How To Track Business Expenses in 6 Simple Steps

Business expenses include every cost your company incurs during its operations, from office supplies and software subscriptions to travel costs and employee benefits.

It’s tough to keep accurate expense records when you’re dealing with lost receipts, mixed personal spending, and complex HMRC rules. An expense tracking tool, whether your own in-house system or one of the top accounting apps, helps you save time, reduce your tax bills, and understand where your money goes.

This guide will help you set up the right processes for your business, maximising your tax efficiency and ensuring you’re meeting all compliance requirements.

Key Takeaways

• Create a clear separation between business and personal expenses by maintaining a dedicated business bank account.
• Use a digital system to immediately record expenses, prevent lost receipts, and maintain accurate records.
• Organise expenses into HMRC-approved categories to maximise tax deductions and ensure compliance.
• Reconcile accounts monthly to ensure accurate financial records and identify discrepancies early.

Why Track Business Expenses?

HMRC requires all businesses to keep detailed records of their income and expenses. With digital recordkeeping fast becoming a requirement, now’s the time to get into the habit of using digital methods. Making Tax Digital will become mandatory from April 2026 for self-employed individuals and landlords with qualifying income over £50,000 and from April 2027 for those with qualifying income over £30,000.

Regular expense tracking helps you monitor cash flow, identify unnecessary spending, and make the right decisions about your business’s future. Proper expense tracking also ensures you can claim all allowable expenses on your tax returns, reducing the amount of profit you’re required to pay tax on.

Furthermore, clear financial records strengthen your position when dealing with banks, investors, or potential buyers, and organised expense reports and financial records demonstrate your professional management and make your business more attractive for financing opportunities.

And, if HMRC ever selects your business for an audit, comprehensive expense tracking provides the evidence you need to support your tax returns and avoid penalties.

What Business Expenses Should You Track?

Every business expense needs tracking, but HMRC has specific rules about what qualifies as an allowable business expense for tax purposes. Here’s a summary of the main things you should monitor:

Essential business operations

• Office costs: Rent, utilities, insurance, and maintenance.
• Equipment and technology: Computers, software, phones, and machinery.
• Professional services: Accounting, legal, consulting, and IT support.
• Marketing and advertising: Website, advertising, and promotional materials.

Employee and travel expenses

• Staff costs: Salaries, benefits, training, and pension contributions.
• Travel expenses: Mileage, accommodation, and meals during business trips.
• Vehicle costs: Fuel, insurance, repairs, and road tax.
• Entertainment: Client meals and events (with restrictions).

Property and remote work

• Premises costs: Business rates, security, and cleaning.
• Home office: Portion of rent/mortgage, utilities, and internet.
• Insurance: Building, contents, and professional liability.
• Maintenance: Repairs, updates, health and safety compliance.

Digital requirements

Under Making Tax Digital, which will be implemented in phases from April 2026, you must maintain comprehensive digital records of your business transactions. This includes all income records, such as sales and revenue, bank interest, and other business income.

For expenses, you’ll need to keep digital copies of purchase invoices you’ve sent, receipts, bank statements, and credit card records. Each transaction must include the date, amount, category, and relevant supplier or customer information.

If you’re VAT registered, you’ll also need to maintain detailed records of VAT transactions and submit digital VAT returns. HMRC requires these records to be kept in approved digital formats, accessible through compatible software platforms.

Tracking Business Expenses – A Step-by-Step Guide

With all that in mind, let’s look at how best to keep track of those business expenses.

1. Set up a dedicated business account

Start by separating your personal and business finances with a dedicated business bank account. This makes tracking expenses much simpler and more accurate while maintaining professional credibility with clients and HMRC.

Look for an account that offers online and mobile banking access, integration with accounting software, and business credit cards for easier expense management.

2. Choose your expense tracking system

For very small businesses or sole proprietors with few monthly transactions, a basic spreadsheet system might suffice. This could be a well-organised Excel or Google Sheets template coupled with a digital folder system for storing receipt images and regular reconciliation with bank statements.

However, most businesses benefit from using dedicated accounting software. There are many to choose from. Some of the top options in the UK include QuickBooks, FreshBooks, and Zoho Books, which all have excellent business expense tracking features.

• QuickBooks has comprehensive reporting and user-friendly expense tracking features, perfect for growing businesses. You can set up rules for automatic expense categorisation based on vendors or transaction amounts. It can also track billable expenses by client, making it easier for you to recover costs through invoicing.
• FreshBooks is good for simple expense categorisation and time tracking, making it popular with freelancers and service businesses. It offers multi-currency expense tracking and can automatically import expenses from your bank account or credit card daily. Freshbooks also allows you to track expenses by project, helping you understand the true cost and profitability of each client engagement.
• Zoho Books is another cost-effective solution with good automation features for budget-conscious small businesses. Its receipt scanner can automatically extract key information like date, amount, and vendor, reducing manual data entry. The software also provides customisable financial reports and approval workflows for businesses with multiple employees.

3. Set up expense categories

To make expenses easy to report, your expense category choices should align with HMRC’s allowable expense types. These include:

• Office and premises costs
• Travel and vehicle expenses
• Staff and employee costs
• Legal and financial costs
• Marketing and entertainment
• Training and development
• Stock and materials
• Insurance and professional fees

Create meaningful subcategories

Each main category can be broken down into types of business expenses that reflect your business activities. For travel expenses, this might mean separating fuel costs from vehicle maintenance, distinguishing between different types of public transport, and maintaining clear records of accommodation and parking fees.

Similarly, office expenses can be subdivided to track utilities separately from rent while maintaining distinct records for supplies, equipment, and software subscriptions.

Adapt to your business context

Your industry and business model should influence how you structure your categories to keep track of business expenses. A contractor’s expense categories will look quite different from a retailer’s or a service business. For example, if you frequently bill expenses back to clients, you’ll want to structure your categories to make this process straightforward. If you manage multiple projects, consider how your categories can help effectively track project-specific costs.

4. Properly manage your receipts

Poor receipt management is one of the most common causes of tax return stress and missed deductions. It’s always best to get a receipt into the system as soon as possible. Many business owners lose receipts or find them illegible after months in a wallet or drawer.

Digital receipt management

When making online purchases, save digital receipts directly to your expense management system as soon as the transaction is complete.

Most modern accounting platforms offer email processing features that can automatically handle receipt management—simply forward your receipts to a dedicated email address, and the system will process them automatically.

Physical receipt handling

When dealing with physical receipts, image quality can be a problem. Take time to photograph receipts properly, ensuring all edges are visible and the image is clear and readable.

Thermal paper receipts require special attention. Often used in shops and restaurants, these common receipt types can become illegible within months. Create digital copies of thermal receipts immediately to ensure you maintain proper records for HMRC’s required retention period.

Documentation best practices

Beyond simply capturing receipt images, record key transaction details while they’re fresh in your mind, including the date, supplier information, amount, payment method, and business purpose.

For business meals and entertainment expenses, take extra care to document all attendees and the specific business purpose—HMRC has strict requirements for these types of expenses.

Employee expense management

If your business has employees who incur expenses, establish clear submission processes and deadlines. A common best practice is requiring expense submission within 30 days of purchase.

For employees who frequently make business purchases, consider using corporate credit cards. This can significantly reduce the administrative burden on both employees and finance teams.

5. Establish a regular review process

A successful expense tracking system requires regular attention and review. Implement a structured schedule to maintain accuracy and gain insights into business spending:

Every week, review new transactions, categorise expenses, and process receipts while they’re fresh. Flag any unusual charges for investigation and follow up on missing documentation.

• Once a month, spend a few hours reconciling bank statements, reviewing expense reports for unusual patterns, and processing employee reimbursements. Check that recurring charges are correct and necessary.
• On a quarterly basis, analyse spending trends, review expense policies, and prepare for tax time. Update categories if needed and ensure documentation meets HMRC requirements.
• Once a year, conduct a comprehensive system review, archive old records properly, and use spending data to create your budget for the next year. Review your expense tracking tools and processes to ensure they still meet your needs.

6. Automate where possible

Technology can greatly reduce manual work in expense tracking. Use these tips and tricks to automate the expense tracking process.

Make transaction imports and categorisation easier

Start by connecting your accounting software directly to your business bank account. The software can automatically download and import all your transactions as they happen, saving the need to enter bank statement data manually. Most platforms can learn from your previous entries to suggest categories for new transactions, saving time on manual categorisation.

Smart receipt management

For receipt management, use OCR (optical character recognition) technology through your accounting software or dedicated apps. These tools can automatically extract key information like dates, amounts, and vendor names, reducing data entry time and improving accuracy.

Set up email forwarding rules to automatically send digital receipts to your expense management system.

Manage regular expenses

You can create recurring expense entries for regular bills like subscriptions, rent, or utilities. Most accounting platforms allow you to set up templates with predefined categories and tax codes, ensuring consistent treatment of similar expenses.

Streamline approval processes

Modern expense management systems can automatically route claims to the appropriate manager or finance team for approval based on amount thresholds or expense types. They can also flag expenses that violate company policies or exceed budgeted amounts.

Maintain documentation automatically

You can also use automation to maintain audit trails and back up documentation. Set up automatic cloud backups of your expense records and configure your system to attach digital receipts directly to the corresponding transactions.