Claiming expenses is super important for all businesses, so although it requires a bit of annoying financial admin, it’s the best way to reduce your taxable income and keep your tax bill down.
We’ll guide you through what expenses are and the types of things you can claim tax relief on when running an ecommerce business. This includes pre-trade expenses, because the sooner you start saving money, the better.
What are expenses?
Expenses are costs your business needs to incur in order for it to run effectively. For example, purchasing stock and packaging, paying for storage space, the cost of running your ecommerce website, and potentially hiring freelancers or staff.
When it comes to claiming expenses for tax relief purposes, you can only claim for those that HM Revenue & Customs (HMRC) deems an ‘allowable expense’.
What are allowable expenses?
As the name implies, allowable expenses are the business costs that HMRC allows you to offset against your taxable turnover.
To claim these expenses for your ecommerce business, they must also comply with HMRC’s rule that they are ‘wholly and exclusively for business use’.
Some allowable expenses are more obvious than others, like the products you purchase for your inventory. Things start to get a bit more complicated when you have costs that are divided between professional and private use such as working from home, your phone bill, or fuel.
What type of expenses can my ecommerce business claim?
Many different costs qualify as allowable expenses for different types of business but let’s focus on the ones most relevant to an ecommerce business.
Business insurance and other legal fees
Whatever the associated costs of business insurance and business-related legal fees, most of these will qualify as tax-deductible allowable expenses.
Remember, these can only be costs related wholly to the running of your business. Whatever you do, don’t try and hide personal insurance or legal fees in amongst your business costs. This could land you in hot water with HMRC and no taxpayer wants that.
Home office
If you work from home and use your home as a base for your ecommerce business, you can claim a proportion of these costs as expenses. This includes your phone, internet and utility bills.
Calculating expenses if you work from home can be tricky because it’s usually helpful to work out precisely how much you spend for business versus personal use, so you can use the method which is most tax efficient. You could calculate your expense claim for working from home with either:
- Simplified expenses (also known as the flat rate method)
- Cost method
An office or co-working space
If you use a co-working space or you have business premises (e.g. an office), you can claim the following as allowable business expenses:
- Rent and/or booking fees
- Office supplies and equipment
- Utility bills
Website running costs
As an ecommerce business, your website is a monumental part of your business, but it can get a little expensive. Fortunately, you can claim for a lot of the related expenses, including:
- Domain
- Web hosting
- Business email
- Technical support
- Software and hardware
Hiring freelancers or staff
If you’re hiring freelancers on temporary projects to help build your brand and set up your business, you could be able to claim tax relief on these costs. You might hire a freelance graphic designer to build your brand guidelines, for example, or an ecommerce photographer to snap and edit your products. If things get really busy, you might hire an employee to pack orders.
Watch out for IR35: If the relationship between you and your freelancer/contractor is more like employer and employee, you may be breaking IR35 regulations.
Mileage and travel
If you have to travel around for business, you’ll probably be allowed to claim:
- Travel, tickets and accommodation wholly for business-related activity
- Vehicle running costs (fuel, tax, insurance, maintenance and servicing)
- Food and drink which relates to the business trips you need to make – and only then within reason!
- Parking and congestion charges
- Tickets or admission for events (e.g. conferences and trade shows)
However, you aren’t allowed to claim:
- Travel between your home and another workplace that you expect to use for more than 24 months (e.g. an office or co-working space)
- Food and drink if it relates to things like client entertainment – or your weekly shop!
Training and learning
If you invest in training, learning and upskilling for the benefit of your ecommerce business, the costs can qualify as allowable expenses. This includes:
- Training courses
- Subscriptions to learning platforms or resources
- Books or online guides
Accounting fees
If you pay for bookkeeping software or you hire an accountant, the related costs qualify as tax-deductible. For those ecommerce businesses not fully set up yet, this also includes your initial company registration fees.
Cloud storage
As an ecommerce business, you’ll have a lot of information, digital assets and data that you’ll need to store somewhere. Many ecomm biz owners choose cloud storage as the perfect solution – which qualifies as an allowable expense!
What are pre-trade expenses?
Pre-trade expenses are the costs required to set the business up before you even start trading or make your first sale. This is particularly relevant for ecommerce businesses as often you’ll need to invest in stock before you can start selling.
Typical examples of pre-trade expenses include:
- Legal fees
- Accounting and bookkeeping costs
- Inventory
- Equipment
- Renting or buying business premises
- Your website and all the associated costs (e.g. domain)
- Insurance
- Marketing, branding and advertising
- Market research
- Recruitment or outsourcing
- Uniforms and protective clothing
This type of expense can also include assets you already owned before starting your business, such as a laptop or desktop computer.
What qualifies as a pre-trade expense?
Pre-trade expenses are expenses that:
- Would’ve qualified as an allowable expense if the business was up and running
- Were made wholly for business and trading-related purposes
It’s important to note that these costs must have occurred no longer than seven years pre-trading.
Pre-trade costs you can’t claim as expenses:
- Training courses
- Business premises maintenance
- Fines or penalties
- Business licenses
- Entertainment
Do I need an ecommerce accountant to help me claim expenses?
No – any qualified accountant will be able to help you identify, record and claim your allowable expenses to keep your tax bill down.
So, if you’re already working with an accountant who you know and trust, sticking with them is fine. However, if you’re looking for a new accountant for your ecommerce business, there are benefits to choosing one that has targeted experience in your niche.
For example, they’ll understand the nuances of your sector and they’ll be acutely aware of the specific rules and regulations for ecommerce businesses to keep you compliant.
Whether you choose to work with an ecommerce specialist or not, we’ve got you covered with some tricks and tips on finding and hiring a good accountant.
Looking for further support for your business? Head over to our info hub, where you’ll find a whole host of helpful resources.
