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What is a business expense?

A business expense is a cost collected during the ordinary course of business. It can apply to any size of business. Business expenses are a part of the income statement and are subtracted from revenue to generate the business’ taxable net income. They can also be referred to as business expense deductions. Most companies will have their own business expense policy, generally separated into capital expenditures and operational expenditures. Corporate travel expenses fall into the business expense category.

One exception to this is client entertaining. While it’s a valid business expense, it’s not tax deductible and you can’t reclaim VAT on it.

Business expenses in the UK are items and services bought so that you can carry out the work of your business. They may be incurred directly and paid for by the business, or paid for by an employee and reclaimed from the company. If they’re wholly and exclusively used for this, the entire cost is subtracted from company revenue before corporate taxation. If they’re only partly used for business purposes, such as vehicle fuel or a mobile phone, which may also be used for personal journeys and calls, you can only claim the business portion.

It’s important to categorise expenses correctly when you record them, so that your company taxation and VAT returns are accurate. HMRC can impose penalties for incorrect tax calculations, even if it’s a genuine mistake. Tax rules can be complex, so it’s a good idea to use an expenses management system that automates as much of the process as possible, applying valid HMRC rules to ensure your records are correct and up to date.

Employees are usually responsible for reclaiming their own business expenses from their employer. If you can provide them with a platform, app or system that makes it easy to record expenses as they are incurred, it helps reduce errors and delays and means you can reimburse employees promptly. In extreme cases, slow reimbursement can lead to employee hardship: it can certainly deter employees from incurring necessary business expenses if they’re afraid they won’t be repaid quickly. This can hurt your business. For example, if sales reps find they’re not being reimbursed for airfares or accommodation for weeks, they may avoid visiting potentially profitable customers in locations that demand expensive travel bookings.

Business expenses can be anything that a business or its employees buy to help them carry out their necessary work. Common categories are:

  • Travel and accommodation – hotels, rail and air fares, ground transport, necessary food and drink for employees working away from their base location
  • Client entertaining – meals, events, promotional gifts and accommodation for clients in support of the business relationship
  • Services – office cleaning and maintenance, accountancy, legal fees and IT services
  • Utilities – heating, lighting, power, water, rent and phone systems
  • Subscriptions – professional subscriptions to industry bodies or publications

HMRC sets out in detail how you should classify and record expenses incurred either by the business directly or by employees for reimbursement. Refer to the HMRC website for full details or seek professional advice from an accountant.

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