Module 07: Keeping Track of Business Costs
and Tax Relief
The importance of keeping cost records
Separating costs
Two important tools to use to track costs
Which costs you can use to pay less tax
Covered in the module:
The importance of keeping cost records
Separating costs
Two important tools to use to track costs
Which costs you can use to pay less tax
Explanation on key costs such as travel, use of your home for business and large items of
equipment.
7.1 Introduction
It is essential to keep accurate records of your business costs.
Understanding which expenses are allowable for tax purposes can reduce your taxable profit and
ensure compliance with HMRC rules.
Good record-keeping not only supports tax relief claims but also helps you control spending and
manage cash flow effectively. Every business expense should be properly recorded and supported
with evidence.
7.2 The Importance of Accurate Record-Keeping
Record keeping benefits:
You know that you owe taxes to HMRC every year on your business profits. What you need to know
is that the expenses that you incur to run your company (like employee costs, computers,
letterheads, etc.) can be deducted from the profits. Hence, it cuts the amount of tax you owe.
It should be noted that you cannot deduct the expenses without maintaining the applicable records.
You need to prove to HMRC that the expense was incurred and that it was wholly and exclusively for
the purposes of the business. For this, you need to have accounting records and organised receipts.
Keeping business and personal finances separate
Keeping business and personal finances separate makes tracking allowable expenses easier and
reduces errors when preparing tax returns.
For example
If you have a credit card solely for business, you will get the records of the office supplies only. Also,
in case you forgot any business expense, you may later search through one account, rather than
several. If you are maintaining accounting software, ensure that all the records are kept in the right
order.
A regular habit of recording
Expenses vary. If you want to deduct most of your expenses, you have to keep all the records of the
purchases. For example, if you have a car, you should maintain a separate vehicle log to provide
details of the trips. You only need to spend a few minutes daily to enter or download receipts from
the bank into your accounting programme. This is a necessary step if you want to pay less tax.
A self-employed person or partnership must keep records for at least five years after the 31st
January submission deadline for the relevant tax year. In the case of companies, it is mandatory to
keep records for six years from the end of the accounting period.
Know what is deductible
All trading expenses that are wholly and exclusively meant for business are allowed as a deduction
for tax purposes. Expenses like wages, rent, utilities, office supplies, professional fees, insurance
and marketing are all allowable. HMRC provides full details of the allowable business expenses.
Seek help
Seeking help is always a good idea when there is any confusion. It is often tough to figure out which
expenses are deductible. In such a case, you may seek the help of an accountant or a pro who has a
complete idea of tax reliefs. They know the changes made in the tax laws and will keep you tax
penalty-free.
Track your cost by separating:
Costs paid for by the business straight away
Those the business takes credit on
Those you paid for personally
If you maintain the above mentioned costs separately, it becomes easier to track costs. You know
exactly what you have spent and where.
If your business takes credit for essential items, the accounting record will exactly show the amount
you have taken, how much you owe and when you have to pay it. You do not want everything to get
mixed up, as it will become problematic for any entrepreneur to do the calculation of tax in such a
way.
To avoid any sort of miscalculation, you should always maintain costs separately, which will be
advantageous for you at the end of the year. This practice should be adopted the moment you start
your business. This reduces stress and improves financial control.
7.3 Digital Tools to Support Record Keeping
Modern accounting software can simplify cost tracking by bringing
your income, expenses, bank activity, and reports into one place.
It reduces manual data entry, improves accuracy, and makes it easier to keep records in a format
that supports tax and compliance requirements.
Accounting software
What does accounting software help you do?
Many accounting platforms include features such as bank feeds, invoicing, expense tracking, and
reporting. These tools can help you keep your records organised and up to date, especially as your
business grows.
Common features you may see include:
Automated bank feeds and transaction importing
Invoicing and payment tracking
Expense categorisation and reporting
Bank reconciliation to match transactions to records
Cash flow summaries and management reports
Integration with payment providers and other business tools
Why this helps
Using a single system to record transactions can help reduce errors, make it easier to find
supporting evidence, and improve the quality of information you provide to your accountant or
include in your tax return.
Storing records digitally
Many cloud-based systems allow you to store receipts and invoices digitally, helping you to maintain
organised records without relying on paper files.
What should you look for when choosing a system?
Consider the size and complexity of your business, the type of reporting you need, whether it
connects to your bank, and whether it supports the way you invoice and track expenses.
Receipt capture and expense tracking tools
Receipt capture tools can reduce the time spent processing expenses.
If you forget to record a transaction, you may need to search through receipts and bank statements
to reconcile costs. Digital expense tools can help you track, record, and report expenses more
efficiently by capturing receipts and extracting key information.
Many tools use OCR (optical character recognition) technology to read receipts and invoices,
capture key details, and send the information into your bookkeeping or accounting system.
Available as a mobile app
Most tools offer mobile apps so you can photograph a receipt and upload it straight away, reducing
the risk of lost paperwork.
For example
If you have a long receipt with multiple items, you can take more than one photo so the details are
clear and complete.
Managing your expenses
Receipts and invoices can usually be submitted in different ways, such as by email, mobile app
upload, cloud storage (for example, Dropbox), or drag-and-drop. The tool then extracts the key
information and helps organise it for review and export into your accounting records.
Reducing manual data entry
Receipt capture tools can extract details such as the supplier name, date, amount, VAT (where
relevant), and payment method. Some tools can also suggest a category for the expense, which can
speed up processing (although entries should still be reviewed for accuracy).
Benefits for small businesses and advisers
Using digital tools can help reduce admin time and improve record quality, particularly where there
are many small purchases and receipts.
Potential benefits include:
Less time spent on manual data entry
Better organisation of receipts and invoices
Improved visibility over spending
Easier sharing of records with accountants or bookkeepers
Reduced risk of missing or duplicate records
Cleaner audit trail and supporting evidence for tax purposes
7.4 Allowable Business Expenses
Understanding which expenses are allowable for tax purposes is
essential.
Allowable business expenses reduce your taxable profit, which in turn reduces the amount of tax you
pay.
There are three key categories of costs that commonly reduce taxable profit:
Travel costs
Use of your home for business
Capital expenditure (large items of equipment)
Travel costs
There is an important distinction between business travel and private travel.
Business travel is allowable when it is wholly and exclusively for business purposes, such as
travelling to a temporary workplace, between workplaces, or to meet clients.
Allowable travel costs may include:
Transport (airfares, taxi fares, train fares)
Accommodation where an overnight stay is necessary
Reasonable subsistence while travelling
There is no tax relief for ordinary commuting (travel between home and a permanent workplace).
Example:
If you travel to Edinburgh for a business meeting and need to stay overnight, the travel and
accommodation costs are normally allowable, provided the journey is wholly and exclusively for
business purposes.
Mileage Allowance Payments (MAPs)
If an employee uses their own vehicle for business purposes, you may reimburse them using
approved mileage rates without creating a taxable benefit (up to the approved limits).
You can find the latest approved mileage rates on the Government website.
Business mileage does not include ordinary commuting. Travel between a permanent workplace and
home is not allowable.
Use of Home for Business
If you use part of your home for business purposes, you may claim a reasonable proportion of
household expenses based on business use.
Examples of potentially allowable costs include rent or mortgage interest (where applicable),
insurance, council tax, heating and lighting, and broadband.
When calculating the business proportion, consider:
Usage - How much of the service is used for business
Time - How long the space is used for business
Area - How much of the home is used for business
Administrative Costs
Many day-to-day running costs are allowable where they are incurred wholly and exclusively for
business purposes. These may include stationery and postage, advertising and marketing,
professional subscriptions, telephone and internet costs.
Where a mobile phone is used for both business and personal purposes, only the business element is
allowable. Clear records should be kept to support the claim.
Disallowed Expenses
Certain expenses are not allowable for tax purposes.
For example:
Private or personal expenditure
Ordinary clothing (unless it is specialist protective clothing)
Personal living costs
Capital Expenditure
Large items of equipment that provide a lasting benefit to the business (for example, machinery,
tools or vehicles) are treated as capital expenditure.
Capital expenditure is not deducted as a normal expense. Instead, tax relief is obtained through
capital allowances, which are explained in the next section.
7.5 How to Claim Capital Allowances
Capital allowances should be claimed on your tax return.
Claims must normally be made within the time limits for amending the relevant tax return (generally
within 12 months of the filing deadline).
Which are the assets on which you can claim capital allowances?
Machinery
Equipment
Business vehicles, such as lorries, vans and cars.
These are known as plant and machinery. You are allowed to deduct all or some of the value of items
from your profit before you pay tax.
What are the other capital allowances which you may claim for?
Dredging
Patents
Extracting minerals
Research and development
Renovating business premises
Know-how
What are the most common types of assets that qualify for capital allowances?
Van
Motorcar
Specialist machinery
Computer, printer, etc.
Tools (like lawnmower, etc.)
How Capital Allowances Are Calculated
The normal method of claiming capital allowances is through writing down allowances. Under this
method, tax relief is given over time by deducting a proportion of the asset’s value each
year. However, there is also a more generous relief known as the Annual Investment Allowance
(AIA).
The Annual Investment Allowance allows a business to deduct the full cost of qualifying plant and
machinery from its profits in the year of purchase, up to an annual limit. This means that instead of
spreading the tax relief over several years, the business can reduce its taxable profit immediately in
the year the asset is bought. Most plant and machinery qualify for AIA, but certain assets (such as
cars) are generally excluded.
The current figures can be found on the government website.
Module Summary
Regardless of business size, keeping track of your costs can maximise available tax relief and help
reduce overall spending. Once your costs have been reduced, this can benefit your customers, as you
will be able to offer them more discounts.
A self-employed person or a partnership business should keep the records for at least five years after
the 31st January submission deadline following the relevant tax year. In the case of companies, it is
mandatory to keep the records of the accounting period for six years from the end of that period.
There are basically three key costs that will help you pay less tax - i.e. travel costs, use of your home
for business and large items of equipment. Capital allowances are claimed through your tax return
for the relevant accounting period. "Any travel between a permanent workplace and home, or any
other place which is not a workplace” is known as ordinary commuting.
Capital expenditure is the expenditure on an item incurred in your business that has a lasting
benefit. The common types of assets that qualify for capital expenditure are a van, motor car,
specialist machinery, computer, printer and tools (like a lawnmower, etc.).