What are the personal tax rules for expenses?

In this blog, we look at the tax rules that are related to personal expenses in businesses. Whilst it’s tempting to believe that any expense you incur related to work can be claimed without a tax burden, there are a few exclusions.

As an employee, it’s not unusual to pay for some small business costs and submit a claim for repayment later. For example, this could include the cost of travelling to a work-related training course. 

The general principle covering the claiming of personal business costs says that you should be reimbursed for these costs but not profit from this.

For example, you cannot claim for the daily costs of travelling from your home to your regular place of work because these are costs that HMRC expects you to fit into your personal costs of being employed. 

However, if you incur costs on behalf of your employer which are completely related to your employment, then it is right that you should expect to be reimbursed. Your employer needs to follow strict rules from HMRC about which costs can be paid back without them (or you) incurring a tax bill.

What can your employer reimburse you for without anyone incurring extra tax?

To see if expenses qualify as "business expenses", here are HMRC's conditions, which must all be met in order for the expense to qualify.

The expense:

- would have been incurred by whoever was doing your job

- was necessary for you to carry out your work

- was incurred "in the performance of your duties"

- was incurred and paid

- was "wholly and exclusively" for your work

So, in essence, an expenses claim needs to relate directly to the requirements of your job and the expense would have been incurred by whoever was doing your job. HMRC look at the requirement of the job itself, rather than your requirements as an individual.

Here’s a quick guide to what’s allowed and what’s not: 

Travel expenses

Business travel expenses cover all work-related travel but exclude nearly all home-to-work journeys. 

Work-related clothing

HMRC give an example of an employee who works at a chemical factory. His employer provides regulation protection overalls, but the employee buys his own as the employer's overalls are uncomfortable.

If the employer repaid the employee for the personal cost of supplying and cleaning his own overalls, the employee would need to pay tax on the amount repaid, because the employer already provided regulation clothing. 

The expense needs to be necessary for you to carry out your work

Earlier we mentioned that the expense must be one that anyone doing the job would have incurred, and the expense must also be necessary for the work to be done.

HMRC is specific in saying that is not necessarily the value of the expense but the nature of the expense.

So, if an employee needs to travel from Manchester to London to meet a client, the cost of the journey is a permitted expense. However, HMRC does not limit the cost, so if the employer decides that going by plane rather than train is more appropriate, then the full costs of the airfare would be claimable. The claim is not limited to the cheapest form of transport. 

An expense needs to be incurred in the performance of your duties

This is a tough hurdle. HMRC provide an example of a salesman whose company exports France. The salesman decides to improve his French by going to night school. However, the cost of his classes is not permitted as a business expense. This is because although the classes are relevant and in connection with the salesman’s job, he does not need to speak French well to perform his job. 

Are books covered as a personal expense?

If you buy a work-related book simply to improve your general business knowledge, then you're unlikely to be able to claim tax relief on the cost of that book. However, if it is the cost of a book necessary for a specific recognised course for a professional qualification, then this is an allowable expense.  

The expense was "wholly and exclusively" for your work

For non-travel expenses, if the expenditure has a dual purpose, business and non-business, then unless you can work out part of it that was just for business, you can't claim any of it.

The “wholly and exclusively” rule comes into sharp focus on the subject of ordinary clothing, sometimes worn for work.

For example, if an employee buys a grey skirt to wear to work, the cost cannot be claimed, because they could also wear the skirt socially. It does not matter whether they do or not. This explains why corporate clothing (for example clothing worn by employees in a bank) is permanently branded with the company’s logo, distinguishing it from ordinary clothing and making it untaxable. 

Disclaimer: This is not legal, accounting, or tax advice - it's simply a guide. If you need help, check with your accountant or contact HMRC directly.