How to categorise a business cost
This article describes how to explain a business cost in FreeAgent after it has been paid out of your business bank account.
Once the relevant bank transaction has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you will need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below.
Please note that FreeAgent can’t advise on which category to allocate a cost to as we’re not authorised by HMRC to provide accounting advice. However, we’ve included a list below of all the standard categories for day-to-day running costs of your business in FreeAgent, as well as some examples of what you might use them for. If none of the available categories is suitable for a cost, you can create a custom category.
There are some costs that can be allocated to more than one category. For example, your FreeAgent subscription could be allocated to ‘Computer Software’ or ‘Subscriptions’. If you’re unsure which category to allocate a cost to, please ask your accountant.
If the cost that you’re categorising was paid for using personal funds, you should create an out-of-pocket expense instead of following the steps below to explain a bank transaction. For information on the difference between an expense, a bill and a bank payment in FreeAgent, please see this article.
Please note that you need to have level 6 access or above to your FreeAgent account to explain bank transactions.
1. Navigate to the relevant transaction
Navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.
Choose the relevant bank account from the list.
Select the transaction that you would like to explain.
2. Choose ‘Payment’ as the transaction ‘Type’
Select ‘Payment’ from the transaction ‘Type’ drop-down menu.
3. Choose the appropriate transaction ‘Category’
Select the relevant cost category from the ‘Category’ drop-down menu. Please see below for more details on the available categories in FreeAgent. You can choose from admin expense categories that are normally VATable or normally zero-VAT, cost of sales or taxes.
Normally VATable admin expenses
Accommodation and Meals
If you travel on business and stay away from home overnight in a hotel, bed and breakfast, guest house or rented room, you might allocate the costs to the ‘Accommodation and Meals’ category.
When you’re travelling on business, costs for meals and other food and drink that you purchase might be allocated to the ‘Accommodation and Meals’ category. Make sure to ask your accountant whether you can claim the costs of your food and drink before you do so. Please note that the cost of a meal shared with anyone else would usually be allocated to either the ‘Business Entertaining’ or ‘Staff Entertaining’ categories, depending on who you were with.
The ‘Accountancy Fees’ category is for accountants’ fees for work relating to your business, such as preparing accounts. Please note that the cost of your accountant preparing your personal tax return isn’t allowable for tax relief, even if all you’re reporting on your return is your business’s accounts. If part of your accountancy bill isn’t allowable for tax, you’ll need to set up a new category to put the disallowable amount in, tag the category as not allowable for tax, and split the cost between the allowable and disallowable categories.
Advertising and Promotion
The ‘Advertising and Promotion’ category can be used for costs associated with making people aware of your business, such as offline and online adverts, networking club memberships and directory listings. You may also wish to allocate other marketing costs to this category, such as email or social media management software.
The ‘Business Entertaining’ category would be used for the cost of entertaining anyone who isn’t a current employee of your business. An example of business entertaining would be taking a customer or supplier out for a meal, buying a cup of coffee for a potential new subcontractor, or taking a group of your customers to a sporting event.
Please note that you can’t use this cost to reduce your tax bill, nor can you usually reclaim VAT on business entertaining. If you select this category, FreeAgent will handle both of these correctly.
If you’re purchasing childcare vouchers for your employees, you would select the ‘Childcare Vouchers’ category. Be aware that the bill for childcare vouchers will often only have VAT on the admin fee, so if this applies, you’ll need to choose ‘Amount’ and enter the actual amount of VAT on the bill.
The ‘Computer Hardware’ category is for smaller items of computer equipment which will only be useful to your business for less than a year and which don’t cost more than you’d pay for a typical day-to-day running cost.
Larger items of computer equipment that will be useful for more than a year and are expensive in the context of your business - for example, a new computer or a new printer - would usually be explained as a purchase of a capital asset instead.
The ‘Computer Software’ category might be used for regular small payments for computer software, such as a subscription to FreeAgent. If you make a large one-off purchase of software, this might be a capital asset purchase. Please ask your accountant if you’re unsure which category to use.
Internet and Telephone
The ‘Internet & Telephone’ category can be used for broadband and landline phone bills. You may also choose to allocate costs for running a mobile phone, such as pay-as-you-go vouchers, to this category. Alternatively, you might want to use the 'Mobile Phone' category, which is where you would allocate your monthly mobile phone bills.
If your business is a limited company and a bill is in the company’s name, you can usually include the whole bill as a cost. If the bill is in your name, please ask your accountant what proportion of the bill you can include.
The ‘Leasing Payments’ category can be used for payments such as car hire or the rental of a franking machine.
If you’re leasing a car, please check with your accountant before using this category, as you may have to treat the car as an asset bought on hire purchase and/or use the ‘Amount’ option to include only 50% of the VAT.
Legal and Professional fees
The ‘Legal and Professional Fees’ category can be used for fees such as solicitors’ fees. If your business is a limited company or LLP, you might also use this category for the confirmation statement fee paid to Companies House.
Your accountants’ fees would normally be allocated to the 'Accountancy Fees' category instead.
Some legal fees, such as those relating to long-term rentals, might not be allowable for tax - check with your accountant if you’re unsure. Penalties such as speeding fines or parking tickets aren’t allowable for tax.
If you have a disallowable legal cost, you’ll need to set up a new category to allocate it to, tag the category as ‘not allowable for tax’, and split the cost between the allowable and disallowable categories.
The ‘Mobile Phone’ category can be used for the running costs of a mobile phone, such as contract fees. Don’t include the cost of buying the phone itself in this category. Instead, this would be a capital asset purchase.
If your business is a limited company and a mobile phone bill is in the company’s name, you’ll usually be able to include the full cost of the bill. If the bill is in your own name, speak to your accountant about how much of it you can include in your accounts. You may have to allocate some of the costs to your director’s loan account instead.
There are several different ways you can calculate how much cost to include for a car that you use for your work. If you're a sole trader or partner, there's more information on this in our guide. If you’re using the mileage claim option in FreeAgent, the mileage will automatically be allocated to its own separate category.
The ‘Office Costs’ category might be used for the day-to-day costs of running an office that’s not based in your home, for example, cleaning, running repairs, electric and heating bills. If you buy tea and coffee for staff to drink in your office, you could also allocate these costs to ‘Office Costs’. Don’t include these if you are the only member of staff in your business, as in that case, they wouldn’t be allowable.
If your office is in your home, your accountant might suggest you use the 'Use of Home' category for running costs instead.
The ‘Office Equipment’ category can be used for small consumable items of equipment, such as batteries, a calculator for your bookkeeper or a new set of keys.
Larger items of equipment that will be useful for more than a year and are expensive in the context of your business would normally be explained as a capital asset purchase. Examples of this would be a new chair or a new desk.
Other Computer Costs
The ‘Other Computer Costs’ category might be used for computer repairs or website maintenance.
The ‘Printing’ category can be used for any type of printing cost, for example having business letterheads or cards, brochures or leaflets printed.
The ‘Rent’ category can be used for the costs of renting an office that’s not in your home. Don’t use this category for any deposits you pay to landlords, as this isn’t a day-to-day running cost of your business. If you need to account for a rent deposit, please see this article.
If your office is in your home and you’re claiming part of your house rent, your accountant will usually recommend you post this to ‘Use of Home’ instead. For more information, please see this article.
The ‘Staff Entertaining’ category would be used for the cost of entertaining current employees of your business who are on the payroll and being paid a salary - for example, if you throw a Christmas or summer party for your staff. Be aware that the costs of entertaining your staff may incur extra tax or NI to pay. Find out more in our guide to entertaining for your business.
If you’re the only member of staff in your business, the cost of ‘entertainment’ for yourself would normally go to 'Accommodation and Meals', 'Drawings' if you’re a sole trader, or to your director’s loan account. Double-check with your accountant if you’re unsure which to use.
The ‘Staff Training’ category might be used for training courses to maintain your existing skills, or those of an employee. You can’t claim training costs that teach either new skills or skills that would enable you or your employees to start doing a different job.
For example, if you are an IT contractor and you attend a course to maintain your knowledge of Ruby, you’ll usually be able to claim the cost of that course. However, if you go on a course to learn French so that you are able to take on new French clients, that course wouldn’t be allowable, because it’s to learn a new skill.
The ‘Stationery’ category can be used for the cost of office stationery such as envelopes, paper, pens and pencils.
The ‘Sundries’ category can be used to describe anything that won't fit easily into another category. Use it sparingly, and as a last resort as it’s helpful to keep track of the different costs of your business and see where you might be overspending.
The ‘Web Hosting’ category can be used for the regular payments that you make to host your website. The cost of building a website might or might not be a capital asset - check with your accountant if you’re not sure.
Normally zero-VAT or exempt admin expenses
The ‘Bank/Finance Charges’ category can be used for bank charges if your bank account is in your business’s name. If your bank account is in your own name, check with your accountant about whether you can claim tax relief on your bank charges.
You can also use this category for other finance fees, such as PayPal fees.
Books and Journals
The ‘Books and Journals’ category can be used if you buy books or newspapers for your business or magazines for your clients to read.
The ‘Charitable Donations’ category can be used if your business gives money to charity.
The ‘Insurance’ category can be used for the cost of insurance for your business. Here are some examples of different business insurance policies that you might pay for:
- Contents insurance for your office (if you have a home office, this would usually go to the ‘Use of Home’ category)
- Employers' liability – all employers must have this, even those with only one employee, except in certain cases such as where the only employee lives abroad (this cost would normally go to the ‘Insurance’ category)
- Jury service – covers jury service costs (this would normally go to the ‘Insurance’ category)
- Key person – covers the cost of hiring a new member of your team if you lose a key member due to long-term sickness or death (this would normally go to the ‘Insurance’ category)
- Motor insurance - this may go in ‘Insurance’ or you might prefer to put it in ‘Motor Expenses’
- Professional indemnity – protects against any losses suffered by your client for negligent work (this would normally go to the ‘Insurance’ category)
- Property – covers the cost of office premises against fire or accident (this would normally go to the ‘Insurance’ category)
- Public liability – covers the cost of any claim for accidents on your property to a member of the public (this would normally go to the ‘Insurance’ category)
If you pay for private medical insurance for your staff, that might also be allocated to the ‘Insurance’ category, but you would have to report it on your form P11D, as there is extra tax and NI to pay on this.
The ‘Interest Payable’ category can be used for interest paid on business loans, hire purchase accounts and so forth. If you’re not sure how much of your payment is interest, please ask your accountant.
The ‘PAYE/NI Penalty’ category should only be used for penalties levied by HMRC for late filing of RTI returns, or late or incorrect payments of PAYE and NI. Please see this article for instructions on how to explain payments of PAYE and NI.
Pension (Stakeholder) and Pension (Annuity)
These categories should only be used if your business is a limited company and you’re making staff pension contributions that don’t go through the payroll. If you’re paying staff pension contributions through the payroll, this article explains how to handle them.
If you’re a sole trader, payments to your pension have to be explained as 'Drawings', because these count as a personal cost rather than a business cost.
The ‘Postage’ category can be used for the cost of postage stamps for your business or the cost of delivery of goods to customers.
Please note that postage through the Post Office is usually exempt from VAT, but you may have to pay VAT on courier delivery costs, so check your bill and use the ‘Amount’ drop-down if needed to make sure you reclaim the right amount of VAT.
The ‘Subscriptions’ category can be used for subscriptions for your business. For example, trade or professional bodies or business membership clubs. Double-check with your accountant whether your subscriptions are allowable for tax relief before claiming.
The ‘Travel’ category can be used for the costs associated with travelling for the purpose of conducting business-related activities, such as bus fares, train fares, air fares and taxi fares. If you travelled by car, you might prefer to record this business cost as a mileage claim, or to the ‘Motor Expenses’ category.
Double-check with your accountant if you’re not sure whether your journey counts as business travel.
Use of Home
The ‘Use of Home’ category can be used for allowable costs that you incur while working at home. For information on working out how much you can claim, please see our infographics for sole traders and limited companies.
The ‘VAT Penalty’ category should only be used for penalties levied by HMRC for late filing of VAT returns and late or incorrect payments of VAT. Please see this article for instructions on how to explain a payment of VAT.
Cost of Sales
The ‘Commission Paid’ category can be used for commission if you’re making sales through a third party. If you are making sales and having commission deducted, you need to include the full amount of the sale, pre-commission, as sales, and the commission as a cost to your business, otherwise your sales figure for VAT and other taxes will be too low.
Cost of Sales
The generic ‘Cost of Sales’ category can be used for costs that relate directly to particular individual sales that your business makes. For example, delivery costs or the cost of materials to make goods for sale.
The ‘Equipment Hire’ category might be used for the cost of hiring machinery to make goods for sale.
The ‘Materials’ category can be used for the cost of materials to make goods for sale.
The ‘Subcontractor Costs’ category can be used for the costs of hiring subcontractors to help make your goods for resale.
If you subcontract out day-to-day running costs such as admin or bookkeeping, these would usually go into an admin category rather than a cost of sales category. You can add a new category in FreeAgent for these if you need to.
The ‘PAYE/NI’ category should be used for payments of PAYE and National Insurance from either your payroll or P11D. Don’t allocate Self Assessment payments to this category, as they should be explained like this.
VAT Mini One Stop Shop
For information on the VAT Mini One Stop Shop (MOSS) scheme, please see the following HMRC guidance.
The ‘Corporation Tax’ category (which is only visible if your FreeAgent account is a limited company) should be used for payments of Corporation Tax to HMRC. For more information, please see this article.
4. Explain the transaction
Once you’ve chosen the relevant category, select ‘Explain Transaction’ to complete the process.
Regardless of which category you choose, a record of the bank transaction being explained will appear in your Audit Trail report.
For information on explaining multiple transactions at once, please see this article.