Why Expenses Actually Matter in MTD

If you are self-employed and filing quarterly updates under Making Tax Digital (MTD), getting your expenses right is one of the most direct ways to reduce your tax bill. Every pound you legitimately claim as a business expense is a pound that does not get taxed. Yet many sole traders either claim too little - because they are unsure what counts - or claim the wrong things entirely, which can invite HMRC scrutiny later.

This post walks through the main expense categories you can claim as a self-employed sole trader, with realistic examples for each. It is written for people with no accounting background who are doing this themselves. No jargon. Just clear, practical guidance on what you can claim, what you cannot, and how to handle the grey areas.

Note: This post covers expenses for self-employed sole traders only. If you also have rental income, the rules for property expenses are different - see our guide on allowable expenses for sole traders and landlords for a comparison, or the dedicated landlord expenses guide if property is your main concern.

What "Allowable Business Expense" Actually Means

An allowable business expense is a cost you have incurred wholly and exclusively for the purpose of your self-employment. That phrase - "wholly and exclusively" - comes directly from HMRC rules and it matters. It does not mean the expense has to be used 100% for business in every case, but it does mean there needs to be a clear, genuine business reason for the cost.

When you enter expenses in your MTD quarterly update, you are telling HMRC what you spent on running your business during that three-month period. Those figures reduce your taxable profit. If your income for the quarter was £8,000 and your allowable expenses were £2,500, your taxable profit for that period is £5,500 - not £8,000.

You do not pay tax on that expense figure at the quarterly update stage - that happens at the final declaration. But recording expenses accurately in each quarterly update means your final numbers add up correctly and you are not scrambling to find receipts months later.

Home Office Costs

If you work from home - even part of the time - you can claim a portion of your household running costs as a business expense. This includes things like heating, electricity, broadband, and rent or mortgage interest (for the business-use portion only).

The simplified flat rate method

HMRC offers a flat rate option that avoids the need to calculate exact proportions. The rates are:

This is straightforward to claim and requires no detailed records beyond a rough log of your working hours. For many sole traders working from home a few days a week, this is the easiest route.

Calculating the actual proportion

If your home office use is significant - for example, you run a busy freelance business from a dedicated room - the actual proportion method may give you a higher claim. You divide the number of rooms used for work by the total number of rooms in your home, then apply that fraction to your household bills.

Example: You have a 5-room house (excluding bathrooms). You use one room exclusively as your office. Your annual household bills total £3,600. You could potentially claim £720 (one fifth of £3,600). But if that room doubles as a guest bedroom, it is not exclusively used for business, so HMRC would expect you to apply a further time-based split.

Mixed-use rooms are a common source of confusion. See our post on mixed-use expenses and claiming the business percentage for a fuller explanation of how to work this out.

Phone and Internet

If you use your personal mobile phone or home broadband for both personal and business purposes, you can claim the business-use proportion.

Example: Your monthly phone bill is £40. You estimate 60% of your usage is for business calls, emails, and messaging clients. You can claim £24 per month as a business expense. Over a quarter, that is £72.

The important thing is that your estimate is reasonable and consistent. HMRC does not expect you to itemise every call. A broad, honest estimate based on your actual usage is acceptable. Just be ready to explain your reasoning if asked.

If you have a dedicated business-only phone, you can claim 100% of that cost. Keep the contract or SIM details as evidence.

Warning: Do not claim 100% of a personal phone bill as a business expense unless you genuinely use it exclusively for work. HMRC can and does challenge this, particularly if your business income is modest and your claimed phone costs are high relative to it.

Equipment and Tools

Equipment you buy for your self-employment - laptops, cameras, tools, machinery, specialist software - is generally allowable. How you claim it depends on the cost and what HMRC rules apply.

Annual Investment Allowance and expensing

For most sole traders, equipment costs can be claimed in full in the year of purchase using what is called the Annual Investment Allowance (AIA). In practice, this means you do not need to spread the cost over several years - you enter the full cost as an expense in the period you bought it.

Example: You are a self-employed photographer and you buy a new camera body for £1,200 in Q1. You can claim the full £1,200 as an allowable expense in your Q1 quarterly update.

If you buy equipment that you also use personally - a laptop you use for both client work and personal browsing, for example - you should only claim the business-use proportion. A 70/30 business-to-personal split might result in a claim of £840 on that £1,200 camera.

Small items

Smaller purchases - printer cartridges, USB drives, a desk lamp, stationery - can be claimed as straightforward expenses in the quarter you buy them. No special treatment needed. Keep receipts.

Business Subscriptions and Software

Subscriptions that are directly relevant to your work are allowable. This includes:

A gym membership is not allowable, even if you argue being fit helps you work better. Netflix is not allowable. These are personal costs, regardless of how you frame them.

If a subscription is partly personal and partly professional - say, a streaming service that you also use to research trends in your industry - you should only claim the genuine business proportion, and you would need to justify that split if asked.

Vehicle Costs

If you use a vehicle for your self-employment, you have two options for how to claim the cost. You must choose one method for each vehicle and stick with it.

Option 1 - Simplified mileage rates

You record every business mile you drive and claim a fixed rate per mile. For the first 10,000 business miles in a tax year, the HMRC approved rate is 45p per mile. Above 10,000 miles it drops to 25p per mile.

Example: You are a self-employed plumber. In Q1 you drive 1,200 miles visiting client sites. You claim 1,200 x £0.45 = £540 as a business expense.

With this method, you do not claim fuel, insurance, servicing, or depreciation separately. The mileage rate is meant to cover all of that. Keep a mileage log noting the date, purpose, and distance of each trip. See our detailed post on mileage allowances and simplified rates in MTD for more on keeping records.

Option 2 - Actual costs

You claim the real costs of running the vehicle - fuel, insurance, MOT, servicing, road tax - but only the business-use proportion. If you use the car 60% for business and 40% personally, you claim 60% of each relevant cost.

This method requires more record-keeping but can produce a higher claim if your vehicle costs are significant. It also allows you to claim capital allowances on the purchase price of the vehicle, which the mileage rate method does not.

Most sole traders with one vehicle find the mileage rate method simpler and perfectly adequate.

Travel and Accommodation

Travel costs for business trips - train fares, bus tickets, taxis to client meetings, flights for work - are allowable. Keep the receipts or booking confirmations.

If you travel to a temporary workplace (somewhere you go occasionally, not your regular base), the cost is allowable. If your work is itinerant - meaning you travel to different locations by the nature of the job - those travel costs are allowable too.

Accommodation and meals during genuine business trips can be claimed, but keep it reasonable. A hotel stay for an overnight conference is fine. A weekend at a luxury spa that includes one work meeting is not.

You cannot claim the cost of your regular commute from home to a fixed place of work. If you work from home, this is less likely to be an issue.

Professional Fees and Services

Fees you pay to professionals for your business are allowable. This includes:

The cost of MTD bridging software is itself an allowable business expense. Keep the receipt.

Marketing and Advertising

Reasonable marketing costs are allowable:

Reasonable client entertainment can sometimes be claimed, but HMRC has strict rules here - entertaining clients in the hope of winning business is generally not allowable. Staff entertaining (including yourself as sole trader) has a small exemption but the rules are narrow. If in doubt, do not claim it.

Clothing

This is one of the most misunderstood expense categories. You can claim the cost of clothing that is a uniform or protective gear required for your work. A builder's safety boots, a nurse's scrubs, or a chef's whites are allowable.

You cannot claim the cost of smart clothing you wear to client meetings, even if you would not have bought it otherwise. HMRC's view is that clothing you could wear outside of work does not meet the "wholly and exclusively" test, regardless of your personal preference.

What Happens to Your Expenses in MTD

In your quarterly update, you enter your total expenses for each category - not individual receipts, just the totals. HMRC has a set of standard expense categories, and your software (or bridging tool) should map your expenses to those categories.

Common categories include: cost of goods sold, office and admin costs, travel costs, advertising and marketing, financial charges, and professional fees. If you are unsure which category something belongs in, see our post on common MTD expense miscategory mistakes.

Expenses are reported as totals for the quarter. You do not attach receipts. But HMRC can ask for those receipts at any time, so keep them for at least five years after the relevant tax return. Our post on how long to keep MTD records covers the retention rules in full.

At the end of the tax year, your final declaration brings all four quarterly updates together and is where your overall profit and tax liability are confirmed. See our guide on preparing for your MTD final declaration to understand what happens at that stage.

Note: If you are unsure whether a specific cost qualifies as an allowable expense, the safest approach is to check the HMRC guidance on self-employed expenses or ask a qualified accountant. Claiming something that does not qualify will not save you money - it will create a discrepancy HMRC may pick up later.

A Quick Summary of What You Can and Cannot Claim

Keeping Good Records Makes This Easier

You do not need to keep paper receipts for everything, but you do need some form of evidence for each expense you claim. A photograph of a receipt stored in a folder on your phone, a PDF invoice saved to cloud storage, or a bank statement showing the payment - all of these count as records.

The key is to keep records at the time you spend the money, not six months later when you are trying to reconstruct what happened. Quarterly updates make this easier because you are reviewing and recording expenses every three months rather than once a year. Our post on what backup records to keep for your quarterly update explains what HMRC actually needs to see if asked.

If you have been disorganised with Q1 records, you are not alone. See our practical guide on fixing messy expense records before your deadline.

File Your Self-Employed Expenses Through MTD Without the Confusion

AffordableMTD lets you import your expenses, categorise them quickly, and submit your quarterly updates directly to HMRC - no accounting knowledge needed. Try it free and see how straightforward self-employed business expenses in MTD can be.

Get Started Free

Summing Up

Self-employed business expenses in MTD follow the same HMRC rules that have always applied to sole traders - but now you are reporting them quarterly rather than once a year. The main categories to focus on are home office costs, phone and internet, equipment, subscriptions, vehicle costs, travel, and professional fees. For anything with personal and business use mixed together, claim only the business proportion and keep a record of how you worked that out. Keep your receipts - even digitally - and you will be in a straightforward position if HMRC ever asks a question. The quarterly rhythm of MTD actually makes this easier over time, because small, regular record-keeping is far less painful than a frantic annual scramble.