How to Record Business Expenses: UK Bookkeeping Guide

Record each business expense with its date, supplier, description, category, net amount, VAT, gross amount, payment method and supporting evidence. The bookkeeping entry must reflect what the business bought, not simply where it bought it.

Tax relief depends on business purpose and specific rules. A payment appearing in the business bank account is not automatically deductible.

Information to capture

• invoice or receipt date;
• supplier name;
• document reference;
• clear business purpose;
• expense or asset category;
• net, VAT and gross values;
• VAT rate and recovery restriction;
• payment date and account;
• customer, project or department where useful;
• business/private-use percentage; and
• digital link to the source document.

Basic double-entry examples

Cash expense without VAT

A £100 qualifying subscription paid from the bank:

• debit subscriptions £100;
• credit bank £100.

Supplier bill with recoverable VAT

A £500 professional fee plus £100 VAT received on credit:

• debit professional fees £500;
• debit input VAT £100;
• credit trade creditors £600.

Payment later debits creditors and credits bank.

Partly private expense

If a £120 telephone bill including VAT is 75% business use, apply a reasonable and documented split. The private element is posted to drawings, a director’s loan account or another appropriate non-business code—not hidden within expenses.

Use meaningful categories

Common categories include:

• cost of sales and subcontractors;
• wages and employer costs;
• rent, rates and utilities;
• travel and subsistence;
• motor costs;
• advertising and website costs;
• software and subscriptions;
• insurance;
• professional fees;
• repairs and maintenance;
• bank charges and interest; and
• office and communication costs.

Avoid excessive “miscellaneous” or “general expenses” balances because they make review and tax analysis difficult.

Capital or revenue?

Equipment and lasting improvements may be capital expenditure rather than ordinary expenses. They are recorded as assets, depreciated in accounts and considered separately for capital allowances.

See how to record capital expenditure.

Business-purpose test

For a sole trader, an expense generally needs to be incurred wholly and exclusively for the trade. Where there is an identifiable private element, relief may be restricted to the business proportion if the cost can be apportioned properly.

For a company, costs are considered under Corporation Tax rules and transactions involving directors or employees may also create benefits, payroll obligations or director’s loan entries.

Commonly restricted items

• client and business entertainment;
• fines and penalties;
• personal living costs;
• ordinary commuting;
• private-use portions;
• capital expenditure claimed as a routine expense;
• certain legal costs;
• depreciation for tax purposes; and
• costs unsupported by adequate evidence.

An expense can be genuine in the accounts but still require a tax adjustment.

VAT treatment

VAT is recoverable only where the business is registered, the cost supports taxable activities, VAT was correctly charged and valid evidence is held. Restrictions apply to cars, entertainment, private use and exempt activities.

If the supplier is not VAT registered or the supply is zero-rated, there is no VAT to reclaim. Do not calculate “VAT” from every gross receipt automatically.

Employee and director expenses

Use an approved expense claim containing:

• claimant and approval;
• date and business purpose;
• receipt;
• category and VAT;
• business mileage details; and
• confirmation that the amount was not claimed previously.

Post the expense when approved and record the liability to the claimant until reimbursement.

For vehicle claims, see the 2026/27 mileage guide and 55p rate.

Cash and personal-card purchases

A legitimate business expense paid personally can still be recorded, provided the entity and evidence rules are met. Credit:

• the proprietor’s capital account for a sole trader;
• the partner’s current account for a partnership; or
• the director’s loan or employee expense account for a company.

Do not credit the business bank if no business-bank payment occurred.

Bank feeds and receipt capture

Bank feeds show money movement but not always what was purchased, whether VAT was charged or whether the item was private. Receipt-capture tools also require review for:

• duplicate documents;
• incorrect dates or suppliers;
• VAT extraction errors;
• credit notes;
• capital items; and
• foreign currencies.

Monthly expense review

1. Reconcile bank, card and cash accounts.
2. Check unmatched and duplicate transactions.
3. Review uncategorised and miscellaneous costs.
4. Separate capital and private items.
5. Validate VAT evidence and rates.
6. Reconcile employee claims.
7. Review unpaid supplier bills.
8. Compare categories with prior periods and budget.

Records and retention

Keep invoices, receipts, agreements, expense claims, mileage logs and payment evidence for the statutory period. Digital copies should be complete, legible, secure and retrievable.

HMRC does not usually require records to be attached to the return, but they must be available if requested.

Frequently asked questions

Can a bank statement replace a receipt?

It proves payment but not necessarily the supply, VAT or business purpose. Retain the invoice or receipt.

Should expenses be recorded when paid?

Cash-basis businesses normally follow payment. Traditional or accrual accounts record costs when incurred and use creditors, accruals or prepayments.

Can personal expenses go through the business?

They must not be treated as deductible business costs. Record them transparently as drawings, benefits or owner/director balances as appropriate.

Official source

See HMRC’s self-employed expense guidance and record-keeping rules.