Which expenses you can actually claim

The rule in one sentence

You can deduct a cost from your profit if it was incurred wholly and exclusively for your business. That phrase does most of the work, and it is worth understanding exactly what it rules in and out.

"Wholly and exclusively" does not mean the cost has to be essential, and it does not mean HMRC has to agree the purchase was wise. It means the reason you spent the money was the business, and only the business.

What that looks like in practice

Mixed use is split, not banned

This is where most people get it wrong in the cautious direction and claim nothing. If a cost has both a business and a personal element, you do not lose the deduction. You claim the business proportion and keep a note of how you worked it out.

A phone bill of £40 a month used 60% for the business gives you £24 a month, or £288 a year, off your profit. Write down the basis for the 60%, because if HMRC ever asks, the burden of proof is on you rather than on them.

What claiming an expense is actually worth

Here is the part that surprises people. An expense does not come back to you. It reduces the profit you are taxed on, so it saves you tax at your marginal rate.

Expense claimed                            £500
Taxable profit reduced by                  £500

Income tax saved at 20%                    £100
Class 4 NI saved at 6%                      £30
-------------------------------------------------
Total tax saved                            £130
Still out of pocket                        £370

So a £500 expense costs a basic-rate sole trader about £370 after tax relief. That is a real saving and you should absolutely claim it. It is not, however, a reason to buy something you do not need.

The bit HMRC does not spell out

There is no minimum. People routinely skip small costs because they feel too trivial to bother with: a £4 parking charge, a £12 domain renewal, £3 of postage. Across a year these are often several hundred pounds of profit that you were taxed on unnecessarily. The rule is the same at £4 as it is at £4,000.

The second thing: pre-trading expenses count. Costs incurred in the seven years before you started trading, which would have been allowable had you already started, can generally be treated as incurred on your first day of trading. The laptop and the website you bought two months before your first invoice are not lost.

Common mistakes

• Claiming everything on a mixed-use bill. Claiming 100% of a phone you clearly also use personally invites a challenge, and undermines your credibility on everything else.
• Claiming nothing on mixed use. The far more common error. Apportion it.
• Treating client entertaining as marketing. Renaming it does not make it allowable.
• Forgetting pre-trading costs. The run-up to your first sale usually contains real, claimable spending.