What Counts as a Business Expense? A Starter Guide
- josie139
- Sep 15
- 4 min read
One of the most common questions I hear is: "Can I claim this as a business expense?" It sounds simple, but the line between business and personal expenses can be surprisingly blurry – especially when you're working from home or using personal items for business purposes.
Getting this right isn't just about maximising your tax savings (though that's important!). It's about staying compliant with HMRC rules and avoiding potential issues down the line. Let's break down everything you need to know about business expenses and why keeping them separate from personal costs is crucial for your success.
The Golden Rule: Wholly and Exclusively for Business
The fundamental principle: To claim an expense in full, it must be incurred "wholly and exclusively" for business purposes.
This means the expense must be:
Necessary for your business operations
Used entirely for business purposes
Reasonable in amount for your type of business
Examples of wholly business expenses:
Office rent for a dedicated business premises
Professional insurance premiums
Business-only mobile phone contract
Advertising and marketing costs
Stock purchases for resale
These can be claimed at 100% because they have no personal benefit whatsoever.
When Personal and Business Mix: The Proportion Rule
Many sole traders use personal items for business purposes, and that's perfectly normal. The key is calculating the business proportion accurately.
Common mixed-use expenses:
Home office costs: If you work from home, you can claim a proportion of household bills
Vehicle expenses: Personal car used for business travel
Mobile phone bills: Personal phone used for business calls
Internet costs: Home broadband used for business activities
Utility bills: When working from home
How to Calculate Proportions
Method 1: Time-based calculation If you use your home office 2 days out of 7 each week:
Business proportion = 2/7 = 28.6%
If your annual household bills are £2,000, you can claim £572
Method 2: Space-based calculation If you have 5 rooms and use 1 exclusively for business:
Business proportion = 1/5 = 20%
Apply this percentage to relevant household costs
Method 3: Usage-based calculation For mobile phones, estimate business vs personal usage:
40% business calls/emails = 40% of annual bill claimable
Why Keeping Business and Personal Expenses Separate Matters
1. Legal Compliance
HMRC requires clear records showing business expenses are legitimate. Mixed personal and business spending makes this much harder to prove.
2. Easier Record-Keeping
Separate accounts mean:
Clearer financial picture of your business
Simpler bookkeeping and tax preparation
Reduced risk of claiming personal expenses by mistake
3. Professional Credibility
Separate business finances demonstrate professionalism to:
Potential lenders or investors
Suppliers offering credit terms
Clients who may request financial information
4. Audit Protection
If HMRC investigates your business:
Clear separation makes it easier to justify claims
Reduces suspicion about mixed personal/business spending
Demonstrates you're taking your business seriously
How to Determine if Something is a Business Expense
Ask yourself these key questions:
1. Is it necessary for your business?
Would your business suffer without this expense?
Does it directly contribute to generating income?
Is it reasonable for your type of business?
2. Is there any personal benefit?
Could you use this item/service for personal purposes?
Does it improve your personal life as well as business?
Would you buy it even if you didn't have a business?
3. Can you justify it to HMRC?
Do you have receipts and records?
Can you explain the business purpose clearly?
Is the amount reasonable and proportionate?
Common Expense Categories Explained
✅ Clearly Allowable:
Raw materials and stock
Professional fees (accountant, solicitor)
Business insurance
Office rent and business rates
Staff wages and subcontractor costs
Business travel (not commuting)
❌ Not Allowable:
Personal clothing (unless uniform/protective)
Commuting costs to regular workplace
Personal entertainment
Fines and penalties
Personal life insurance
Gifts over £50 per person per year
⚠️ Needs Careful Calculation:
Home office expenses
Vehicle costs (business mileage only)
Mobile phone bills (business portion)
Meals during business travel (reasonable amounts)
Training courses (must be business-relevant)
Best Practices for Managing Business Expenses
1. Open a Business Bank Account
Even as a sole trader, this creates clear separation and makes record-keeping infinitely easier.
2. Use Business Credit Cards
For business purchases only – makes tracking and categorising expenses much simpler.
3. Keep Detailed Records
Save all receipts and invoices - ideally using software
Note the business purpose for each expense
Use accounting software to categorise expenses
Take photos of receipts immediately and upload to your app
4. Review Regularly
Monthly review of expenses
Question anything that seems unclear
Adjust proportion calculations if usage changes
5. When in Doubt, Ask
It's better to seek professional advice than risk claiming incorrectly.
Red Flags to Avoid
HMRC may investigate if they see:
Unusually high expense claims for your business type
Round numbers suggesting estimates rather than actual costs
Personal expenses mixed with business claims
Lack of supporting documentation
Inconsistent expense patterns
Ready to Master Your Business Expenses?
Understanding what you can and can't claim is fundamental to successful sole trader bookkeeping. At Josie Dayment Bookkeeping we can:
Set up proper expense tracking systems
Calculate business proportions accurately
Maintain compliant records
Maximise legitimate tax savings
Avoid common costly mistakes
Don't miss out on expenses to reduce your tax bill – or risk problems with HMRC. Contact us today to learn how 1-2-1 training can give you the confidence to handle your business expenses like a pro.
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