Three expense areas cause more confusion than any others under Making Tax Digital: vehicle costs, working from home, and living on business premises. For each, HMRC offers two methods — a simplified flat rate or an actual cost calculation. Choosing the right method can make a meaningful difference to your tax bill.
This guide covers both methods for each category, includes the current HMRC flat rate tables, and helps you decide which approach suits your situation. For the full list of allowable expenses, see What Expenses Can I Claim Under MTD?
Who Can Use Simplified Expenses?
Simplified expenses are available to sole traders and business partnerships. They are not available to limited companies, and landlords cannot use them for property business expenses.
You do not need to apply or register — you simply choose to use the flat rate method when calculating your expenses. Your MTD software will typically ask which method you want to use for each category.
Vehicle and Motor Expenses
If you use a vehicle for business journeys, you have two options for claiming the cost.
Option 1: Simplified Mileage Allowance
Claim a flat rate per business mile driven. The rate covers all running costs — fuel, insurance, servicing, repairs, road tax, and depreciation. You cannot claim these costs separately if you use the mileage allowance.
HMRC mileage rates (2026-27):
| Vehicle type | First 10,000 miles | After 10,000 miles |
|---|---|---|
| Cars and vans | 45p per mile | 25p per mile |
| Motorcycles | 24p per mile | 24p per mile |
| Bicycles | 20p per mile | 20p per mile |
Example: You drive 12,000 business miles in a tax year. Your claim is: (10,000 x 45p) + (2,000 x 25p) = £4,500 + £500 = £5,000.
You need a mileage log with the date, destination, purpose, and miles for each business journey.
Option 2: Actual Costs
Claim the business proportion of your actual vehicle running costs:
- Fuel
- Insurance
- Road tax
- MOT
- Servicing and repairs
- Breakdown cover
- Parking and tolls (business journeys)
- Lease or hire purchase payments (revenue element only)
Track total miles and business miles during the year, then apply the business proportion to your total running costs.
Example: Your car costs £4,800 per year to run. You drive 15,000 miles total, of which 9,000 are business miles. Business proportion = 60%. Allowable claim = £4,800 x 60% = £2,880. Here, the simplified mileage allowance (9,000 x 45p = £4,050) gives a larger deduction — but for a low-cost vehicle driven heavily for business, actual costs can sometimes win.
Important Rules for Vehicle Expenses
- Once you choose a method for a vehicle, you must stick with it for as long as you use that vehicle in the business. You cannot switch from mileage to actual costs (or vice versa) for the same vehicle.
- Capital allowances: If you bought a vehicle through the business and claimed capital allowances, you must use the actual cost method.
- Multiple vehicles: You can use different methods for different vehicles — mileage for your car and actual costs for a van bought through the business.
For gig economy workers who rely heavily on vehicle expenses, see our dedicated guide: MTD for Uber, Deliveroo and Gig Economy Workers.
Home Office Expenses
If you use part of your home regularly for business, you can claim a proportion of your household running costs. Again, you have two methods.
Option 1: Simplified Home Office Allowance
Claim a flat monthly rate based on the number of hours you work from home each month. There is no need to calculate your actual household bills or work out room proportions.
HMRC flat rates for working from home:
| Hours worked from home per month | Monthly flat rate |
|---|---|
| 25 to 50 hours | £10 |
| 51 to 100 hours | £18 |
| 101 or more hours | £26 |
If you work fewer than 25 hours from home in a month, you cannot claim for that month.
Example: You work from home for 110 hours per month for 11 months of the year (taking August off). Your annual claim is 11 x £26 = £286.
The flat rate is deliberately conservative — designed to be simple, not generous.
Option 2: Actual Costs
Claim the business proportion of your actual household running costs:
- Mortgage interest or rent
- Council tax
- Electricity
- Gas
- Water rates
- Home insurance
- Internet and broadband
Calculate the business proportion using room area and time of use:
Example: You have a 4-bedroom house and use one room exclusively as an office. Your household bills total £12,000 per year. Room proportion = 1/4 = 25%. You use the office 10 hours a day, 5 days a week (roughly 30% of the week). Combined proportion = 25% x 30% = 7.5%. Allowable claim = £12,000 x 7.5% = £900.
Compare this with the flat rate (£286-£312 for full-time home workers) and the actual cost method is clearly better in this scenario.
Simplified vs Actual: When Each Method Wins
| Factor | Simplified flat rate | Actual costs |
|---|---|---|
| Best for | Part-time home workers, low household costs | Full-time home workers, high household bills |
| Record keeping | Hours log only | Bills, room measurements, hours |
| Typical annual claim | £120-£312 | £400-£1,500+ |
| Mortgage interest | Not included | Included (business proportion) |
| Can switch method? | Yes, between tax years | Yes, between tax years |
Unlike vehicle expenses, you can switch between simplified and actual cost methods for home office from one tax year to the next. You cannot switch mid-year.
Practical tip: In your first year of working from home under MTD, calculate both methods and use whichever gives the higher deduction. Keep the records needed for actual costs even if you plan to use the flat rate — you can always switch next year if your circumstances change.
Business Premises (Living on Your Business Premises)
This applies if you live at your business premises — the classic example being a shopkeeper in the flat above the shop. If this does not describe you, skip this section.
When you live at your business premises, your personal household costs need separating from business costs. The simplified method provides a flat monthly deduction for personal use, so you can claim the rest as business expenses.
Simplified Flat Rate for Business Premises
Instead of calculating actual personal use, you deduct a flat monthly amount from your total premises costs. This flat rate represents the personal (non-business) element.
HMRC flat rates for living on business premises:
| Number of occupants | Monthly personal use amount |
|---|---|
| 1 | £350 |
| 2 | £500 |
| 3 or more | £650 |
Example: You live alone above your shop. Your total premises costs (rent, rates, utilities, insurance) are £18,000 per year. Personal use deduction = 12 x £350 = £4,200. Allowable business expense claim = £18,000 - £4,200 = £13,800.
Actual Cost Method for Business Premises
Alternatively, calculate the actual split between business and personal use based on floor area and hours. The simplified flat rate is often the better option, as it tends to give a lower personal use deduction than an actual calculation would.
Decision Summary: Simplified vs Actual Costs
| Category | Simplified method | Actual cost method | Can you switch? |
|---|---|---|---|
| Vehicles | 45p/25p per mile (covers everything) | Business proportion of running costs | No — locked per vehicle |
| Home office | £10-£26/month based on hours | Proportion of household bills | Yes — between tax years |
| Business premises | Deduct £350-£650/month for personal use | Calculate actual personal proportion | Yes — between tax years |
What You Cannot Claim
Even with simplified expenses, some costs remain non-deductible:
- Commuting costs — travel between home and a regular workplace is never allowable, regardless of method
- Capital purchases — buying a vehicle or computer is capital expenditure (claim capital allowances instead, not simplified expenses)
- Clothing — unless it is a uniform or protective wear, clothing is not an allowable expense
- Food and drink — daily meals are personal expenses, even when working from home. Only subsistence during overnight business trips qualifies
- Private use proportion — the personal element of any shared cost is never deductible
Recording Simplified Expenses Under MTD
Under MTD, record simplified expenses digitally with the date, amount, and category. Your MTD software calculates the claim using HMRC rates — you just need to keep the supporting records (mileage log, hours worked from home, or premises costs).
If you are using a complex accounting tool for what is essentially MTD compliance, a simpler, focused tool may save you time and money. ClearMTD handles both simplified expenses and actual cost methods for sole traders.
Sign up for ClearMTD and simplify your MTD expense reporting.
Frequently Asked Questions
Can I switch between simplified expenses and actual costs?
It depends on the category. For vehicles, once you choose a method for a particular vehicle, you must use it for that vehicle for as long as you use it in the business — you are locked in. For home office expenses, you can switch method from one tax year to the next, but not mid-year.
Can I use simplified mileage for a vehicle I bought through the business?
No. If you purchased a vehicle through the business and claimed capital allowances on it, you must use the actual cost method for that vehicle. The simplified mileage allowance is only available for vehicles on which you have not claimed capital allowances.
Do I need to track every journey for the mileage allowance?
Yes. You need a mileage log recording the date, destination, purpose, and miles for each business journey. Under MTD, this log must be kept digitally. Your MTD software may include a built-in mileage tracker, or you can use a spreadsheet linked to your MTD software. HMRC can request this log during an enquiry.
Is the home office flat rate worth it?
It depends on your situation. If you work from home full-time (over 101 hours per month), the flat rate gives you up to £312 per year. If your actual household costs are high — say a large mortgage, high energy bills, and expensive council tax — claiming the actual business proportion could give you significantly more. Run both calculations for your first year to see which works in your favour.
Can landlords use simplified expenses?
No. Landlords cannot use the simplified expenses flat rates for home office or vehicle costs relating to their property business. Simplified expenses are only available to sole traders and business partnerships. Landlords must use the actual cost method for their property expenses. However, if a landlord also has a separate sole trade, they can use simplified expenses for that trade's costs.