By Dr Angelo Chirulli ACA ADIT BFP IFA CPA (ITA)

 Mail: angelo@vectigalistax.co.uk  

HM Revenue & Customs (HMRC) is intensifying its compliance efforts around private use adjustments in self‑assessment returns. 

The Chartered Institute of Taxation (CIOT) has noted that HMRC is launching a digital campaign to educate taxpayers and their agents about the rules governing private use of business expenses. 

This initiative follows a pilot in 2024 in which approximately 600,000 income‑tax self‑assessment taxpayers were urged to correct private use adjustments; the trial reportedly yielded over £27 million in extra tax, highlighting widespread misreporting. In 2025 HMRC is expected to open more enquiries to verify that sole traders, partners and landlords deduct only the part of an expense that is “wholly and exclusively” for business purposes.

The statutory rule: wholly and exclusively

Under the Income Tax (Trading and Other Income) Act 2005 and the Corporation Tax Act 2009, a business expense is deductible only if it is incurred wholly and exclusively for the purposes of the trade. 

The rule demands that the taxpayer’s sole purpose for incurring the cost must be business‑related; if the expenditure has a dual purpose or includes a non‑trade element, it is not allowable. 

However, there is an important nuance: if an identifiable portion of the expense is solely for business use, that proportion remains deductible. HMRC’s Business Income Manual notes that dual‑purpose expenditure should be disallowed in full, but costs with both business and personal elements may be apportioned based on a representative period of usage. 

It is therefore essential to keep detailed records and apply a consistent method when calculating private‑use adjustments.

Common expense categories and pitfalls

Travel, vehicle and subsistence – The self‑employed can claim business travel costs such as vehicle insurance, repairs, fuel, parking, public transport, hotel rooms and meals on overnight business trips. However, expenses for commuting between home and work, private travel or any fines and penalty charges are not deductible. Instead of claiming actual running costs, taxpayers may elect to use HMRC’s flat‑rate mileage (45 p per mile for the first 10,000 miles and 25 p thereafter) to simplify record‑keeping; the flat rate cannot be used if you have already claimed capital allowances on the vehicle.

Capital allowances and plant & machinery – Where the business buys assets such as vehicles or machinery, the cost is treated as capital expenditure and relief is obtained through capital allowances rather than a deduction. A private use adjustment must be made so that allowances are given only on the business element; for example, if a car is used 70 % for business and 30 % privately, only 70 % of the annual writing‑down allowance is permitted.

Use of home as office – Home‑working expenses (such as utilities and broadband) must be apportioned on a reasonable basis, usually by number of rooms or time spent working. HMRC offers simplified expenses based on flat rates for home working and living on business premises. Mortgage interest, rent and council tax should be apportioned only where part of the home is used exclusively for business.

Entertaining and gifts – Client entertainment and most gifts are not tax‑deductible. Small promotional gifts that carry the business’s branding and cost less than £50 may qualify, but hospitality is specifically disallowed. Staff entertainment is treated differently: staff parties are generally deductible, subject to limits for income tax and benefits in kind.

Training and professional development – Expenditure on training is deductible only if it is wholly and exclusively for business, enhances existing skills and is not of a capital nature. Courses that provide new qualifications or skills (for example, a postgraduate degree) are normally considered capital and non‑deductible.

Why HMRC is taking action

HMRC’s pilot highlighted that many taxpayers either failed to identify personal elements of expenditure or applied simplistic percentage estimates without supporting evidence. With over £15 billion of the small‑business tax gap attributable to errors and failure to take reasonable care, HMRC believes that improving private‑use adjustments is an efficient way to increase compliance. 

The digital campaign will target self‑employed individuals and landlords through emails and online adverts, prompting them to review their expense claims and adjust where necessary. 

HMRC has indicated that it will use artificial intelligence to flag anomalies in self‑assessment returns, increasing the likelihood of enquiry for those who do not make adequate adjustments.

Professional advisers should ensure that clients:

· Understand the wholly and exclusively rule and identify dual‑purpose expenditure.

· Keep contemporaneous records (such as mileage logs, invoices and timesheets) to justify apportionment.

· Review their 2024/25 tax returns before submission and make corrections to earlier years if misreporting is discovered.

· Apply capital‑allowance restrictions for personal use of vehicles, tools and other assets.

· Adopt consistent methodologies for apportioning mixed‑use costs and document the rationale.

Wider consequences and risks

Failure to apply the statutory test can lead to additional tax, interest and penalties for careless or deliberate inaccuracies. HMRC has new powers to request master and local files or accounting records outside of formal enquiries, and failing to maintain documentation can lead to a presumption of carelessness. 

Private‑use errors may also influence eligibility for other reliefs (e.g., R&D tax credits) and affect profit calculations for income‑based thresholds (such as High Income Child Benefit Charge and pension annual allowance tapering).

Advisers should remember that connected parties can be impacted by misallocated expenses. For example, if multiple businesses share an asset (such as a company car or equipment) or premises, each entity’s apportionment method must be consistent. In family‑owned groups, incorrectly allocating expenses to one entity may distort taxable profits and influence the apportionment of allowances across the group. HMRC’s increased scrutiny may therefore extend beyond sole traders to partnerships and companies where private use adjustments are material.

Practical next steps

1. Conduct a compliance review– Analyse client expense categories to identify areas where private use adjustments are required and ensure that prior‑year claims comply with the statutory test.

2. Enhance documentation– Maintain evidence of business use (logbooks, timesheets, receipts) and adopt a robust methodology for apportioning mixed expenses.

3. Educate stakeholders– Provide training to finance teams and clients on the rules for private use adjustments and the difference between revenue and capital expenditure.

4. Monitor HMRC guidance– HMRC may issue further guidance on best practices for private use adjustments; staying updated will help mitigate risk.

HMRC’s forthcoming digital campaign underscores its determination to reduce the tax gap arising from incorrect claims for personal expenditure. Understanding and applying the wholly and exclusively rule, supported by careful record‑keeping and proportionate apportionment, is essential for compliance. 

Professional advisers should take this opportunity to review clients’ expense claims, rectify past mistakes and strengthen processes to withstand HMRC scrutiny. With focused attention on private‑use adjustments, even minor miscalculations could become costly, so proactive action now will provide peace of mind in future enquiries.

How we can help

Vectigalis Tax can support you in navigating HMRC’s evolving compliance landscape. 

If you need guidance on private‑use adjustments, record‑keeping or reviewing past expense claims, please get in touch at angelo@vectigalistax.co.uk or visit www.vectigalistax.co.uk. 

Taking advice now can help ensure your tax affairs remain compliant and optimised for the future.