What are expenses?

Definition of expenses

Expenses are a type of business cost. The word ‘expenses’ can be used to describe several different types of cost but it usually indicates that the cost can be reimbursed in some way.

Types of expenses

In the context of small business accounting or bookkeeping, the term ‘expenses’ may refer to:

Allowable expenses

Self-employed sole traders and partners in a partnership can deduct ‘allowable expenses’ when working out how much taxable profit their business made over a period of time (e.g. the tax year or the business’s accounting year).

Allowable expenses include a variety of running costs that may be incurred while running a business. These costs include:

• office costs (including premises costs, such as heating)
• travel costs
• staff costs
• clothing expenses, such as uniforms
• financial costs, such as insurance

Limited companies are subject to different rules for allowable expenses but can deduct business costs from their profits when calculating how much Corporation Tax they owe.

Employers may have to report any items that employees (including limited company directors) make personal use of as a potentially taxable benefit. Employers should include these items when reporting end-of-year expenses and benefits to HMRC.

More information about allowable expenses can be found in our guide to expenses for the self-employed and on HMRC’s website.

Out-of-pocket expenses

An ‘out-of-pocket’ expense is a cost that is paid for by an employee or business owner and is later reimbursed by the business that employs them. This includes limited company directors who are employees of their own company.

Employers are subject to rules from HMRC about what they can reimburse without incurring extra tax. Our guide to out-of-pocket expenses for employees has more information on which expenses can and can’t be repaid.

Costs

The term ‘expenses’ is sometimes used to refer to all of a business’s day-to-day running costs, such as staff wages.

Software for tracking costs and expenses

FreeAgent allows you to track business costs and expenses quickly and easily. With the FreeAgent mobile app you can sort out your expenses as you incur them by snapping receipts with your phone and uploading them to FreeAgent from wherever you are.

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