What should a sole trader do if HMRC challenges their expense claims?

What it means when HMRC challenges your expense claims

If you are a sole trader and HMRC challenges your expense claims, it can feel personal and alarming. In reality, HMRC checks expense claims for lots of reasons, and many enquiries begin as routine questions triggered by risk filters, discrepancies, or random compliance activity. A “challenge” might be as mild as a request for clarification, or as serious as a formal compliance check (often called an “enquiry” or “compliance check”) into your Self Assessment return.

HMRC is essentially asking: were the expenses you claimed genuinely incurred, were they incurred wholly and exclusively for the purposes of your trade, and are they supported by appropriate evidence? Your goal is to respond calmly, accurately, and in a way that reduces uncertainty. The best outcomes come from organised records, prompt engagement, and a clear explanation of what the expense was and why it was business-related.

It is also important to understand that HMRC can challenge claims even if you acted in good faith. Sometimes it is because the expense category is often abused (such as travel, subsistence, home office, or motor costs). Sometimes it is because your figures look unusual compared with your turnover or your past returns. And sometimes it is because the information HMRC holds from other sources does not align with your return. None of this automatically means you have done something wrong, but it does mean you should take the process seriously and respond methodically.

Stay calm and act quickly, but do not rush

The first practical step is to slow down, read the letter or message carefully, and identify exactly what HMRC is asking. HMRC communications can contain deadlines and specific requests. Missing deadlines can escalate the matter unnecessarily, but responding too quickly without checking your records can create mistakes that are hard to unwind later.

Make a simple checklist: what is the deadline, what periods are covered, what expenses are under question, and what format does HMRC want for your response? Some requests are narrow, such as “provide receipts for these specific transactions.” Others are broad, such as “explain the basis for your travel and subsistence claims.” Treat the request as a project with a defined scope.

If you need more time, it is often possible to ask for an extension, especially if the request is large. The key is to communicate early. Silence is rarely helpful. A brief, polite message that you are collating records and would like an extension can prevent the situation from deteriorating.

Identify what type of HMRC contact you are dealing with

Not all HMRC challenges are the same. Understanding the type of contact helps you judge the level of risk, the likely timeline, and the best response.

Common scenarios include:

1) A simple query or “nudge” letter: HMRC may ask a question about a figure or prompt you to check whether you have claimed correctly. This may not be a formal enquiry, but it still deserves a careful response or correction if needed.

2) A compliance check: HMRC can open a compliance check into specific aspects of your return. This can focus on expenses, income, or both.

3) A formal Self Assessment enquiry: HMRC can open an enquiry into a tax return within certain time limits. Formal enquiries tend to involve more detailed information requests and can lead to amendments and penalties if errors are found.

4) A check linked to another tax area: For example, VAT, PAYE issues (if you also have staff), or CIS (if relevant). Sometimes expense questions arise alongside these.

Even if you are not sure which category applies, you can still respond appropriately: clarify the facts, provide evidence, and keep a tidy record of everything you send.

Get your records together in a structured way

When HMRC challenges expense claims, your records are your strongest asset. Disorganised evidence does not automatically mean your claim is wrong, but it can prolong the process and make HMRC less confident in your accounting. The best approach is to produce a clear pack of documents, summarised and indexed, rather than dumping a pile of receipts.

Start by compiling:

Bank statements and credit card statements covering the period under review.

Receipts and invoices for the expenses in question. If you have digital copies, name files consistently (for example: “2024-06-12_Train_London-Manchester_£78.pdf”).

Your bookkeeping records or accounting software exports showing the entries, categories, and notes.

Any logs or diaries relevant to the claim, such as a mileage log, appointment diary, job sheets, or client visit records.

Contracts and correspondence that explain why travel or purchases were necessary, such as emails confirming site visits.

Create a simple summary spreadsheet (even if HMRC did not ask for one) that lists each challenged expense, the date, supplier, amount, category, and the evidence you are providing. This helps you answer questions quickly and shows HMRC you are taking the matter seriously.

Understand the “wholly and exclusively” rule in practice

For sole traders, the central test for most business expenses is whether the cost was incurred wholly and exclusively for the purposes of the trade. This phrase sounds straightforward, but it becomes tricky when an expense has a personal element. HMRC commonly challenges expenses that appear to have mixed use, or where the connection to the business is not obvious.

In practical terms:

Pure business expenses (for example, trade stock, business insurance, professional subscriptions directly linked to your work) are usually easier to support.

Mixed-use expenses (for example, a mobile phone used for both personal and business calls, or a vehicle used for both work and private trips) require apportionment or a different method of claiming.

Private expenses dressed as business (for example, normal daily meals, family holidays, or clothing that is not protective or specifically required for the trade) are likely to be disallowed.

When preparing your response, explain the business purpose in plain language. A receipt on its own may not show why the cost was necessary. HMRC wants the story: what you did, for which client or job, why the purchase or trip was required, and how you calculated the amount claimed.

Deal with common challenged categories one by one

Some expense categories attract more scrutiny than others. If HMRC is challenging your expenses generally, you should proactively review these areas and be ready to explain them.

Motor expenses and mileage

Vehicle costs are frequently challenged because they often involve mixed personal use. Sole traders generally have two approaches: claim actual running costs (with an appropriate business-use percentage) or claim simplified mileage (if eligible and chosen). HMRC may question whether you have double-claimed (for example, claiming mileage while also claiming fuel costs) or whether your business mileage figure is reasonable.

If you claim actual costs, you should be prepared to show:

How you calculated business use (ideally with a mileage log or a reasonable method based on total mileage versus business mileage).

Evidence for costs claimed (insurance, servicing, repairs, fuel, vehicle finance interest where applicable).

Why any capital allowances claims are correct (if relevant).

If you claim mileage, you should be prepared to show:

A mileage log with dates, start and end points, purpose of the trip, and miles travelled.

How you calculated the total claimed.

Why any commuting is excluded (travel from home to a regular place of work can be treated differently from travel to temporary workplaces).

Even if your records are imperfect, do not invent or reconstruct falsely. Instead, be honest about what you have, what you can reasonably evidence (such as diary entries, client invoices that indicate site visits, and maps), and improve your record-keeping immediately.

Travel and subsistence

Travel and subsistence are also common areas for HMRC challenges. Travel must have a business purpose and cannot be ordinary commuting to a permanent workplace in the same way. Meals are generally allowable when you are travelling for business, but normal everyday food costs are not. If you are claiming meals routinely while working locally, HMRC may ask why those meals are not simply your normal living costs.

To respond well, you should provide:

Details of the business trip: client, job, meeting purpose, and location.

Evidence of the travel cost (tickets, receipts, booking confirmations).

A short explanation of why the meal was required (for example, you were away from your normal base attending a client meeting and needed sustenance during the trip).

If there is any private element, be clear and adjust the claim accordingly. For example, if a trip combined business and leisure, you may need to restrict the claim to the business portion where appropriate, and you should be able to show how you did that.

Use of home as office

Many sole traders claim a portion of home costs such as electricity, heating, broadband, or rent, based on business use. HMRC might challenge these claims if the amounts seem high, if you claim the full cost, or if there is no basis for the apportionment.

A strong response includes:

Your method of calculation (for example, a reasonable split by rooms and time spent working, or use of a simplified flat-rate method if you have chosen that).

Evidence of the underlying costs (utility bills, rent statements, mortgage interest where appropriate).

A description of your workspace and working pattern.

Be careful with claims for rent and mortgage-related costs, as there can be wider implications depending on circumstances. If you are unsure, professional advice may be worthwhile before you send a response.

Phone, internet, and tech

HMRC may query phone and broadband costs because most people use these services personally as well as for business. If you claim the whole bill, HMRC may ask why there is no private use. If you apportion, HMRC may ask how you calculated your business percentage.

Provide:

Contracts and bills showing the costs.

Your apportionment method (for example, a reasonable split based on itemised bills or a consistent estimate of business usage).

Evidence that the device or service supports business activity (client calls, online booking, marketing, invoicing, etc.).

If you purchased equipment such as a laptop or camera, be ready to explain whether it is used privately and how you treated it in your accounts.

Clothing, uniforms, and appearance-related costs

This is a classic challenge area. Everyday clothing is usually considered personal, even if you only wear it for work. Allowable clothing tends to be protective clothing, specialist clothing required for the trade, or a uniform that clearly identifies you as part of a business. HMRC may challenge claims for suits, shoes, gym wear, or “smart clothing” used for meetings.

If you have claimed clothing expenses, you should be prepared to explain why the clothing is genuinely part of the trade rather than personal wardrobe. If it is not defensible, it may be better to acknowledge the error and correct it, rather than arguing a weak position.

Training, courses, and professional development

Training costs can be allowable, but HMRC may challenge them if the training is to start a new trade or is not sufficiently connected to your existing work. You may need to show how the course maintains or improves skills used in your current business activities.

Provide:

Course invoices and proof of payment.

A clear explanation of how the training relates to your current services.

Any supporting materials showing the relevance (syllabus, learning objectives, or links to client work).

Be careful with training that looks like career change or personal interest. If the course enables a fundamentally new business line, HMRC may view it differently.

Entertainment and gifts

Business entertainment is a high-risk category and is often disallowed for tax purposes. HMRC may ask whether meals with clients were entertainment and whether you have treated them correctly. Gifts can also be restricted depending on the nature of the gift and who received it.

Have a clear record of:

Who attended and why.

The business context (for example, negotiating a contract).

How you treated the cost in your accounts.

If you are unsure whether something is entertainment, it may be sensible to take advice before responding.

Check whether you claimed the right thing under the right method

Sometimes HMRC challenges expenses not because the cost is inherently non-business, but because the method of claiming is inconsistent. For example, you might have used simplified expenses in one area while also claiming actual costs that overlap. Or you might have included a capital item as an ordinary expense when it should have been treated differently.

Review your return and bookkeeping for:

Duplicate claims (for example, mileage plus fuel, or home office flat rate plus apportioning actual utilities).

Capital items treated as revenue expenses (such as expensive equipment claimed entirely in one go when it should be handled as a capital purchase, depending on the rules and your accounting approach).

Personal items accidentally coded as business costs (a common bookkeeping slip).

Correcting honest mistakes quickly can reduce the overall cost, shorten the enquiry, and may reduce the chance of penalties. The key is to handle corrections carefully and transparently.

Responding to HMRC: be clear, factual, and organised

When you reply, aim for a tone that is professional and cooperative. Your response should address each point HMRC raised, supported by evidence. Avoid over-explaining or sending irrelevant documents that create confusion, but do provide enough context that HMRC can understand your reasoning.

A good structure for a written response is:

1) Brief introduction: confirm you are responding to their letter, state the tax year and the areas questioned.

2) Summary of what you are providing: list documents attached and how they are organised.

3) Point-by-point answers: for each expense category or item, explain the business purpose and provide the matching evidence reference.

4) Any corrections: if you discovered errors, explain them and state what you propose to do next.

5) Offer to clarify: invite HMRC to ask further questions if needed.

Think of it as making it easy for someone unfamiliar with your business to follow your logic. If the inspector can see the link between the expense and your trade quickly, the challenge is more likely to resolve sooner.

If you cannot find a receipt, do not panic

Missing paperwork happens, especially for older periods or small transactions. HMRC generally expects you to keep adequate records, but the absence of a receipt does not automatically mean the expense is disallowed. The stronger the alternative evidence and the clearer the business rationale, the better.

Possible alternatives include:

Bank or card statements showing the transaction.

Supplier invoices resent to you (many suppliers can reissue invoices).

Email confirmations for bookings or online purchases.

Delivery notes, order confirmations, or screenshots from online accounts.

Contemporaneous diary notes or job records supporting the purpose.

However, avoid creating documents after the fact that could be interpreted as unreliable. If you reconstruct details, be transparent that you are doing so based on available information, and keep the reconstruction reasonable and consistent with your business operations.

Know when to amend your return or make a voluntary disclosure

If your review shows that some expense claims were wrong, you may be able to correct matters by amending the tax return (if within the amendment window) or otherwise making a disclosure as part of the compliance process. This can be uncomfortable, but it is often the best way to limit penalties and demonstrate cooperation.

As a sole trader, you should be especially careful about the difference between:

Genuine mistakes: such as an expense coded to the wrong category or a duplicated entry.

Careless errors: such as claiming without checking whether the cost was allowable.

Deliberate behaviour: intentionally inflating expenses or claiming private costs knowingly.

How HMRC views the behaviour can affect penalties. Being proactive, honest, and organised can make a significant difference to how the matter is handled.

Consider getting professional help early

Many sole traders handle minor HMRC queries themselves, especially if they have good records and straightforward expenses. But if HMRC is asking extensive questions, disputing multiple categories, or suggesting significant adjustments, professional help can be valuable.

A tax adviser or accountant can help you:

Check the technical rules and the strength of your position.

Prepare a clear, persuasive response.

Negotiate or correspond with HMRC on your behalf.

Quantify potential tax, interest, and penalties.

Decide whether making a disclosure is the best approach.

Professional support is particularly useful if the enquiry spans multiple years, involves complex mixed-use apportionments, or if you feel overwhelmed by HMRC’s language and process.

Keep a careful audit trail of everything you send and receive

From the moment HMRC challenges your expenses, treat it like a formal case file. Create a folder (digital and/or physical) and keep:

All HMRC letters and messages, with dates received.

Copies of everything you send to HMRC, including attachments.

Notes of phone calls: date, time, the person you spoke to, and what was agreed.

Your calculations and working papers.

If the matter escalates or takes months, you will be very glad you kept a clean trail. It also helps you spot inconsistencies and respond confidently if HMRC asks follow-up questions.

Understand potential outcomes: adjustment, tax due, interest, and penalties

When HMRC challenges expense claims, the outcome can range from “no further action” to significant changes. If HMRC disallows expenses, your taxable profit increases, which can increase Income Tax and potentially National Insurance contributions. HMRC may also charge interest on late-paid tax. Penalties can apply depending on the nature of the error and how you handled it.

Possible outcomes include:

No change: HMRC accepts your explanation and evidence.

Partial change: some expenses are accepted, others are disallowed or reduced.

Full adjustment: HMRC disallows a category, often due to insufficient evidence or because it is not allowable.

Wider review: HMRC expands the check to other areas or tax years if they lose confidence in the records.

Your approach can influence the tone and scope of the enquiry. Clear evidence and cooperative behaviour can keep the review narrow. Disorganised records, contradictions, or missed deadlines can cause HMRC to ask more questions and look more widely.

If HMRC disagrees with you, focus on facts and reasonableness

Sometimes you can provide evidence and still face disagreement, especially in grey areas like mixed-use expenses or travel patterns. If HMRC disputes your claim, ask them to clarify exactly what they do not accept. Is it the business purpose, the amount, the method of apportionment, or the absence of supporting documentation?

Then respond with:

Any further evidence you can provide.

A clearer explanation of the business context.

A revised calculation if the original method was weak.

A willingness to agree a reasonable apportionment where appropriate.

Avoid emotional arguments. HMRC will not be persuaded by “I always do it this way” or “everyone claims this.” They will be persuaded by a consistent, well-evidenced explanation grounded in the reality of your trade.

Do not ignore the bigger picture: improve your bookkeeping immediately

Whether the challenge is resolved quickly or not, use it as a signal to strengthen your systems. HMRC scrutiny often reveals gaps in record-keeping that you can fix to reduce future risk and stress.

Practical improvements include:

Capture receipts as you go using a scanning app or your accounting software.

Add notes to transactions in your bookkeeping describing the business purpose (client name, job reference, location).

Maintain a mileage log consistently, not retrospectively.

Separate business and personal finances with a dedicated business bank account.

Review your expense categories monthly to catch errors early.

Keep digital backups of key records in a secure location.

These steps do more than satisfy HMRC. They also help you understand your profitability, price better, and reduce the time you spend on tax compliance.

How to handle specific tricky situations

Some scenarios are especially likely to trigger questions. If any of these applies, address them directly in your response rather than hoping HMRC will not notice.

Working from home while travelling or working at client sites

If your business involves both home working and frequent travel, HMRC might question the pattern. Make it clear how your work is structured. For example: you may do admin and planning at home, then travel to client premises for delivery of services. Provide evidence such as appointment schedules and invoices showing that travel is integral to the trade.

Cash expenses and small purchases

Cash transactions can be harder to evidence. If HMRC queries them, provide receipts where possible and a clear explanation of why cash was used. If receipts are missing, bank statements will not help, so your record-keeping needs to rely more on contemporaneous notes, supplier confirmations, or other corroboration.

Large one-off expenses

A big purchase relative to turnover may attract attention. Be ready to explain what you bought, why you bought it, how it relates to your work, and whether it has any private use. If the item is used over several years, be prepared for questions about whether it should have been treated differently in your accounts.

Expenses near the end of the tax year

Purchases made right before the tax year ends sometimes look like an attempt to reduce tax quickly. If the expense was genuine, explain the timing (for example, replacing broken equipment, buying materials for a confirmed project, or paying an annual policy renewal).

Know your rights and keep communications professional

While it is wise to cooperate, you are also entitled to fair treatment. You can ask HMRC to explain what they need and why. You can request reasonable time to respond. And you can challenge conclusions you believe are incorrect, provided you do so calmly and with evidence.

Keep communications factual and polite. If you speak on the phone, follow up with a short written confirmation of what was discussed, so there is a clear record.

What to do if you feel out of your depth

It is normal for sole traders to feel intimidated by HMRC correspondence. The combination of unfamiliar terminology and the fear of financial consequences can be stressful. If you feel unsure, the best practical step is to avoid reactive responses and focus on organising your evidence. If the issue is significant, consider professional advice before sending detailed explanations.

Even if you choose to handle it yourself, you can still improve your position by:

Answering only what is asked, clearly and directly.

Providing a tidy evidence pack with an index.

Acknowledging uncertainties rather than guessing.

Correcting errors openly if you find them.

The goal is to show that your tax return is based on genuine business records and reasonable judgement, not improvisation.

A practical step-by-step plan you can follow

If you want a straightforward plan, use this sequence:

Step 1: Read HMRC’s request carefully, note deadlines, and identify the exact items or categories challenged.

Step 2: Create a case folder and start an evidence index listing each expense and the supporting documents you have.

Step 3: Pull bank statements, receipts, invoices, mileage logs, diaries, and any correspondence that supports the business purpose.

Step 4: Review your claims for mixed-use issues, duplicate claims, and obvious mistakes.

Step 5: Draft a point-by-point response explaining the business purpose and referencing the evidence clearly.

Step 6: If you identify errors, decide the best correction route and disclose them in a controlled, transparent way.

Step 7: Send your response securely in the format HMRC requested, keep copies, and record the date sent.

Step 8: Improve your bookkeeping systems immediately to prevent repeat issues.

Final thoughts: treat it as a process, not a crisis

When HMRC challenges your expense claims, it does not automatically mean you are in trouble, but it does mean you need to respond with care. The most effective approach is calm, structured, and evidence-led: understand what HMRC is asking, assemble your records, explain the business purpose clearly, and correct mistakes where necessary.

As a sole trader, you are both the business owner and the finance department, so it is easy for record-keeping to slip when you are busy delivering work. HMRC challenges often highlight where your systems need tightening. If you use the experience to improve how you capture receipts, document business purpose, and track mixed-use costs, you will reduce future risk and make your tax life far easier.

Above all, focus on clarity and credibility. HMRC wants to see that your expense claims are grounded in real business activity and supported by records. When you provide a clean explanation and organised evidence, you put yourself in the best position to resolve the challenge efficiently and move on with your business.