Ultimate guide: what are business expenses?

Every business, big or small, has costs they must pay. These costs are called business expenses and can refer to anything from bills to uniform costs. 

This complete guide to business expenses will answer the following questions:

• What are the different types of business expenses?
• How does tax work on business expenses?
• What items count as tax-deductible business expenses?
• Why do I need to record my business expenses?
• Can I claim for business start-up costs?
• Can business expenses be carried forward?
• How do I claim business expenses on IR35 contracts?
• Can I claim VAT back on business expenses?
• What is the two-year expenses rule?
• What records should I keep?
• How do I store records of my business expenses?

Business expenses typically separate into three main categories:

Fixed expenses are costs that either don’t change at all or only fluctuate slightly over time. Examples of fixed expenses include car payments, WiFi bills, loan repayments and rent.

Variable expenses vary from month to month. Typically, variable expenses refer to supply costs, mileage, utility bills, and so on.

Periodic expenses are costs that occur here and there, meaning you only pay them every once in a while, which is why they can be challenging to plan for. For example, if you need money for an unexpected machine replacement or repair.

When it comes to taxes, business expenses fall into two categories that you record differently in your business accounting and tax returns:

• Tax-deductible – the most common type of expense for which you can claim money back on your tax bill. These expenses include travel, IT equipment and services like web hosting. We’ll list more items in the next section.
• Non-tax deductible – this type of expense does not impact the company tax bill, meaning you can’t claim it back. The most common example of this expense is client entertaining: you can still record them, but it won’t reduce your tax bill.

If a cost is necessary and only relates to business purposes, it’s a business expense. Personal items like non-uniform clothes and expenses like dry cleaning or grocery shopping must not form part of your expense recording.

Below we’ve listed some common business expenses that may be tax-deductible:

• Bank fees and interest
• Rent
• Utilities
• Insurance
• Company car
• Equipment or equipment rental
• Software
• Supplies
• Membership fees
• Meals
• Travel
• Subscriptions
• Advertising
• Legal fees
• Maintenance and repair

If you operate out of your home, you may be able to deduct partial expenses, such as:

• Home office space (as long as this is your main place of business)
• Mortgage interest
• Security system
• Property taxes
• Maintenance, repairs or upkeep
• Business phone line (separate from the home line)
• Insurance

The government website has a complete list and details of what you can claim as a business expense.

Most of your business expenses will be tax-deductible, meaning they are deducted from your profits and reduce your tax bill. A lower tax bill means you have more money to work with, which increases your company’s value and maximises profits available for investment or to draw as dividends (profits distributed to shareholders).

Recording your expenses effectively gives you a clear view of how your business is performing. Efficient expense records also give you an accurate picture of your financial position throughout the year. 

Make expense management a routine and record your costs as they happen to save you from digging through piles of receipts and invoices come tax season. Countingup’s simple app and business current account with built-in accounting software comes with a receipt capturing tool that prompts you when you make transactions, so you can log your expenses in real-time. 

Yes, you can claim costs you pay personally while setting up your business as business expenses. Record any expenses you pay using personal funds and claim them back when the company starts trading. However, you can only claim these costs if:

• The cost meets the business expense criteria we mentioned earlier. 
• The expense was made within a certain time bracket before you started trading: seven years for Corporation Tax purposes and six months for VAT (value-added tax).

Typically, you must declare your company’s financial expenses in the tax year you made the purchases. However, if you missed any large expenses that affected your taxes, you could choose to file an amended tax return. You must do so within three years.

Additionally, expenses considered capitalised costs* will be carried forward, but the depreciation* amounts will change every year. Carrying over capitalised costs is standard for a new company with a lot of expensive set-up costs. 

*Capitalised costs are expenses from buying or building a fixed asset like property or machinery. Depreciation refers to when assets decrease in value over time. 

IR35 acts to identify if ‘disguised employees’ are operating within a business, and ensures they and the company pay the tax they owe.

If you have a contract that falls under the IR35 legislation, the expenses you can claim are restricted. You would essentially be able to claim the same business expenses as an employee.

VAT is a tax placed on most goods and services in the UK. Companies with an annual turnover of over £85,000 must register for VAT. Whether you’re a large or small business, you can reclaim VAT on business expenses if you are registered for VAT. Different items are subject to different VAT brackets, which are as follows:

• Standard (20%) – The VAT rate charged on most expenses.
• Reduced (5%) – such as domestic fuel and power, energy-saving materials.
• Zero(0%)  – includes train tickets, flights, books, newspapers, food (except hot prepared food to eat in or takeaway, which is standard rated).
• Exempt – like bank charges, postage, insurance, and mortgage interest.

Want to learn more about VAT and how it works for small businesses? Take a look at our guides on when do you pay VAT and what items are exempt from VAT.

The 24 month or ‘two-year rule’ is a time period set by HMRC where you can claim expenses against working at a ‘temporary’ workplace, such as a client site. If you use the workplace for over two years, HMRC considers it permanent, meaning you can no longer claim it as an expense. 

This rule also states that you must stop claiming travel as soon as you know you’ll be at a workplace for more than two years. You must stop claiming these expenses immediately, meaning you can’t continue claiming for the rest of the two-year period. For example, if you start with a one-year contract with a client and extend it to a three-year contract, you must stop claiming at the one-year mark.

You need to keep a receipt/proof of purchase for all expenses that you claim for. This can be in the form of paper originals or electronic copies.  It is worth noting that if you are keeping electronic copies, you should ensure that they are complete, legible, secure and backed up in more than one place.

As with all receipts and HMRC required evidence, you need to make sure they are retained and available for inspection. Otherwise you could receive an unexpected tax bill if you can’t provide the required proof of purchase. Within the Countingup accounting software, you can easily capture and store your receipts against your transactions.

The best way to track your business expenses is to use accounting software tailored to small businesses and sole traders. This type of system is designed to simplify financial management and only includes features small businesses need. 

Using accounting software like Countingup makes it much easier to track your expenses, organise them correctly and access up-to-date financial information. These insights will be especially valuable come tax season as you’ll want to make sure you get all deductions you’re entitled to.

We’ve listed a few steps you can follow to make sure your business expense management is as simple and effective as possible:

As a new business owner, you will need to open a business current account to use exclusively for business transactions.

As a limited company owner, you’re legally obligated to keep your business finances separate from your personal affairs. However, sole traders will also benefit from having a separate business current account, making it much easier to track and record your expenses properly.

Opening a Countingup business account gives you access to free built-in accounting software and an app that allows you to track your expenses as they happen.

Bookkeeping and tax admin can be time-consuming and stressful, especially when running your own business. You want to choose an accounting system that removes as much of the headache from these tasks as possible.

Countingup is designed to make it easier. Combining your business current account and accounting software in one app automates the time-consuming aspects of your financial admin. Features like invoice automation, receipt capturing and cash flow insights help you stay informed about your finances at all times.

You’ll also need to choose either cash accounting or accrual accounting.

Most small businesses and sole traders prefer using cash accounting since it’s the simpler option. For this method, you record the transactions when they happen, like when you receive or make a payment. 

Accrual accounting is more in-depth but necessary for growing and larger businesses, as well as companies with employees. This method involves recording income as soon as you make a sale without waiting until you get paid. You record expenses the same way, i.e. when you receive the bill, not when you pay it.

You can choose to outsource your bookkeeping to an accountant to take the burden off yourself and ensure it’s done correctly. To simplify your bookkeeping and business expense tracking even further, have your accountant connect to your accounting software.

Countingup has a designated accountant hub, where accountants can connect with their clients to manage their finances easier. Connecting your accountant to your Countingup account gives them instant access to your real-time transaction data. They can review and manage your account efficiently and prepare your taxes accurately.

Make tracking your transactions a habit and set aside time every day to add your receipts to your accounting software. Using a paper system is inefficient and increases the risk of you losing receipts. 

Countingup allows on-the-go expense management, letting you take a picture of a receipt and upload it to your software. The system will store it and attach it to the appropriate expense once you fill it in. 

By setting up a Countingup business current account, you can manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You’ll receive real-time insights into your business finances, profit and loss reports, tax estimates, and unpaid invoices. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!

Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Find out more here.