Allowable Expenses for Making Tax Digital: UK Guide

Does Making Tax Digital Change Allowable Expenses Rules?

A common misconception among sole traders and landlords is that Making Tax Digital for Income Tax (MTD ITSA) changes what expenses you are legally permitted to claim. The underlying UK tax law defining allowable business expenses remains strictly governed by the "wholly and exclusively" rule under Section 34 of the Income Tax (Trading and Other Income) Act 2005.

What MTD does change is the timing and method of record-keeping. Under the traditional Self Assessment regime, many self-employed individuals gathered paper invoices and bank statements once a year in January. Under MTD ITSA, you must record every transaction digitally on an ongoing basis and submit digital summaries to HMRC four times a year.

Category Breakdown: What Sole Traders Can Claim

To deduct an expense from your self-employed revenue, it must be incurred purely for business purposes. Common categories include:

• Office Supplies & Software: Computer hardware, stationery, internet subscriptions, phone bills (business proportion), and MTD accounting software subscriptions.
• Travel & Transport: Business vehicle fuel, train fares, bus tickets, parking fees, and congestion charges. Commuting from home to a regular fixed workplace is not allowed.
• Subcontractors & Wages: Payments to assistants, freelancers, or specialist contractors (e.g. electricians or graphic designers) used in delivering your work.
• Stock & Raw Materials: Goods bought for resale or raw materials used directly in manufacturing or service delivery.
• Professional Fees: Accountancy charges, legal advice for business contracts, trade association subscriptions, and professional indemnity insurance.
• Marketing & Advertising: Website hosting, domain registration, digital marketing ads, business cards, and directory listings.

Simplified Expenses vs Actual Cost Calculations

HMRC allows sole traders to choose between calculating actual expenses or using simplified flat-rate expenses for specific operational costs.

1. Vehicle Mileage Flat Rates

Rather than calculating the precise cost of fuel, insurance, servicing, MOT, and vehicle depreciation, you can claim HMRC simplified mileage rates:

• Cars and Vans: 45p per mile for the first 10,000 miles in the tax year, and 25p per mile thereafter.
• Motorcycles: 24p per mile across all mileage.
• Bicycles: 20p per mile.

Note: Once you choose simplified mileage for a vehicle, you must continue using that method for as long as you keep that vehicle for business.

2. Working From Home Flat Rates

If you work from home for 25 hours or more per month, you can claim a monthly flat rate based on your hours rather than calculating proportional energy, council tax, and internet bills:

• 25 to 50 hours/month: £10 per month (£120/year)
• 51 to 100 hours/month: £18 per month (£216/year)
• 101 or more hours/month: £26 per month (£312/year)

Landlord Allowable Expenses Under MTD

Residential landlords entering MTD ITSA face strict rules regarding property deductions. Allowable rental expenses include:

• Property Repairs & Maintenance: General repairs, redecorating between tenants, gas safety certificates, and servicing boilers. (Note: Capital improvements that increase property value are excluded and count against Capital Gains Tax upon sale).
• Insurance: Landlord insurance, building and contents insurance, public liability.
• Lettings Agent & Legal Fees: Property management commission, tenant referencing fees, and legal costs for lease preparation under one year.
• Replacing Domestic Items Relief: Cost of replacing furniture, carpets, appliances, and kitchenware on a like-for-like basis.

Digital Record-Keeping Requirements under MTD

To satisfy HMRC MTD guidelines, your accounting software or digital spreadsheet must hold a digital record of each expense line item. Each record must detail:

1. The date the expense was incurred.
2. The monetary amount.
3. The expense category (e.g. office costs, motor expenses, legal fees).

While you do not need to attach digital images or scans of paper receipts for every submission, you must keep original paper or digital receipts for 5 years after the 31 January submission deadline in case of an HMRC compliance check.