Allowable expenses for small businesses and sole traders

As a small business or sole trader, it can feel like managing your overheads and expenses is a never-ending battle. Cash is often in short supply during the 'start-up phase' and yet it is at this point when you are likely to experience the highest expenditure as you get your business off the ground. 

The good news is, many of your expenses will be allowable when you submit your tax return. Generally speaking, any expense incurred "wholly and exclusively" for business purposes can be claimed. You should keep a record of all your allowable expenses (in case HMRC asks for proof), add them all up and claim them in your tax return.  

Thankfully, it is possible to claim simplified expenses if you are operating as a sole trader. This allows you to work out some of your expenses using HRMC approved flat rates rather than adding up all the individual costs you accrue.

What expenses are allowable?

You will have a range of expenses that can be deducted from your taxable profits providing they are allowable. If an expense has been incurred for business purposes, it is likely it will be allowable, and you will be able to claim for it.

You cannot claim expenses if you use your £1,000 tax-free ‘trading allowance’ instead.

Premises expenses

The extent of your premises costs will depend partly on where you operate and partly on what your business does. If you run your business from home, you may only need to buy an office desk and a comfortable chair. You can also claim a proportion of the cost of utilities, council tax and other household costs that can be apportioned to your business use of your home. You might even 'rent a room' to your business.

On the other hand, if you buy or lease premises, you will face a much wider range of costs and expenses. These could include mortgage repayments, rent, service charges, business rates and buildings and content insurance.

You may need to fit your new premises out with shop fittings, computer cabling and wi-fi connection points or specialist services such as an uninterruptable power supply. You may need furniture, flooring and blinds, safety and security features and street signage so your customers know where you are.

You might need to decorate your premises to make them appealing to customers or to reflect your branding. You may even have to carry out works to convert them (providing you have the necessary approvals) to the purpose you intend.

Don't forget there will also be on-going costs which can include water, electric, gas, broadband, storage, and any services you use. Some serviced offices provide everything from call answering and secretarial services to printing, photocopying and temporary use of additional space such as meeting rooms.

These costs can all add up making your premises one of your biggest outgoings, so it pays to record and claim them all.

Utilities bills

Even if you only operate from a spare bedroom, you will use electricity to run a computer or charge a mobile phone. You can claim a proportion of your domestic bills for your business usage.

If you have separate premises, you will be billed every quarter for the gas, electricity, and water you have used in the business.

Until you have been trading for a few months, you will not know exactly how much you will use. Your supplier may be able to give you some guidance, based on the size of your premises. You can adjust the figures once you have been in the premises for a few months.

It's worth shopping around the different energy companies to get the best deal for your business, particularly if you're going to be a heavy energy user.

Staffing costs

Staffing costs are likely to make up your largest cost centre - especially as your team grows. Costs will include wages, national insurance and tax, statutory pension contributions, holiday and sick pay and any other staff benefits you offer. You can also claim the costs of any workplace training and uniform and up to £150 per employee for staff entertainment such as a staff Christmas party.

If you hire agency staff, you can also claim also the agency or subcontractor fees as a business expense.

Office costs

You don't need to run your business from an office to accrue some of the costs that can be bundled under the category of 'office costs'. These can include stationery and postage costs, printing and ink, computer software and app subscriptions, phone, broadband and mobile costs.

You will need at least one phone line or a dedicated business mobile phone. It's also essential to have broadband access and email. You might also benefit from services such as voice over internet protocol (VoIP). A website is also an excellent way of advertising your business and the services you offer.

There are many different providers for broadband, email, and web hosting. Shop around to find the best deal for the package of services your business requires. Various packages and discount structures are available to business users, which can help to reduce telecommunications costs.

Depending on the type of business you run or the activities you are carrying out, your postage and delivery costs can be sizeable - especially if you run an ecommerce business and all your sales have to be posted to customers. You might be paying for packaging materials including boxes, fillings and bags, courier costs, postage, and printing costs.

You might also incur costs for contract cleaners or window cleaners, cleaning materials, supplies for the office rest room and first aid supplies.

You might claim computers and printers as capital allowances rather than allowable expenses if you use traditional accounting methods.

Travel and subsistence expenses

Travel expenses can include any cost associated with running a company vehicle such as purchasing or hire costs, road tax, insurance, breakdown cover, fuel, ongoing maintenance costs, parking fees provided it is for the purposes of business. If you buy your vehicle, you may claim this as a capital allowance instead.

Vehicle running costs can soon mount up and can include:

• the cost of fuel used for business purposes
• servicing and repairs
• replacement tyres, exhausts and so on
• road tax
• any tolls and congestion charges incurred by the business

You cannot claim for non-business use or fines.

You can also claim for subsistence costs - which may include hotels and meals - if you are on overnight business trips. It may be possible to claim some of the costs of a business trip if you decide to add a few days holiday on to the end providing you only claim for the business expenses.

Rather than calculating all your costs, you may claim a proportion of your travel costs instead based on your business mileage using simplified expenses. You might do this if you are using your own vehicle for a mixture of business and private travel.

If you are travelling by public transport, you can claim your bus, train, taxi or air fares for any business travel you undertake.

Some of these costs, such as fuel, you will incur every month. Others, such as road tax, you can pay annually, every six months, or in monthly instalments (by direct debit).

Marketing and subscription costs

These days your marketing may take place online or offline. However, you choose to market your business, be it a mailing, an advertisement in a trade or local publication, via your own company website or using social media marketing, the costs are allowable as a business expense. You can also claim the costs of membership to any relevant trade bodies or publications.

Training costs

The range of training costs you can claim are limited but there are some that are allowable. You can claim for any training that improves the skills and knowledge you use in your business. Staff training related to your business activities can also be claimed. However, you cannot claim for any training that helps you start or expand your business.

Equipment costs

This is another broad category and could include anything from a hairdresser's scissors and combs to a decorator's paintbrushes and rollers all the way up to much bigger items such as a cement mixer, ladders, or a cherry-picker. If you have tools of the trade, you can claim for them if you need them in order to work.

If you don’t buy the items outright, you may be able to claim the costs of hiring or leasing them instead. The advantage of a leasing agreement is that the cost of major items can be spread over an agreed period, which will help cash flow.

Generally, the payments are fixed at the beginning of the lease period and do not reflect movements in interest rates, although agreements over longer terms might include a variable rate option. Lease payments are made monthly.

Ownership of a leased item always remains with the leasing company, although you will normally be responsible for maintaining the item.

Professional fees and legal costs

Small businesses often rely on the help and support of some key business professionals. You may use the services of a business formation agent or solicitor when starting your business. You may hire an accountant to assist with your annual accounts and returns. Your bank is also likely to charge you fees for some banking services. You may also need some forms of insurance - vehicle and employer liability insurance as a minimum.

If you are registering as a limited company, limited liability partnership or taking steps to protect your intellectual property, these costs can quickly add up. These expenses can all be claimed too.

Insurance premiums

When you start up in business you will need insurance cover. It might be worth speaking to a broker or insurer and explaining how your business will operate - they can then recommend what cover you should have. This might include:

• professional indemnity insurance
• premises, premises contents
• personal accident and travel
• loss of earnings
• business interruption
• employer's liability
• public liability
• motor insurance

Many insurance companies offer combined office policies which are tailored to the needs of office-based firms.

Members of professional accountancy bodies such as the ICAEW and ACCA may benefit from competitive rates on business insurance.

Premiums may be paid as a lump sum or in instalments. Your insurer will be able to advise you of the amounts due - enter them in the months when you will pay them.

Finance and banking charges

You may decide to borrow money to finance your business, either by way of overdraft or loan.

You will have to pay interest on any money borrowed and there will also be bank charges due on the operation of your business bank account. Interest and charges are normally debited from your bank account every quarter - your bank will be able to help you estimate the amounts that will be due.

If you decide to accept payment by credit or debit card, you'll need to open a 'merchant account'. You'll have to pay monthly card charges to your merchant account provider.

What is the best way to keep track of my expenses?

With all of these allowable expenses you can claim, it can be easy to lose track of them if you are not organised. The secret is to make sure you are organised from the off. It doesn't matter if you keep a manual system to manage your expenses, use a spreadsheet or opt to use one of the many apps out there that will keep track of them for you. As long as you have a way to track them, you will be able to claim them and reduce the tax you pay.

If you are still unsure whether you can claim a cost as an allowable expense, you can read the GOV.UK guidance on expenses if you are self employed or contact the Self Assessment helpline.