If you are the owner of a small business, the best way to maximise your tax saving is by making sure you claim everything you are entitled to as a business expense. You will find many articles online giving from 6 to 25 deductions for what expenses small businesses can deduct.
The truth is this is difficult as there is no single small business expenses list for things you can deduct. All businesses are different so it’s not possible to create a definite and catch-all small business expenses list.
What you can do instead is read our guide to what expenses you can deduct as a small business owner, and how the deductions work. Here’s a quick overview first though…
What expenses can a small business deduct? A small business can deduct expenses if it can be classed as tax-deductible. This boils down to whether it is wholly and exclusively for the purpose of the business. Examples include things you buy to sell, advertising, office costs, travel costs and training costs.
You must keep accurate records of your small business expenses so you can deduct them from your income when calculating your profit and therefore the amount of tax due.
Whilst you do not have to submit the individual records to HMRC with your self-assessment return you will want to make sure you can prove what expenses you have deducted for your small business.
How to write off business expenses sole proprietor
If you are self-employed, you’ll have various running costs and expenses. You take these costs and expenses away from your business income to work out the profit in your accounts.
You can only deduct certain expenses as a sole proprietor as they aren’t all allowable for tax purposes. You can also claim capital allowances for certain other costs or expenditure to reduce your taxable profits. We will go into more detail about this in a moment.
Keep records of all your business expenses as proof of your costs.
Add up all your allowable expenses for the tax year and put the total amount on your Self-Assessment tax return.
You do not need to send in proof of expenses when you submit your tax return. But you should keep proof and records so you can show them to HM Revenue and Customs (HMRC) if asked.
You must make sure your records are accurate.
Handy Hint: Read our guide on what records do I need to keep for a small business to learn more.
Small business expenses list
There is no distinction between a small business or a large business when it comes to what is an allowable expense that can be deducted.
Remember the legislation disallows any expenditure not incurred wholly and exclusively for the purposes of the trade, profession, or vocation. This means that the rule is only satisfied if the taxpayer’s sole purpose for incurring the expense is for the purposes of their trade, profession, or vocation.
There is no reference to the size or type of business.
A non-trade or private purpose precludes deduction in full where there is no objective yardstick by which any trade element can be distinguished from the non-trade element.
A common example of this approach is the running costs of a car used partly for the purposes of the trade and partly for other purposes. You should allow the actual costs of any trade journeys (i.e., fuel, tolls, parking fees etc).
You should also allow a proportion of the licence, insurance (provided the insurance covers business use), repairs, finance costs, etc.
You should not argue that such costs would be incurred in any event and only the marginal additional costs attributed to trade use are allowed.
Tax-deductible business expenses list
There is no definitive tax-deductible business expenses list. As we have identified the key to whether an expense is tax-deductible for your small business boils down to whether it is wholly and exclusively for the purpose of the business.
Whilst there is no definitive tax-deductible business list, we have created a list of the most common tax-deductible business expenses below to help you get started.
Self-employed allowable expenses list
If you’re self-employed, your business will have various running costs and expenses. You can deduct some of these costs to work out your taxable profit if they’re allowable expenses.
Example
Your turnover is £40,000, and you claim £10,000 in allowable expenses. You only pay tax on the remaining £30,000 – known as your taxable profit.
Allowable expenses do not include money taken from your business to pay for private purchases.
If you run your own limited company, you need to follow different rules. You can deduct any business costs from your profits before tax. You must report any item you make personal use of as a company benefit.
What deductions can I use for my small business?
The following expenses are tax deductible for small businesses in the UK.
- office costs, for example, stationery or phone bills.
- travel costs, for example, fuel, parking, train, or bus fares.
- clothing expenses, for example, uniforms.
- staff costs, for example, salaries or subcontractor costs.
- things you buy to sell on, for example, stock or raw materials.
- financial costs, for example, insurance or bank charges.
- costs of your business premises, for example, heating, lighting, business rates.
- advertising or marketing, for example, website costs.
- training courses related to your business, for example, refresher courses.
Handy Hint: You cannot claim expenses if you use your £1,000 tax-free ‘trading allowance’.
Check out our guide on can a small business do their own taxes to find out more about the tax-free allowance.
Costs you can claim as capital allowances
If you use traditional accounting, claim capital allowances when you buy something you keep using in your business, for example:
- Equipment.
- Machinery.
- Business vehicles, for example, cars, vans, lorries.
If you use something for both business and personal reasons
You can only claim allowable expenses for the business costs.
Example
Your mobile phone bills for the year total £200. Of this, you spend £130 on personal calls and £70 on business.
You can claim for £70 of business expenses.
If you work from home
You may be able to claim a proportion of your costs for things like:
- Heating.
- Electricity.
- Council Tax.
- Mortgage interest or rent.
- Internet and telephone use.
You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.
Example
You have 4 rooms in your home, one of which you use only as an office.
Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).
If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).
Simplified expenses
You can avoid using complex calculations to work out your business expenses by using simplified expenses. Simplified expenses are flat rates that can be used for:
- Vehicles.
- Working from home.
- Living on your business premises.
Self-employed allowable expenses list
| Category | Allowable expenses | Disallowable expenses |
| Accountancy, legal and other professional fees | Accountants, solicitors, surveyors, architects and other professionalindemnity insurance premiums. | Legal costs of buyingproperty and large itemsof equipment; costs ofsettling tax disputesand fines for breakingthe law |
| Advertising and business entertainment costs. | Advertising in newspapers, directoriesetc. mailshots, free samples, website costs | Entertaining clients,suppliers and customers;hospitality at events. |
| Bank, credit card andother financial charges | Bank, overdraft and credit card charges; hire purchase interest and leasing payments. Alternative finance payments. | Repayment of the loansor overdrafts or financearrangements. |
| Car, van and travel expenses | Car and van insurance, repairs, servicing, fuel, parking, hire charges, vehicle licence fees, AA/RAC membership; train, bus, air and taxi fares; hotel room costs and meals on overnight business trips. | Non-business motoring costs (private use proportions); fines; costs of buying vehicles; travel costs between home and business; other meals |
| Communications, stationery and otheroffice costs (mobile, internet, email costs) | Phone, mobile, internet, email and fax running costs; postage, stationery, printing and small office equipment costs | Non-business or private use proportion of expenses; new phone, fax, computer hardware or other equipment costs. |
| Construction industry – payments to subcontractors | Construction industry subcontractors payments (before taking off any tax) | Payments for non-business work. |
| Cost of goods that you are going to sell or use in providing services | Cost of goods bought for resale, cost of raw materials used, direct cost of producing goods. | Cost of goods or materials bought for private use; depreciation of equipment. |
| Depreciation and loss/profit on sales of assets | Depreciation and loss/profit on sale of assets are not allowable expenses – any amount entered here should also be shown in box 43 of the tax return. | Depreciation of equipment, cars etc. Losses on sales of assets (minus any profits on sales). |
| Insurance policy | Costs of any business specific policy. | Recoverable costs. |
| Interest on bank and other business loans | Interest on bank and other business loans. Alternative finance payments. | Repayment of the loans or overdrafts, or finance arrangements. |
| Irrecoverable debts written off | Amounts included in turnover but unpaid and written off because they will not be recovered. | Debts not included in turnover; debts relating to fixed assets; general bad debts. |
| Other business expenses | Trade or professional journals and subscriptions; other sundry business running expenses not included elsewhere. | Payments to clubs,charities, political partiesetc., non-business part ofany expenses; cost ofordinary clothing |
| Rent, rates, power and insurance costs | Rent for business premises, business and water rates, light, heat, power, property insurance, security; use of home as office (business proportion only) | Costs of any non-business part of premises; costs of buying business premises |
| Repairs and renewals for property and equipment | Repairs and maintenanceof business premises andequipment; renewals ofsmall tools and items ofequipment. | Repairs of non-business parts of premises or equipment; costs of improving or altering premises and equipment. |
| Wages, salaries and other staff costs | Salaries, wages, bonuses, pensions, benefits for staff or employees; agency fees, subcontract labour costs, employers NIC etc | Own wages anddrawings, pensionpayments or NICs;payments fornon-business work. |
Tax loopholes for small business
If it sounds too good to be true, it is. Dave down the pub might be a great carpenter and he may well have some great ways of reducing his tax bill, but he is also not a trained professional in tax, and you should probably not take advice from him.
There is no such thing as a legal tax loophole for small business if you want to stay compliant and within the rules. The best tax loopholes for small businesses we can provide you with is to make sure you claim every deduction for expenses you can as a small business.
Being organised and making sure you claim everything you are entitled to be the best way to minimise your tax liability.
FAQs on the what expenses a small business can deduct
What are allowable business expenses?
The general rule is that the costs you pay with the sole purpose of earning business profits are allowable expenses. You cannot deduct costs for non-business or personal purposes.
There is no definitive tax-deductible business expenses list. As we have identified the key to whether an expense is tax-deductible boils down to whether it is wholly and exclusively for the purpose of the business. Whilst there is no definitive tax-deductible business list, we have created a list of the most common tax-deductible business expenses below to help you get started.
Costs you can claim as allowable expenses
- office costs, for example, stationery or phone bills.
- travel costs, for example, fuel, parking, train, or bus fares.
- clothing expenses, for example, uniforms.
- staff costs, for example, salaries or subcontractor costs.
- things you buy to sell on, for example, stock or raw materials.
- financial costs, for example, insurance or bank charges.
- costs of your business premises, for example, heating, lighting, business rates.
- advertising or marketing, for example, website costs.
- training courses related to your business, for example, refresher courses.
For a detailed explanation check out the self-employed allowable expenses list above.
Can you write everything off as a business expense?
No. You cannot deduct costs for non-business or personal purposes. There are many exceptions to the rules about what can be written off as a business expense so if you are unsure, it is worth checking with HMRC or a professional such as an accountant or bookkeeper.
Getting this wrong could lead to thousands of pounds of incorrectly deducted expenses over several years.
You do not need to send your records to HMRC when submitting your tax return, HMRC does not know whether your claim is valid and is not checking each transaction.
This can lead you to believe that what you are doing is fine. As such submitting information that looks odd could cause you an issue.
Read our guide on what triggers an HMRC investigation for more information.
Below you will find more information on what deductions can I use for my small business and what cannot be deducted as a business expense.
What deductions can I use for my small business?
If you’re self-employed, your business will have various running costs and expenses. You can deduct some of these costs to work out your taxable profit if they’re allowable expenses.
Allowable expenses do not include money taken from your business to pay for private purchases.
If you run your own limited company, you need to follow different rules. You can deduct any business costs from your profits before tax. You must report any item you make personal use of as a company benefit.
If you use traditional accounting, claim capital allowances when you buy something you keep using in your business, for example:
- Equipment.
- Machinery..
- Business vehicles, for example, cars, vans, lorries
If you use something for both business and personal reasons, you can only claim allowable expenses for the business costs. You will need to apportion the costs between business and personal to make a claim.
If you work from home, you may be able to claim a proportion of your costs. You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.
What cannot be deducted as a business expense?
Remember the legislation disallows any expenditure not incurred wholly and exclusively for the purposes of the trade, profession, or vocation. This means that the rule is only satisfied if the taxpayer’s sole purpose for incurring the expense is for the purposes of their trade, profession, or vocation.
Use the tax-deductible business expenses list above to review what cannot be deducted as a business expense. These are the exceptions to what tax-deductible business expenses can be claimed and should be used alongside the wholly and exclusively for business purposes to give you an idea of what cannot be deducted as a business expense.
If in doubt check with a professional such as an accountant or bookkeeper. This could help you avoid interpreting the rules incorrectly which over a period could amount to a significant financial burden if wrong.
Conclusion
Running a small business is a lot more complex than most would want to acknowledge. There are so many rules and regulations (not to mention exceptions to the rules) that you as a small business owner are supposed to know. Ignorance is not a form of defence when it comes to HMRC.
You probably did not set up in business to become a bookkeeper or accountant but that is where you can end up very quickly if you want to do a proper job which we would highly recommend you do. According to a report from Starling the average micro-business spends 15 hours per week or 19% of their time doing financial admin tasks. Have you factored into your plans spending 10 weeks a year doing financial admin?
Whilst there is a cost to paying an external resource such as a bookkeeper or accountant to manage this on your behalf, there’s a also a cost to doing it yourself.
That hidden cost may in fact be much higher than paying an expert. It is worth careful consideration before you enter the rabbit hole that if financial admin for a small business owner.
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Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
