Allowable Business Expenses: Home Office, Travel and Subsistence Without the HMRC Argument

Expense claims are where good businesses quietly lose money in both directions: under-claiming out of caution, or over-claiming and inviting an enquiry. The rules are clearer than most people think.

The test that governs everything

For a sole trader, a cost is deductible if it is incurred wholly and exclusively for the purposes of the trade. For a company employee or director, a cost reimbursed tax-free must be incurred wholly, exclusively and necessarily in performing the duties of the employment — a tighter test.

Where a cost has a genuine dual purpose, sole traders can often apportion it on a reasonable basis. Employees generally cannot, unless there is a specific statutory exemption. That single difference explains most of the confusion.

Working from home

Sole traders have two options:

1. Simplified flat rate based on hours worked at home each month. No records of actual costs needed, just hours.
2. Apportioned actual costs — a reasonable share of rent or mortgage interest, council tax, utilities, insurance and broadband, based on rooms used and time used.

Apportionment usually beats the flat rate for anyone working full-time from home. Keep the calculation written down: rooms used for business ÷ total rooms, adjusted for the proportion of time the room is used for business.

Directors should use a homeworking agreement and either claim the fixed weekly homeworking allowance (no evidence required) or reimburse additional household costs that can be evidenced. Charging your company rent for a home office is possible, but it creates rental income on your Self Assessment, needs a licence agreement at a market rate, and can affect Private Residence Relief if a room is used exclusively for business. For most directors it is more trouble than it is worth.

Travel

The rule is about where you are travelling to, not how.

• Allowable: travel to a temporary workplace, to clients, to suppliers, between two workplaces.
• Not allowable: ordinary commuting between home and a permanent workplace.
• The 24-month rule: a workplace stops being temporary once you expect to spend more than 40% of your working time there for more than 24 months. From the moment that expectation forms, travel becomes commuting.

Mileage. Using your own car, the approved mileage rates apply — a higher rate for the first 10,000 business miles in a tax year and a lower rate thereafter, with a small additional rate per passenger. Keep a mileage log with date, destination and business reason. Reconstructed logs are the fastest way to lose an enquiry.

Company cars are a different regime entirely — benefit-in-kind based on list price and CO2, with fuel benefit if private fuel is provided.

Subsistence

Food and drink is allowable when it arises from allowable business travel. So:

• Lunch on a genuine trip to a client site: allowable.
• Lunch at your desk, or bought on the way to your usual office: not allowable. Everyone has to eat.
• Overnight stays: hotel plus meals allowable, with a small incidental overnight expenses allowance for personal costs.

Client entertaining is never deductible for tax, even though it is a legitimate business cost. Record it, claim the VAT position correctly (generally not recoverable), and add it back in the tax computation. Staff entertaining is different — an annual event open to all staff costing under £150 per head is exempt.

Mobile phones, broadband and software

• A company-provided mobile phone in the company's name, with the contract in the company's name, is exempt from benefit-in-kind — including private use. One phone per employee.
• A personal contract reimbursed by the company is taxable except for the identifiable business calls.
• Broadband at home is usually a mixed cost; the exemption applies only where there was no existing connection and it is provided for business.
• Software and subscriptions used for the business are straightforwardly deductible.

Clothing

Ordinary clothing is not deductible even if you only wear it for work — the "warmth and decency" duality kills the claim. Uniforms with a permanent logo, and genuine protective clothing, are allowable.

Training

Costs that update or maintain skills used in the existing business are deductible. Training that introduces a genuinely new trade or qualification is capital in nature for sole traders and generally not deductible. For employees, work-related training paid by the employer is exempt.

Evidence: what to actually keep

1. The receipt or invoice, not just the card statement line
2. The business reason, recorded at the time
3. For travel: date, destination, purpose, miles
4. For apportioned costs: the calculation, kept with the year's records
5. Six years of records for a company, five years after the filing deadline for a sole trader

Photographing receipts into your bookkeeping software at the point of spend removes almost all of this pain.

The bottom line

Claim everything you are genuinely entitled to, document the reason at the time, and apply the tighter employee test if you operate through a company. Under-claiming is not caution — it is an unnecessary tax payment.