HM Revenue and Customs (HMRC) could begin issuing penalties to self-employed individuals over their business expense claims as early as this weekend, according to urgent warnings from tax specialists. Experts at financial services provider Capital on Tap have highlighted concerning patterns in taxpayer behaviour that could lead to widespread compliance issues.
Last-Minute Filing Creates Compliance Risks
Tax professionals have identified a worrying trend where self-employed workers and small business owners leave their expense claims until the final moments before filing deadlines. Research reveals that search interest in "allowable expenses for self-employed" spikes dramatically as submission dates approach, with January 2025 seeing searches increase by over 300% compared to summer months.
Rebecca Alford, Chief Financial Officer at Capital on Tap, explained the implications: "This last-minute surge significantly increases the risk of rushed or incorrect expense claims when time is limited. Many SMEs only question what they can and can't claim at the final stage of filing, creating perfect conditions for errors that could trigger HMRC penalties."
Understanding Allowable Business Expenses
For self-employed individuals, business running costs - commonly referred to as 'expenses' - can be deducted when calculating taxable profit, provided they qualify as allowable expenses. These legitimate business costs reduce the amount subject to Income Tax.
For example: If your business turnover reaches £40,000 and you successfully claim £10,000 in allowable expenses, you would only pay Income Tax on the remaining £30,000, which represents your taxable profit.
Common Areas of Confusion
Alford highlighted several expense categories that frequently cause confusion: "Home office costs, phone bills and travel expenses rank among the most commonly misclaimed items. The fundamental question to ask is whether the cost was incurred wholly and exclusively for business purposes. Money taken from your business for personal use never qualifies as an allowable expense."
She recommended practical solutions for sole traders: "HMRC's simplified expenses calculator can help business owners quickly work out what proportion of these mixed-use costs is actually allowable, rather than relying on guesswork that could prove costly."
Correcting Errors and Avoiding Penalties
Taxpayers who identify mistakes in their submissions have a crucial window for correction. Alford advised: "If you realise something is wrong with your return, you have 12 months to amend it online through HMRC's digital services. Correcting errors early can substantially reduce potential penalties and interest charges, and in many cases can help avoid triggering a full HMRC enquiry altogether."
Important Distinctions for Business Structures
The experts clarified a common misunderstanding about business structures: "If you operate through a limited company, you are not technically 'self-employed' even if you're the sole owner and employee. Different rules apply to company directors regarding expenses and taxation."
For those uncertain about whether specific business costs qualify as allowable expenses, the recommendation remains clear: contact HM Revenue and Customs directly for authoritative guidance before submitting claims that could potentially attract penalties.
