Allowable expenses – What are allowable expenses?
Allowable expenses are essential business costs that are not taxable.
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Allowable expenses are not considered part of a company’s taxable profits; you therefore don't pay tax on these expenses. For example, a company has an annual turnover of £15,000. They spend £2,000 on allowable expenses. They only pay tax on the remaining £13,000.
Most small businesses can claim allowable expenses, but there are a few exceptions. You can’t claim allowable expenses if you use the £1,000 tax-free ‘trading allowance’, and separate rules apply to limited companies.
What can I claim as allowable expenses?
Only certain costs can be claimed as allowable expenses, including:
- Office costs such as stationary, phone bills, or other items that you use for less than two years.
- Costs of business premises, such as utility bills and rent. Costs associated with buying property are not considered allowable expenses.
- Travel costs such as fuel, parking, or train tickets. Travel to and from work is not an allowable expense.
- Staff costs such as wages, salaries, bonuses, and pensions.
- Clothing costs such as uniforms or protective clothing. Everyday clothing that you wear to work is not an allowable expense.
- Legal and financial costs such as credit card charges; overdraft fees; insurance policies; or hiring accountants, bookkeepers, solicitors, or surveyors. You cannot claim for any legal fines.
- Advertising and marketing costs such as printed adverts and the cost of building a website.
- Items that you only buy to sell on such as raw materials or merchandise.
Business expenses vs. personal expenses
When claiming allowable expenses, it is important to distinguish between business costs and personal expenses as you cannot claim private purchases as allowable expenses. If you use money from your company to pay for a personal expense, you should not include the cost when calculating your annual allowable expenses.
For small businesses, it is common to have expenses that cover both business and personal costs; under these circumstances, only the business costs can be claimed as allowable expenses.
For example, you use your car to drive to meetings with clients, but you also use it to get around outside of work. You spend £200 a month on petrol. You calculate that you use 25% of the petrol during work-related trips (not including journeys between home and work). You can therefore only claim £50 a month as an allowable expense for fuel.
How to claim allowable expenses
You can claim allowable expenses through your annual Self Assessment tax return. You do not need to submit proof of your expenses when you submit your tax return; however, you may be asked by HMRC to show evidence of your costs. It’s therefore important to keep complete, accurate records of your expenses throughout the tax year.
Allowable expenses in Australia
In Australia, allowable expenses are more commonly known as allowable deductions. Like in the UK, allowable deductions can only be claimed on expenses related to your income (or the business portion of mixed expenses). You must keep evidence (such as payment receipts, invoices, or contracts) of any allowable deductions you wish to claim.
As a business owner, you can reclaim allowable deductions through your tax return. This might be an individual tax return or company tax return, depending on the structure of your business.
Allowable expenses in Debitoor
It’s easy to record costs and manage your company expenses with Debitoor accounting & invoicing software. Whenever you create an expense, Debitoor will suggest how it should be categorised, making it easier to see how your money is being spent.
Plus, you can record expenses in a snap with the Debitoor iOS app and Debitoor Android app. Simply take a photo of a receipt or invoice, and our OCR technology automatically fills in the date and amount of your expense.