Tax Deductions for UK Online Businesses

UK online sellers can usually deduct allowable business costs when calculating taxable trading profit. The rules depend on your business structure, accounting method and whether a cost has private use. A deduction reduces the profit used to calculate tax; it is not a pound-for-pound refund of the amount spent.

This guide focuses on sole traders. A limited company is a separate taxpayer, and payments to its owners need different treatment. Use the linked HMRC guidance for the rules behind each section and ask for advice on your own records before filing.

Start with business use and your accounting method

Keep evidence of what you bought, why the business needed it and any personal use. Only claim the business part of a mixed-use cost. For example, if a phone bill is £40 and a reasonable, documented business-use share is 60%, the business portion is £24. Paying with a business card does not make a personal purchase deductible. See HMRC’s allowable expenses overview.

Cash basis generally records income when received and expenses when paid. Traditional accounting uses when income is earned and costs incurred, with adjustments such as closing stock. A purchase may therefore affect different periods under the two methods. Limited companies cannot use the self-employed cash basis. Check HMRC’s cash basis guidance before choosing or changing your method.

Common costs for ecommerce sellers

For stock and materials, see HMRC’s reselling-goods guidance. Unsold stock needs attention when using traditional accounting: do not assume that buying stock before year end creates an immediate deduction for its full cost. Reconcile quantities, returns and write-offs with the method used in your accounts.

Regular business software subscriptions, postage and the business share of phone or internet bills can be allowable. Equipment such as a computer may qualify as an expense under cash basis or need capital-allowance treatment under traditional accounting. Cars have separate rules. See HMRC’s office and equipment guidance.

Advertising on marketplaces or social platforms needs invoices and a clear business purpose. Customer entertaining is treated differently. Check HMRC’s marketing and entertainment rules. For professional fees and finance costs, use HMRC’s legal and financial costs guidance; fines and the repayment of loan principal are not ordinary deductible running costs.

Do not deduct platform fees twice

Illustration: assume a UK seller who is not VAT registered has £1,000 of sales, no refunds and £120 of allowable platform fees deducted before payout. The bank receives £880. Recording £1,000 sales and £120 fees leaves £880 before other costs. Recording the £880 deposit as sales and deducting the £120 again understates profit by £120. Real settlements may also contain reserves, refunds, marketplace-collected tax and payments spanning different periods.

Use the sales and settlement reports alongside the bank feed. Our monthly ecommerce bookkeeping service covers reconciling those records; the payment gateway reconciliation guide explains the workflow.

Home working: actual costs or simplified expenses

A sole trader working from home may claim an appropriate share of eligible household costs, or use simplified expenses when eligible. The method and evidence matter; using a room occasionally does not justify claiming all household bills. Simplified expenses are available to sole traders and some partnerships, not limited companies. See HMRC’s simplified expenses guidance.

Trading allowance or actual expenses?

The trading allowance is up to £1,000 of gross trading income a tax year, subject to eligibility and exceptions. It is not a £1,000 profit threshold. Where you use the allowance instead of actual expenses, you cannot deduct those expenses as well. Check HMRC’s trading allowance rules.

Illustration: an eligible sole trader has £4,000 of trading receipts and £1,600 of allowable expenses, with no other adjustments. Actual expenses give £2,400 profit; a £1,000 allowance gives £3,000. The actual-expense method leaves less taxable profit in this example. The tax ultimately payable also depends on other income, allowances and the applicable rules.

Keep VAT and owner withdrawals separate

Recoverable input VAT is handled through the VAT system and should not also inflate an expense deduction. Where VAT cannot be recovered, treatment depends on the cost and scheme. A sole trader’s own drawings are not wages or a business expense. For companies, salary, dividends and directors’ loans have separate rules.

Records to gather before your return

• Sales and settlement reports from every platform, plus bank and payment-provider statements.
• Purchase invoices, fee invoices, refunds, stock records and evidence for write-offs.
• Your method for allocating mixed business/private costs and details of equipment purchases.
• VAT records where applicable, plus the previous return and any changes of accounting method.

Self-employed records normally need to be kept for at least five years after the 31 January filing deadline for the relevant tax year, with longer periods in some cases. See HMRC’s record-retention guidance.

For registration and deadlines, read UK online business tax rules. For help preparing the figures, see our tax and VAT service and what an accountancy quote should include.