Not sure how you should categorise your business and personal expenses? This article may help.
We can’t give you exact advice about where to put a cost - that’s up to you and your accountant. But we can give you some general guidance that may be helpful. Here’s a list of all the standard categories for day-to-day running costs of your business in FreeAgent, and some examples of what you might use them for. We’ve also looked at when costs might be capital assets rather than running costs.
You’ll see that there are some costs that could go in one or more categories - for example your FreeAgent subscription might go in Computer Software or Subscriptions. It’s entirely up to you which one you choose in this case, but do talk to your accountant if you’re not sure.
Important:not all your day-to-day running costs can be used to reduce your tax bill - or, in accounting-speak, not all running costs are “allowable for tax relief”. You can see more guidance about which costs are allowable for tax relief in our whitepaper. You should always get professional advice from your accountant if you are not sure whether a particular cost is allowable.
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, “Accommodation and Meals” is where you might put that cost.
“Meals” refers to your own meals and other food and drink, such as a mid-morning cup of coffee and a muffin, when you’re out and about on business. Don’t put the cost of a shared meal with anyone else in the “Accommodation and Meals” category - that should go in either “Business Entertaining” or “Staff Entertaining”, depending on who you are with. Be sure to check whether you can claim the costs of your food and drink before you do so, as HMRC’s rules are quite strict about what you can claim here, given that we must all eat to live.
This category is for accountants’ fees for work relating to your business, such as preparing accounts. Be aware 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, you’ll need to set up a new category to put the disallowable part in, tag the category as not allowable for tax, and split the cost between the allowable and disallowable categories.
Advertising and Promotion
This category would include costs of making people aware of your business, such as offline and online adverts, networking club memberships, and directory listings. You may also wish to put marketing costs in here, such as newsletter sending software.
Business Entertaining is the cost of entertaining anyone who isn’t a bona fide current employee of your business. Some examples 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 favourite customers to a sporting event.
You can’t use this cost to reduce your tax bill, nor can you usually reclaim VAT on Business Entertaining, but if you use this category in FreeAgent it will handle both of these correctly.
If you’re buying childcare vouchers for your employees, this category is where you would put the cost of those vouchers. Be careful of the VAT here, because the bill for the vouchers will often only have VAT on the admin fee, so you’ll need to make sure you choose “Amount” and put in the actual amount of VAT on the bill.
This is for smaller items of computer equipment which will only be useful to your business for less than a year and which doesn’t cost more than you’d pay for a typical day-to-day running cost. Examples might be a new power cable for your computer, or a new mouse.
Larger items of equipment that will be useful for more than a year and are expensive in the context of your business, would be categorised as “Capital Assets”, rather than “Computer Hardware”. Examples of this would be a new computer or new printer.
You could use this category for regular small payments for computer software, such as a subscription to FreeAgent or to email marketing software. If you make a large one-off purchase of software, this might be a capital asset - talk to your accountant if you are not sure.
Internet & Telephone
As its name suggests, this category could be used for broadband and landline phone bills. You may also choose to put mobile phone running costs in here, such as pay-as-you-go vouchers, or alternatively you might want to use the separate “Mobile Phone” category.
Check with your accountant to make sure how much of your phone bill you can include. If your business is a limited company and the bill is in the company’s name, you’ll usually be able to include the whole bill. If the bill is in your name, talk to your accountant about what proportion you could include.
You might use this category for payments such as car hire, or the rental of a franking machine.
If you’re leasing a car, talk to your accountant first before using this category, because you may have to treat the car as an asset bought on hire purchase. You might also have to use the “Amount” option and include only 50% of the VAT.
Legal and Professional Fees
You could use this category for fees such as solicitors’ fees, and, if your business is a limited company or LLP, you could include here your annual return fee paid to Companies House. It’s usually a good idea to put your accountants’ fees into the separate Accountancy Fees category.
Some legal fees, such as those relating to long-term rentals, might not be allowable for tax - check with your accountant if you’re not sure. Penalties such as speeding fines or parking tickets definitely aren’t allowable for tax, because you incurred the cost while breaking the law. If you have a disallowable legal cost, you’ll need to set up a new category to put this in, tag the category as not allowable for tax, and split the cost between the allowable and disallowable categories.
You might want to use this category for the running costs of a mobile phone, such as contract fees or pay-as-you-go vouchers. Don’t put the cost of buying the phone itself in here - that would be a capital asset.
Check whose name the bill is in. If your business is a limited company and the bill is in the company’s name, you’ll usually be able to include the full cost of the bill, even when you’ve used the phone for non-business calls and internet as well. If the bill is in your own name, check with your accountant how much of it you should be including in your accounts. You may have to put some of the costs to “Drawings” instead, or to your director’s loan account.
There are several different ways you could work out 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 go into its own separate category.
Costs that might go in the “Office Costs” category are day-to-day costs of running an office that’s not based in your home, such as cleaning, running repairs, and light and heat. If you buy tea and coffee for your staff to drink in your office, you could also put these costs in “Office Costs”, but 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 will usually suggest you use the “Use of Home” category for running costs instead.
This category would be 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 be categorised as “Capital Assets”. Examples of this would be a new chair, or a new desk.
Other Computer Costs
You might choose to use this category for repairs to computers, or for website maintenance.
This category is useful for when you’re having letterheads or business cards printed, or perhaps brochures or leaflets to give out at an exhibition. Use this category for the print costs.
The cost of a Christmas party of up to £150 per employee can be claimed. During the year, including the Christmas Party this is the maximum that can be claimed, so you could have two events each costing £75 each.
If you pay rent for an office that’s not in your home, you could use this category for the cost of your regular rent. Don’t use this category for any deposit you pay your landlord, though, as this isn’t a day-to-day running cost of your business - it’s money that your landlord owes back to you. If you need to account for a rent deposit, please contact firstname.lastname@example.org and we’ll explain how to do that.
You could also use this category for business rates, or you might want to post these to Office Costs instead or set up a new category for them.
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.
Use this category only for the costs of entertaining current employees of your business, who are on the payroll and being paid a salary. For example if you throw a Christmas party for your team (you can still put the whole cost of the event here if your staff are allowed to bring a +1), this would be “Staff Entertaining”.
Be aware that the costs of entertaining your staff may incur extra tax or NI to pay - we give more information in our whitepaper.
If you’re the only member of staff in your business, unfortunately you can’t include any costs for entertaining yourself. You should either categorise these as as “Accommodation and Meals” or post them to Drawings or to your director’s loan account. Double-check with your accountant if you’re not sure.
Training courses are allowable for tax relief if they’re 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 to start doing a particular job.
For example, if you are an IT contractor and you go on a course to maintain your knowledge of Ruby, you’ll usually be able to claim the cost of that course. If, however, 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.
This would be the cost of office stationery such as envelopes, paper, pens and pencils.
Sundries is a category used to describe anything that won't fit easily into another category. Use it sparingly and as a last resort, because it’s helpful to keep track of the different costs of your business and see where you might be overspending.
This would be for the regular payment 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 Admin Expenses
If your bank account is in your business’s name, you can put your bank charges in the “Bank/Finance Charges” category. 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 could also use this category for other finance fees, such as PayPal fees.
Books and Journals
If you buy books or newspapers for your business, or magazines for your clients to read, you could put these in the “Books and Journals” category.
If your business gives money to charity, use this category for that payment and FreeAgent will make sure it goes in the right place on your tax return.
You can claim the cost of insurance for your business. Here are some examples of different business insurance policies:
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 (this would normally go to the “Insurance” category)
Jury service – covers jury service costs (this would normally go to the “Insurance” category)
Key man – 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 would also go here but you would have to report it on your form P11D, as there is extra tax and NI to pay on this.
This would be for interest on business loans, hire purchase accounts and so forth. If you’re not sure how much of your payment is interest, ask your accountant to calculate it for you.
Use this category only for penalties levied by HMRC for late filing of RTI returns, or late or incorrect payments of PAYE and NI. Don’t use it for the actual payments of PAYE and NI - they appear lower down the list of payment categories in FreeAgent.
Pension (Stakeholder) and Pension (Annuity)
Only use these categories if your business is a limited company and it’s making pension contributions that don’t go through the payroll.
If you’re a sole trader, payments to your pension have to be explained as Money Paid to User > Drawings, because these count as a personal rather than a business cost.
If you’re paying staff pension contributions through the payroll, this article explains how to handle them.
Company Pension Contributions
Company paid pension contributions for the benefit of an employee or director are claimable but where the amount paid exceeds the beneficiaries salary careful attention is needed and advice should be sought.
You might use this category for the cost of postage stamps for your business, or the cost of delivery of goods to customers.
Be careful with VAT here. Postage through the Post Office is usually exempt from VAT, but you may have to pay VAT on delivery costs, so check your bill and use the “Amount” drop-down if needed, to make sure you reclaim the right amount of VAT.
Double-check with your accountant whether your subscriptions, such as to trade or professional bodies or business membership clubs, are allowable for tax relief.
The “Travel” category is for business travel other than in a car, such as bus fares, train fares, air fares and taxi fares.
Be very sure that your journey counts as business as far as HMRC is concerned. It’s rare to be able to claim the cost of a journey from home to work, for example, even if you work at home.
Double-check with your accountant if you’re not sure whether your journey counts as business.
Use Of Home
Use this category for costs that you incur working at home. For how to work out how much you can claim, take a look at our infographics for sole traders and limited companies.
Use this category only for penalties levied by HMRC for late filing of VAT returns and late or incorrect payments of VAT. You should use the “VAT” category, rather than this one, for payments of VAT.
Cost of Sales
You might have to pay commission if you’re making sales through a third party, such as notonthehighstreet.com. The “Commission Paid” category is useful for those costs.
If you are making sales and having commission deducted, remember you do 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
These would be costs that relate directly to particular individual sales that your business makes. For example, you might want to put delivery costs in here, or the cost of materials to make goods for sale.
If you hire machinery to make goods for resale, then the cost of that equipment could go in here.
You may want to divide out your cost of sales into different categories, and put the cost of materials to make goods for sale in here.
If you hire subcontractors to help make your goods for resale, the cost of paying them could go in this category. For example, if you are an upholsterer and you outsource hand-sewing of cushion piping, then the cost of paying your hand-stitcher could go here.
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. Set up a new category for these if you need to.
Use this category only for payments of PAYE and NI from either your payroll or P11D. If you are a sole trader, post your payments of Self Assessment income tax, Class 2 NI and Class 4 NI as Money Paid to User > Drawings. Don’t put these payments in the “PAYE/NI” category - HMRC counts the costs in this category as money that you owe them, rather than money your business owes to them.
Use this category for payments of UK VAT to HMRC.
VAT Mini One Stop Shop
If you have to pay VAT on sales of digital services to EU consumers, and file a separate VAT MOSS return, put the VAT you pay under these rules into this category. It’s helpful to keep this separate from your ordinary UK VAT.
Purchase of Capital Asset
If you are buying a large item of equipment for your business that will last you more than a year or two, will help your business earn money, and costs more than you spend on an average day-to-day running cost, it is likely to be a capital asset and you will need to explain it as a “Purchase of Capital Asset” rather than a “Payment”.
If your business is using the VAT Flat Rate Scheme, it’s especially important to explain any assets that cost over £2,000 including VAT correctly, so that FreeAgent can process the automatic reclaim of VAT on these assets.
This guide was put together with the help of BFCA Limited Chartered Accountants and Tax Advisers.
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