What happens if HMRC disagrees with my expense claims?

Understanding what it means when HMRC “disagrees”

When people say “HMRC disagrees with my expense claims,” they usually mean one of a few things: HMRC thinks the expense is not allowable, believes it has been claimed in the wrong category or at the wrong rate, suspects it is partly personal, thinks the evidence is insufficient, or believes the expense should have been treated differently for tax purposes (for example, treated as a benefit-in-kind rather than a deductible business cost). Disagreement doesn’t automatically mean wrongdoing. It often starts as a technical challenge: HMRC is asking you to justify why an expense was claimed and how it relates to your work or business.

That said, HMRC’s view matters because it can lead to adjustments to your tax position, repayment of tax relief, interest, and sometimes penalties. The impact depends on your status (employee, director, sole trader, partnership member, landlord, contractor), the tax involved (income tax, corporation tax, VAT, PAYE, NIC), and how significant the claim is. Understanding what triggers HMRC’s concerns and how to respond calmly and methodically is the key to protecting yourself.

Common reasons HMRC challenges expense claims

HMRC typically challenges expenses for one or more of these reasons:

1) The expense looks personal or dual-purpose. A lot of expense disputes come down to whether the cost was wholly and exclusively for business (or, for employees, whether it was wholly, exclusively, and necessarily incurred in the performance of duties). Meals, clothing, home costs, travel, and phone bills are common flashpoints because they can easily mix personal and business use.

2) The expense is legitimate but poorly evidenced. You might have incurred a genuine cost, but if you can’t show receipts, invoices, mileage logs, or an explanation linking the cost to work, HMRC may disallow it. A bank statement alone often doesn’t tell the full story (for example, it may not show what was bought, whether VAT was included, or who the supplier was).

3) The timing or treatment is wrong. A cost might be allowable but claimed in the wrong accounting period, capitalised incorrectly, or treated as revenue when it should be capital (or vice versa). Similarly, claiming VAT without valid VAT invoices or claiming mileage and fuel in an inconsistent way can raise questions.

4) The claim is outside the rules for that taxpayer type. Employees, self-employed individuals, limited companies, and landlords each have different rules. Something that is allowable for a self-employed consultant might be disallowable for an employee claiming expenses against employment income.

5) The claim pattern looks unusual. Large “other expenses,” repeated round-number claims, high proportions of travel and subsistence relative to income, or significant home-office costs with no clear basis can trigger scrutiny.

How HMRC typically raises a challenge

HMRC can disagree with your expense claims in a range of ways, from informal queries to formal investigations. The process often looks like this:

Informal request for information. HMRC may write asking you to explain certain figures on a tax return or in your accounts. They might request receipts, invoices, bank statements, mileage logs, or a breakdown of “miscellaneous” expenses.

Compliance check or enquiry. For self-assessment and company tax returns, HMRC can open an enquiry within certain time limits. Once open, HMRC can ask for records and explanations and can propose adjustments.

PAYE/NIC review or employer compliance visit. If you’re an employer, HMRC might review expense payments, dispensations (where relevant), or how you’ve treated travel and subsistence, scale rates, and benefits.

VAT inspection. If VAT is involved, HMRC may challenge input VAT claims where invoices are missing or where the purchase seems partly personal or non-business.

Sometimes disagreement appears first as an assessment or amendment: HMRC changes your return or issues a calculation showing reduced allowable expenses. In other cases, HMRC may propose adjustments and invite you to agree before they finalise the position.

What can happen if HMRC disallows an expense?

If HMRC decides an expense is not allowable, the immediate consequence is usually that your taxable profit or taxable income increases. That can lead to:

More tax to pay. If the expense is removed, you lose the tax relief you claimed on it. For a company, that increases corporation tax. For an individual, it increases income tax (and often Class 4 NIC for self-employed people).

Interest on late-paid tax. If the adjustment means you should have paid more tax earlier, HMRC can charge interest from the original due date.

Penalties (sometimes). Penalties are not automatic. They depend on the nature of the inaccuracy and your behaviour (careless, deliberate, deliberate and concealed). If HMRC believes the expense was claimed in error but you took reasonable care, you may avoid penalties entirely. If HMRC believes you were careless or worse, penalties may apply.

Amended returns and knock-on effects. Disallowed expenses can affect more than one tax year, especially if similar claims were made repeatedly. They can also affect payment on account calculations, student loan repayments, child benefit high-income charge, and other thresholds.

For companies: possible benefit-in-kind issues. If a company paid for something and it’s deemed personal to a director or employee, HMRC may treat it as a benefit-in-kind, leading to employer Class 1A NIC and a P11D reporting requirement (or payrolled benefits where relevant). Sometimes the fix is not merely “disallow the cost” but “treat it correctly as remuneration.”

Employees: what HMRC may challenge and why

Employees face a stricter test than the self-employed. In broad terms, to claim a deduction for employment expenses, the expense must be incurred wholly, exclusively, and necessarily in the performance of duties. That “necessarily” element catches many people out.

Here are some employee expense categories that HMRC often challenges:

Travel to work. Ordinary commuting is not an allowable deduction. Travel between workplaces may be allowable, but the definitions and circumstances matter. If you routinely travel to a permanent workplace, claiming that travel is likely to be challenged.

Working from home costs. There are routes to relief, but HMRC may question whether additional household costs were actually incurred due to employment and whether the claim is evidence-based. Claims based on “it feels fair” rather than method can be vulnerable.

Professional fees, subscriptions, and training. Some fees are allowable, but not all. Training that gives you new skills can be challenged as not incurred “in the performance” of duties, even if it helps your career.

Uniform and clothing. Everyday clothing is typically not allowable even if you only wear it for work, unless it’s a uniform or protective clothing meeting specific criteria.

If HMRC disagrees with employment expenses on a self-assessment return, they may reduce or remove the claim and issue a revised calculation. If the amounts are large, they may ask for evidence and explanations.

Self-employed and sole traders: “wholly and exclusively” in practice

For the self-employed, the concept of “wholly and exclusively for the purposes of the trade” is central. HMRC may disagree when it thinks a cost has personal elements, is not connected to the business, or is excessive in the context of the trade.

Common problem areas include:

Subsistence and meals. Meals taken during normal working patterns may be challenged. If your business involves travel, you need to show the travel is business travel and that the meal cost is incurred in that context, not simply personal consumption.

Use of home. Claiming a portion of rent, mortgage interest (where applicable), council tax, utilities, broadband, and other costs requires a reasonable basis. HMRC may challenge claims that seem too high or lack a method (for example, no apportionment by rooms and time).

Car and travel costs. If you use a personal vehicle, HMRC may want mileage logs or evidence of business journeys. If you claim actual costs (fuel, repairs, insurance) you’ll need a defensible business-use percentage. Mixing methods or double-claiming can trigger issues.

Phone and internet. If you claim 100% of a phone contract used personally as well, expect questions. Clear apportionment and itemised bills can help.

Entertaining. Business entertaining is a classic “disallowable” category for tax relief. If it’s in your accounts and you’ve deducted it for tax, HMRC may correct that.

Clothing and appearance. Claiming ordinary clothes, grooming, or “looking professional” costs is often challenged because these costs are usually personal.

HMRC’s disagreement might be narrowly focused (disallow one category) or broader (questioning record-keeping or whether the business is being run on a commercial basis). Your response should focus on the legal test and the factual link between the cost and the business.

Limited companies and directors: when expenses become remuneration or benefits

With a limited company, expense disagreements can be more complex because there are multiple layers: the company’s corporation tax position, PAYE/NIC obligations, and the personal tax position of directors and employees. An expense may be disallowed for corporation tax and also treated as a taxable benefit or additional salary.

Common director/company expense disputes include:

Personal purchases through the company. If the company pays for something that is essentially personal (for example, family travel, personal gadgets, or home improvements not genuinely for business), HMRC may treat it as a benefit or as earnings.

Director’s loan account issues. If a company pays personal costs and posts them to the director’s loan account as an amount owed back to the company, HMRC may still ask whether the cost should have been treated differently, depending on facts. Separately, overdrawn director loans can create additional tax consequences for the company and the director.

Travel and subsistence for contractors. HMRC often looks closely at travel patterns, regularity of the workplace, and whether claims align with the nature of the engagement. Documentation around contracts, work locations, and the purpose of travel can be vital.

Home office and equipment. Claims for equipment may need to be treated as capital assets. If equipment is used personally, there may be benefit considerations unless it qualifies for specific exemptions and is provided mainly for business use.

When HMRC disagrees, it may propose reclassifying costs rather than simply removing them. That can change the bill significantly, especially once employer NIC and penalties are considered.

VAT: how disagreement can affect input tax claims

If you are VAT-registered, HMRC may disagree with your expense claims in relation to VAT recovery (input VAT). Even if a cost is broadly business-related, VAT recovery can be denied or restricted if:

You don’t have valid VAT evidence. HMRC typically expects a proper VAT invoice where required. A card receipt or order confirmation may not be enough for full VAT recovery.

The purchase has a private element. VAT recovery can be restricted to the business portion where there is mixed use.

The expense is blocked or restricted by VAT rules. Certain categories have special rules (for example, some entertaining). If you claim input VAT where the rules restrict recovery, HMRC can assess the VAT back.

The supplier’s VAT position is questionable. If there are red flags around a supplier or invoice validity, HMRC may scrutinise the claim.

A VAT assessment can include interest and penalties, and it can also prompt broader reviews of bookkeeping and controls.

Penalties: when do they apply and how are they influenced?

A major worry is penalties. The key point is that penalties depend on behaviour and disclosure, not simply on whether HMRC disagrees. If you made a genuine mistake despite taking reasonable care, you may avoid penalties. If HMRC believes you were careless, penalties become more likely. If HMRC believes you deliberately overclaimed, penalties can be much higher.

Factors that often influence penalty outcomes include:

Quality of records and process. If you have a consistent system, keep receipts, maintain logs, and can show you tried to follow the rules, that supports “reasonable care.”

Prompt and cooperative response. Engaging with HMRC, answering questions, and providing evidence can reduce penalties and keep the conversation factual.

Disclosure. If you identify an error and disclose it to HMRC voluntarily, you can often reduce penalties significantly compared with waiting for HMRC to find it.

Professional advice and reliance. If you relied on competent advice and provided complete information to the adviser, that can help demonstrate reasonable care. It doesn’t automatically eliminate penalties, but it can be an important factor.

Even where a penalty is proposed, it may be negotiable within the rules depending on your behaviour and cooperation. The aim is not to argue emotionally, but to present a clear narrative: what happened, why you believed the expense was allowable, what steps you took, and what you have done to prevent recurrence if there was an error.

Time limits: how far back can HMRC go?

How far back HMRC can challenge expense claims depends on the circumstances. There are different time limits for different taxes and different behaviours. In general terms, HMRC can go further back where it believes errors were careless or deliberate, and less far back where returns were accurate or where any errors were genuinely innocent and corrected promptly.

This matters because an expense category that looks small in one year can become significant if HMRC applies the same adjustment across several years. If your records are weak, HMRC may also be more inclined to make broader assumptions. Good documentation can narrow the scope and keep the discussion focused on specific items rather than opening the door to wider estimations.

How to respond if HMRC questions your expenses

Your first response sets the tone. The best approach is structured, calm, and evidence-led:

1) Read the letter carefully and identify exactly what HMRC is asking. HMRC may be querying a single figure, a category, or a pattern. Highlight deadlines, the tax year(s), and the specific items requested.

2) Gather evidence and build a clear explanation. Collect invoices, receipts, contracts, diaries, mileage logs, emails, and any notes explaining the business purpose. If you have missing receipts, gather alternative evidence such as booking confirmations, supplier statements, or bank transaction details, and prepare a short explanation.

3) Map each expense to a business purpose. For each challenged item, write a one- or two-sentence justification in plain English: what it was, why it was needed, and how it relates to your trade or duties.

4) Be honest about mixed-use and apportionments. If an expense is partly personal, acknowledge that and show how you calculated the business proportion. HMRC often responds better to reasonable apportionment than to unrealistic “100% business” assertions that don’t match real life.

5) Avoid over-explaining or providing irrelevant material. Provide what HMRC asked for, in an organised way. A cluttered data dump can cause confusion and prompt further questions.

6) Keep records of what you send. Keep copies, note dates, and ensure you can prove what was provided and when.

If the amounts are significant or the issues are complex (for example, employment status, travel rules for contractors, director benefits), getting help from a qualified tax adviser can be a wise step. A good adviser can help you frame the facts correctly, present evidence effectively, and avoid accidental admissions or inconsistent explanations.

What if you can’t find receipts or records?

Missing receipts are common, but they are risky. HMRC may disallow expenses where evidence is inadequate. However, there are steps you can take to strengthen your position:

Reconstruct the record. Use bank statements, credit card statements, email confirmations, supplier portals, and calendar entries. If you can obtain duplicate invoices from suppliers, do so.

Provide context and consistency. If a cost is recurring (such as software subscriptions), showing a pattern of payments and the business use can help.

Use reasonable estimates only where appropriate. Some areas allow reasonable calculations if the underlying method is sound (for example, mileage logs built from diaries and maps), but a vague estimate without backup is more likely to be rejected.

Improve your systems going forward. Even if HMRC disallows a past cost, demonstrating that you have improved record-keeping can help in discussions about penalties and future risk.

Negotiation and resolution: agreeing adjustments vs disputing them

Not every disagreement needs to become a fight. Often, the most cost-effective solution is to agree adjustments that are clearly correct and focus your energy on the items where you have strong support. Consider:

Materiality. If an expense is small and evidence is weak, it may not be worth prolonged dispute.

Strength of position. If the rules clearly disallow the cost, conceding early can reduce friction and may help with penalty mitigation.

Principle vs practicality. Sometimes you may feel strongly that an expense should be allowed, but if proving it would require extensive time and costs, you might decide to settle.

When you do dispute HMRC’s view, keep it technical. Reference the nature of your work, your business model, the facts of the expense, and why it meets the relevant test. Provide evidence and show your calculations. A well-structured response often resolves disagreements without escalation.

Appeals and reviews: what if you still disagree with HMRC?

If HMRC issues a decision you don’t agree with (for example, by amending your return, issuing an assessment, or formalising an adjustment), you may have the right to challenge it. This can involve an internal review and, if needed, an appeal to an independent tribunal. The process has strict deadlines, and your chances improve when your case is built around facts and documentation rather than general fairness arguments.

In practice, many disputes settle earlier once both sides see the evidence clearly. If you’re contemplating formal action, professional advice is strongly recommended because procedure and framing matter. Even where you are correct in principle, missing a deadline or presenting inconsistent evidence can damage your position.

Examples of expense disputes and how they play out

It can help to see how disagreements usually arise:

Example 1: “Business lunches” that look like personal meals. A sole trader claims frequent meal expenses near home with no corresponding travel evidence. HMRC asks for explanations. Without diaries, meeting notes, or travel records, HMRC may treat the meals as personal subsistence and disallow them. If the trader can show client meetings, travel to temporary sites, or genuine business journeys, some or all may be allowed.

Example 2: Home office claim with no apportionment. A freelancer claims a large portion of rent and utilities without explaining the basis. HMRC asks how it was calculated. If the freelancer produces a room/time apportionment method and explains business usage, HMRC may accept a reduced figure. Without a method, HMRC may disallow the claim entirely.

Example 3: Company-paid personal travel. A director puts a holiday flight through the company accounts. HMRC disallows it for corporation tax and may treat it as a benefit or earnings. If it was genuinely a business trip with a minor private extension, careful apportionment and evidence (itinerary, meeting agendas, client emails) can protect the business element. If it was primarily personal, the cleanest fix may be repayment to the company or treating it as remuneration with correct reporting.

Example 4: VAT reclaimed without proper invoices. A business reclaims input VAT on costs but can’t produce VAT invoices. HMRC assesses VAT back. If the business can obtain duplicate invoices and demonstrate business use, the assessment may be reduced or withdrawn. If the invoices cannot be obtained, the claim may remain denied.

How to reduce the chances of HMRC disagreeing in the future

You can’t eliminate risk entirely, but you can make challenges less likely and easier to resolve:

Keep strong records. Store invoices and receipts digitally, label transactions, and keep supporting documents (contracts, emails, diary entries). A simple habit—adding a note to each expense explaining “who/what/why”—can be invaluable later.

Separate business and personal spending. Use dedicated business bank accounts and cards where possible. Mixed spending makes everything harder to justify.

Maintain mileage and travel logs. Record date, start and end points, purpose, and miles. For contractors, keep evidence that travel relates to temporary workplaces and document changes in work patterns.

Use consistent methods for cars and home office. Don’t mix and match approaches without understanding the rules. Choose a method and stick to it unless you have a clear reason to change and you document it.

Be careful with grey areas. Entertainment, clothing, personal devices, and subsistence are perennial problem areas. If you’re unsure, treat it cautiously or get advice before claiming.

Reconcile and review before filing. Before submitting returns, review “other expenses” and anything that looks unusual. Ask yourself: “If HMRC asked for this, could I prove it?” If not, fix the record or reconsider the claim.

What to do right now if HMRC has already raised concerns

If you’ve received a letter or notice, focus on action rather than worry:

Organise the information. Build a spreadsheet or list of the challenged items with dates, amounts, suppliers, and your business explanation. Attach evidence behind each line item.

Respond by the deadline. If you need more time, request it promptly and explain why. Silence or missed deadlines can escalate matters quickly.

Correct obvious errors early. If you identify expenses that shouldn’t have been claimed, acknowledge them. Voluntary corrections can reduce penalties and build credibility.

Get help if the stakes are high. If the enquiry involves significant sums, multiple years, or complex areas like employment status or director benefits, advice can pay for itself by preventing costly missteps.

The bottom line

If HMRC disagrees with your expense claims, the outcome can range from a simple adjustment to a more involved review. The main risks are additional tax, interest, and potential penalties, with extra complexity for limited companies where expenses can be reclassified as benefits or remuneration. The best defence is clarity: clear evidence, clear business purpose, and clear calculations for any apportionments. Even if HMRC challenges you, a calm, structured response with organised records often leads to a fair resolution—sometimes with a reduced adjustment, sometimes with no change, and sometimes with a correction that closes the matter cleanly and lets you move forward with improved systems.