Claiming business expenses might seem straightforward, but HMRC is paying closer attention to one key area where errors are common: private use adjustments.
With this new focus, business owners and landlords would be wise to take a closer look at how they apportion mixed-use costs.
The ‘wholly and exclusively’ rule
To be allowable for tax purposes, expenses must be incurred wholly and exclusively for the purposes of the business, with any appropriate adjustments being made for private use. This is a well-established principle, but one that can become complex when expenses have both business and private elements.
Common examples include:
- Mobile phones used for both work and personal calls
- Cars used for business travel and the school run
- Home internet or broadband services used by the entire household
- Equipment or software purchased for both work and leisure
- Capital assets (e.g. laptops or tools) used outside working hours
In these situations, HMRC expects you to make a fair and evidence-based private use adjustment, claiming only the business-related portion of the expense.
What exactly is a private use adjustment?
If a cost is incurred for both business and personal reasons, you must apportion the expense so only the business use is claimed for tax purposes. The adjustment should be:
- Reasonable based on the facts of your business
- Supported by records, such as usage logs or itemised bills
- Consistently applied year to year (unless circumstances change)
For example:
- You claim £600/year for broadband. If you use it 50% for work, only £300 is allowable.
- You use your car 30% of the time for business. That same ratio applies to insurance, repairs and fuel costs.
Even capital allowances may require adjustment if the asset is used privately, for example, a work laptop also used at home.
Why is HMRC focused on this?
HMRC views private use adjustments as a major compliance risk, and part of the reason the small business tax gap remains high.
In 2024, it ran a trial involving 600,000 self-assessed individuals, prompting them to review their business expense claims. The trial revealed widespread overclaims, with HMRC recovering more than £27 million in underpaid tax. HMRC is now running a digital campaign encouraging accurate private use adjustments of business expenses that are reported via self-assessment returns.
How can you stay compliant?
When it comes to expenses, you should track business vs. private use wherever possible. This can be as simple as a mileage log or breakdown of monthly phone usage. We would advise:
- Not to guess or apply a round number. If challenged, HMRC will expect to see the basis for your apportionment.
- To make sure you apply the same logic across your claims, and year on year, unless circumstances change.
- To look back at prior years’ returns to check whether private use has been properly considered.
If you’re unsure how to apply an adjustment, or whether a claim is valid, seek advice from your accountant.
How can we help?
Whether you’re filing your own self-assessment or preparing your company’s annual return, getting private use adjustments right is more important than ever. We can help you review your claims and reduce your risk of HMRC enquiries. Get in touch with our team at tax@haroldsharp.co.uk, complete our contact form or call 0161 905 1616.