What counts as income vs expenses

Before you can categorise expenses, you need to be sure each movement of money is a business transaction at all. Loans, drawings, asset sales and grants all move money through your account — and none of them is quite what it looks like in a quarterly update.

What counts as income

• Sales of goods and services — including every cash job. The odd £20 paid in cash counts, so keep a daily note.
• Platform money — Etsy, eBay, Uber, Deliveroo, Fiverr and everything similar.
• Tips and gratuities — received through your work.
• Invoiced sales — under cash basis accounting, most sole traders count income when the money arrives.
• Barter and part-exchange — the market value of goods or services you swap.
• Taxable business grants — many support grants count as trading income.

Just as important is what isn't income: money you borrow (a £5,000 loan is not a sale), your own savings paid in, refunds of things you bought, and the sale of an old business asset like your previous van. If you're registered for VAT, your income figures exclude the VAT you charge.

What counts as an expense

• Costs wholly and exclusively for the business — the test HMRC applies to every claim.
• Day-to-day running costs — recorded in the right category, from cost of sales to software.
• The business share of shared costs — a fair percentage of a shared phone, car or home.
• Capital equipment — not an expense at all: claimed through capital allowances at year end.

And what isn't an expense: drawings (money you take out for yourself), your own income tax and National Insurance, loan capital repayments (only the interest counts), and client entertainment. If you're not sure, record it with a note and ask your accountant.

Common mistakes

Recording a loan as income is the most expensive slip. A £5,000 loan that lands in your account during a quarter and gets logged as a sale overstates your profit by £5,000 — and your quarterly update tells HMRC you earned money you didn't. The same applies in reverse: loan repayments going out are not expenses.

Drawings recorded as wages is the mirror-image error. Taking £1,500 a month out of the business is your own money moving accounts; treating it as payroll shrinks your reported profit by £18,000 a year.

Cash is the last blind spot. Cash sales that never get recorded and cash expenses paid from the till both distort your totals — a simple daily note of cash in and cash out keeps the whole picture honest.

How to record it in your MTD tracker

Log sales under income, and put each cost in its own expense category. Loans, savings you inject, drawings and asset sales each have their own sections outside income and expenses — using them keeps your quarterly totals telling the true story.