HMRC Expense Rules: What UK Small Businesses Need to Know

The golden rule

HMRC allows you to deduct expenses that are incurred "wholly, exclusively and necessarily" in the performance of your duties. That is the core test for every expense claim.

If there is any personal element — even a small one — the expense may not be fully deductible. A business dinner where you discuss strategy is allowable; the same dinner where the conversation is mostly personal is not.

What expenses are allowable

Travel and subsistence

Travel costs between different workplaces, to client sites, or to temporary places of work (lasting less than 24 months) are allowable. This includes:

• Train, bus, taxi, and flight costs for business journeys
• Fuel and mileage (at HMRC advisory rates — 45p/mile for cars, first 10,000 miles)
• Accommodation for overnight stays away from home
• Meals while on business travel, subject to HMRC subsistence rates

Important: commuting from home to your regular workplace is never allowable — this is one of the most common mistakes HMRC sees.

Client entertainment

Business entertainment — meals, events, and hospitality with clients or prospects — is a grey area. It is not deductible for corporation tax purposes, but employees can still claim it as a valid business expense. The company pays, the tax treatment differs from other expenses.

Equipment and supplies

Office supplies, tools, and equipment used exclusively for business are allowable. For items with both personal and business use (like a mobile phone), only the business proportion can be claimed.

Professional subscriptions and training

Subscriptions to professional bodies approved by HMRC and training that maintains or improves skills relevant to your current role are allowable. Career change training — learning a new profession — is not.

What HMRC requires you to keep

HMRC requires businesses to retain records for at least 6 years. For each expense claim, you should keep:

• The original receipt or VAT invoice
• The date of the purchase
• The supplier name and address
• The amount paid and VAT charged
• The business purpose of the expense

Digital copies — clear photographs of receipts — are acceptable to HMRC. You do not need to keep physical paper records, but the digital copies must be legible and unaltered.

VAT on expenses

If your business is VAT-registered, you can reclaim the VAT on most business expenses — but only if you hold a valid VAT receipt. A VAT receipt must show the supplier's VAT registration number, the rate and amount of VAT charged, and the date.

Some expenses have specific VAT rules — for example, you can only reclaim 50% of the VAT on car hire, and there are restrictions on reclaiming VAT on business entertainment.

Benefits in kind

If your company pays for something that has a personal benefit — a gym membership, a company car used for private journeys, or a mobile phone where the employee makes personal calls — HMRC may treat this as a benefit in kind (P11D), which is taxable on the employee and subject to Class 1A National Insurance from the employer.

Certain benefits are exempt — known as "trivial benefits" — such as a gift under £50 that is not cash or a cash voucher. These do not need to be reported.

Common mistakes that trigger HMRC enquiries

• Claiming commuting as business travel
• Failing to keep receipts — especially for cash purchases
• Claiming personal meals as business subsistence
• Rounding up or estimating mileage rather than recording actual journeys
• Claiming 100% of a mixed-use expense (phone, broadband) rather than the business proportion
• Missing the P11D deadline (6 July each year) for benefits in kind