What makes a cost an allowable expense

Getting your expenses right is one of the simplest ways to keep more of what you earn, and one of the easiest places for a freelancer to create avoidable problems. HMRC's test is blunt and reliable: a cost must be incurred wholly and exclusively for the purposes of your trade. If you would have spent the money anyway, whether or not you were working, it is almost certainly personal.

That single rule settles most arguments. A laptop used only for client work is clear. The weekly food shop is not. The grey area in the middle, such as your phone, your broadband or the spare room you work from, is where you need to be sensible, consistent and able to explain your reasoning if asked.

The costs you can usually claim

Most freelancers can claim a wider range of costs than they first assume. In broad terms, look for anything that keeps the business running:

• Office and admin: stationery, printer ink, postage, accounting software, cloud storage, and the fees you pay an accountant or bookkeeper.
• Equipment: laptops, monitors, cameras and tools. Higher-value items usually go through capital allowances rather than as a straightforward expense.
• Insurance: professional indemnity, public liability and any cover that is genuinely for the business.
• Professional costs: membership of a recognised professional body, trade magazine subscriptions, and training that updates skills you already use in your current work.
• Travel: fuel or tickets for journeys to client sites, temporary workplaces or a co-working space. Not your ordinary commute to a permanent workplace.
• Marketing: your website, domain names, advertising, printed materials and the photography for your portfolio.
• Financial: bank charges on a business account, and interest on business borrowing. Not the capital repayment of the loan itself.
• Phone and internet: the business proportion only.

One notable exception is client entertaining. Meals, drinks and event tickets for clients are specifically not allowable, even though they feel like a business cost. Entertaining your own staff is treated differently, but most freelancers have no staff to entertain.

Keep dated receipts, not just good intentions

A bank statement shows that money left your account. It rarely shows what you bought or why, and that is exactly what an enquiry will focus on. HMRC generally expects you to keep records for at least five years from the 31 January filing deadline that follows the end of the tax year, so build the habit early rather than reconstructing a year in a panic.

Photograph or scan every receipt as you receive it, and give it a short note: what it was, when it was bought, and which client or project it related to. For anything ordered online, save the email confirmation, since it is far more useful than a card statement line reading "payment to a retailer". If a receipt goes missing, note the purchase in your records while you still remember the details.

Mixing personal and business spending

Mixed-use costs are normal. The trick is to claim only the business share and to be able to defend the number you choose. If your broadband is used for work about half the time, claim half. If only a small proportion of your phone calls are to clients, claim that proportion and keep it consistent from year to year. A figure that jumps around without explanation invites questions.

Working from home is the classic example. You can claim a flat rate under simplified expenses, which ranges from around £10 to £26 a month depending on how many hours you work from home, or you can work out a reasonable proportion of your heating, electricity and broadband. What you should not do is claim your full rent or mortgage, or your whole council tax bill. Your home is primarily a home, and claiming otherwise is difficult to justify.

Flat rates and other simplifications

Simplified expenses exist precisely so that freelancers do not spend their evenings adding up gas bills. For vehicles, you can use 45p per mile for the first 10,000 miles in a tax year and 25p per mile after that, instead of tracking every fuel receipt, servicing bill and insurance premium. You cannot mix and match: once you use mileage rates for a vehicle, you stick with them.

There is also the trading allowance of £1,000. If your total expenses come to less than that, you can deduct £1,000 instead of claiming actual costs. It is quick and tidy, but it is not always the better deal, so compare the two before deciding. Separately, the Annual Investment Allowance means most freelancers can deduct the full cost of equipment in the year they buy it, rather than spreading it over several years.

Where freelancers trip up

A handful of claims cause most of the trouble. Watch out for these:

• Everyday clothing. A suit or smart outfit is not allowable, even if you only wear it for meetings. Uniforms and protective clothing are a different matter.
• Fines and penalties. Parking tickets, speeding fines and late filing penalties are never deductible.
• Holidays with a bit of work attached. Checking emails does not turn a family trip into a business expense.
• Training for a brand-new trade. Learning skills for the work you already do is fine. Retraining to start something completely different is not.
• Vague percentages. If you claim 40% of your household bills, know why that figure is fair.

None of this needs to be stressful. Keep your business spending on a separate card where you can, save receipts on the day you get them, and write a one-line note explaining anything unusual. Do that, and your tax return becomes a half-hour job rather than a weekend of guesswork, and you can claim what you are genuinely owed with confidence.