Allowable Expenses: The Complete Guide for Finance Professionals
Whether it’s £500K worth of payroll and an office at The Shard, or a share of your home’s utility bills, every business has expenses.
The good news is that HMRC lets you deduct some of these expenses — called allowable expenses — from your earnings. Which means you pay less tax.
The bad news is that not all business expenses are allowable. And the rules around allowable expenses are tricky. So much so, that up to 60% of businesses under-report and pay more tax than they have to.
With this in mind, we’ve put together this handy guide to help you better understand the rules around allowable expenses.
Read on to learn:
- Which business expenses are allowable (and which ones aren’t)
- The special rules around entertaining
- How to keep records HMRC can’t argue with
What are allowable expenses?
Allowable expenses are business expenses you can deduct from your earnings. Deducting allowable expenses lowers your profits, which means you pay less corporation tax.
Business expenses are usually allowable if they pass HMRC’s “wholly and exclusively” test. This means one of two things:
- You had to make the expense to:
- Do business
- Win more business
- Do your job (if you’re an employee)
- The expense is partly business and partly personal, but you can show that a definite proportion of it is “wholly and exclusively” business-related
Let’s say you process grain and sell it to supermarkets. You buy milling equipment and a fleet of delivery vans.
You wouldn’t have needed the milling equipment were it not for your business — you’ve no need for it in your personal life. This means it passes the “wholly and exclusively” test and is an allowable business expense.
Your staff take the delivery vans home and sometimes use them for family trips. That said, they keep detailed mileage logs and can show exactly how much mileage they racked up on business journeys and how much was for personal travel.
Because you can show that a definite proportion of the mileage was business-related, it’s allowable. You can deduct the business mileage — but not the personal mileage — from your earnings.
You can apply the “wholly and exclusively” test to any expense you can think of. Expenses that pass the test and, so, are allowable business expenses include:
- Startup costs, including assets you’ve purchased for personal use but started using in your business
- Business insurance, such as employers’ liability
- Staff training
- If you work from home, a percentage of your utilities, broadband, and rent or mortgage, called a use of home as office deduction (you’ll need to work out the business proportion)
What are disallowable expenses?
If expenses don’t pass the “wholly and exclusively” test, they’re disallowable. This means you can’t offset them against your earnings.
Some situations are clear cut — it’s unlikely there’ll be a scenario in which your Stephen King novels are allowable business expenses, for instance. But things can get tricky when there’s a dual purpose, that is the expense has both a personal and business element.
HMRC is clear that expenses with a dual purpose aren’t usually allowable if there’s no definite business proportion. In other words, if you can’t show exactly how much of an expense is business-related, you probably can’t deduct it.
Take business lunches.
While you wouldn’t have hosted one if you didn’t have clients to woo, you’d still have to eat to survive. It’s impossible to argue that a portion of your meal is “wholly and exclusively” business-related, so you can’t claim.
Similarly, while some types of clothing like safety goggles and hard hats have a clear business purpose, going to work naked isn’t usually an option. So, neither your suits nor your casual clothing (if the office has a smart casual dress code) are allowable expenses.
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When entertainment expenses are allowable
The ‘dual purpose’ rule means entertaining isn’t an allowable expense. But there’s an exception: staff entertainment.
Staff events are allowable expenses if:
- The total cost of all the events you hold in a financial year, including VAT, transport, accommodation, and other costs, is £150 per person or less
- The event or events are open to all staff members
- The primary reason for the events is to entertain staff or boost morale, for example a summer picnic or Christmas party
- All guests are current employees — people who are on your payroll at the time of the event. You can invite other guests, such as spouses, shareholders, or subcontractors, but the cost of entertaining them isn’t allowable. The whole event becomes disallowable if your employees are acting as hosts to the other guests
Claiming allowable business expenses: how do you store expense receipts?
It goes without saying, but HMRC won’t take your word for it when you claim allowable expenses. They may ask to see proof.
You need to keep accounting records, including expense receipts, for at least 6 years from the end of the financial year it relates to. So, if you buy laptops for the business in 2020, you need to keep receipts until at least 2027.
The upside is that there’s no need to keep paper copies of your receipts. There are no rules around how you should store your records. What HMRC require is that they are complete, accurate, and readable. Which means you can store everything digitally if you prefer.
Keeping HMRC on-side, with Soldo
At Soldo, we’ve built a platform that makes keeping complete, accurate, and readable records simple and effortless.
When staff pay business expenses with their Soldo prepaid card, they get an alert on their phone and can upload a receipt to the Soldo dashboard there and then, so it won’t get torn or misplaced.
More to the point, you’re in complete control of what everyone can or cannot buy with their card. You can set spending categories and block purchases that are disallowable expenses. And, you can set budgets so there are no more end-of-month surprises.
HMRC can fine you thousands of pounds for record-keeping mistakes. Why risk it, when you can stay on top of your business expenses without breaking a sweat?