HMRC alert over tax rules that could affect millions of UK households

HMRC has warned millions of UK households over rules that a pilot has found many people are flouting

HMRC has launched a crackdown on “personal expenditure” with a warning to millions of UK households. A new digital campaign is being introduced to ensure that income tax self-assessment (ITSA) taxpayers do not incorrectly claim tax relief on personal expenses when submitting their 2025/26 returns.

The government’s tax authority launched a pilot scheme last year, generating more than £27 million in tax revenue and exposing instances where private spending was wrongly reported as business expenses. Building on this, HMRC is now preparing to carry out further investigations to ensure sole traders, business partners and landlords claim tax deductions solely for legitimate business costs.

Tax advisers are being urged to carefully review expense claims when preparing clients’ 2024/25 returns. According to personal tax specialists, they are also being instructed to amend any previous returns where claims may have been incorrect, 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.

However, these incidental benefits don’t automatically disqualify the expense from being claimed. For example, if a self-employed consulting engineer travels to remote locations for work, while the appeal of these destinations might seem like perks, if the trips are undertaken solely for business purposes, it doesn’t matter. That makes the associated costs allowable.

The rules stipulate that for an expense to be deductible, it must be “incurred wholly and exclusively for the purposes of the trade”. If a specific portion of an expense is clearly related to business activities, that portion can be claimed as an allowable deduction. However, the expense must not be capital in nature.