Knowledge

Claiming Business Expenses As A Startup – What Exactly Can You Claim?

Starting a business can be a daunting task, you’ve got so much to think about.

Operations, marketing, sales, recruitment, finances, sales and more. You’re wearing the hats of managing director, operations director, technical director and finance director…

You’re trying to navigate the choppy startup waters, wondering where to spend your money for maximum impact. Some things are considered allowable expenses, and others are not.

In the eyes of HMRC, an allowable expense is an essential cost needed to keep your business running properly. 

Allowable expenses are deducted from your gross profit and reduce your tax liability as you only pay corporation tax on your net profit.

A quick example:

Your gross profit for the tax year is £100,000 but you have allowable expenses of £30,000 meaning your net profit is £70,000 which is the amount you will be taxed on.

So what’s considered an allowable expense? 

Firstly it’s important to note HMRC’s definition is that any allowable expense must be “wholly and exclusively for the purposes of the trade, profession or vocation”

Also, it’s worth noting the most common things business owners try to claim for which aren’t deductible:

  • Dividends 
  • Client Entertainment
  • Customer Gifts
  • Fines and penalties(!) 

All can’t be deducted.

Before we look at a real example, here are some common expenses you CAN claim for…

  • Salaries
  • Accounting fees (yep!)
  • Advertising and marketing costs
  • Office supplies
  • Office equipment
  • Postage
  • Goods

Let’s look at what this means for a typical UK startup and let’s also explore some lesser-known expenses you may be able to claim for.

Example

Imagine you have started an online store selling T-Shirts aimed at cat lovers. 

You offer several designs, take orders via a website and send the orders yourself to the customer.

The model is simple, effective and if you get it right can be very lucrative.

Allowable expenses:

 

The first obvious one is the cost of goods.

 

  • Your T-shirts are of course an allowable expense
  • Postage and packing – Both allowable, as these are necessary.

 

Perhaps you hired a designer to come up with the T-shirt designs. If that’s a freelancer and you paid them a one-off fee, then that’s deductible. 

If they are on the payroll then that too is an allowable expense.

 

What about the website?

If you paid for a website to be designed and built by an agency that would be an allowable expense, as would any software subscriptions needed to run the store. Eg Shopify

 

Perhaps you ran some Facebook advertising campaigns and paid an Instagram influencer to promote your T-Shirts? Both are allowable and completely deductable.

 

What about transport costs, mileage allowance, travel and entertainment?

These get a little more complicated…

 

If you rented say an industrial unit to store your stock (which would be an allowable expense btw) you can’t claim any mileage allowance for your journey to and from the unit as it’s considered a regular place of work.

You could however claim for driving to the post office or say driving to see a new T-Shirt supplier.

(Mileage allowances are 45p per mile for the first 10,000 miles then 25p per mile thereafter.)

Then, if say your bookkeeping and annual accounts are done by an accountant – RJF of course 🙂  These are allowable expenses.

  • You pay yourself a salary = Allowable
  • You top up your income with a dividend on profits = Not allowable
  • You give yourself a Christmas party = Yep, allowable up to £150!
  • You buy yourself a new laptop = Solely for business use, then yes, allowable
  • You buy yourself a new pair of shoes = Nope! (Well, unless they are workwear eg: safety boots, in which case, yes!)

We once had a client try and put suits through as an expense. 

Whilst his logic of “well we need them to look good for clients” was sound, unfortunately, this is not allowable.

HMRC don’t consider a suit as necessary. 

You could go to meet clients in shorts and a vest right? (Hey we don’t make the rules!)

I know you’re thinking “this is a minefield” and you’re right, there are so many little quirks and nuances to claiming expenses.

Just remember – wholly and exclusively, if it’s necessary to run your business then most likely it will be an allowable expense. If it’s not then you might not be able to claim.

Remember we are here to help if you’re not sure that something is allowable give us a call or send us an email. We’ll always try and give you an answer pretty quickly.