reviews VAT and tax treatment checks Book a free consultation today at [email protected] or call us on 01234 752 566. We’d love to help. |
