The taxman will be launching a digital campaign with people being warned ahead of the crackdown
HMRC has announced a crackdown on “personal expenditure”, issuing a stark warning to millions of UK households. The revenue service will roll out a digital campaign to ensure income tax self-assessment (ITSA) taxpayers don’t wrongly claim tax relief for personal spending when filing their 2025/26 returns.
The Labour government’s tax department kicked off a trial run last year, which raked in more than £27 million in tax revenue and “highlighted reporting of disallowable private use in business expenditure.” The taxman is now set to launch additional investigations to check that sole traders, partners, and landlords only claim write-offs for genuine business costs.
Tax advisers are being told to scrutinise claims when preparing a client’s 2024/25 return. They’re also being instructed to make required amendments to any earlier returns where the claims might be wrong, according to personal tax specialists, reports the Liverpool Echo.
HMRC rules BIM37000 state: “In S34 Income Tax (Trading and Other Income) Act 2005 for unincorporated companies and S54 Corporation Tax Act 2009 for companies, the statute says that expenditure cannot be deducted in computing trading profits unless it is incurred wholly and exclusively for the purposes of the trade, profession or vocation.
“The guidance that follows describes this statutory restriction. A full list of the contents of the guidance on wholly and exclusively is shown below. The guidance is subdivided into sections, the contents page of each section being listed below.”
It’s essential to navigate the ‘wholly and exclusively’ test with caution. Should a taxpayer bear an expense solely for their trade, profession or vocation, they might inadvertently receive a benefit.
Yet, this incidental perk doesn’t necessarily invalidate the claim for the expense. Consider a self-employed consulting engineer who jets off to far-flung destinations for work, the travel and allure of such places could be seen as perks, but if they’re purely for professional reasons, they’re merely incidental, and thus the costs are permissible.
The rules stipulate that for an expense to be deductible, it must be “incurred wholly and exclusively for the purposes of the trade”.
If an identifiable part of an expense is incurred for trade purposes, that part of the expense is an allowable deduction. Additionally, the expense must not be capital in nature.