Expenses if you’re self-employed – Can I claim it?
If you’re self-employed, there are certain allowable expenses that you may claim to reduce your taxable profit and pay less tax. It’s important to know what is allowable and what isn’t from the start. This will allow you to keep the records and receipts you need to correctly report you expenses to HMRC at the end of the tax year.
Common Expense Categories
Some of the most common allowable expenses fall into the following general groups:
• Office costs: stationary etc.
• Travel costs: fuel, parking, train/bus fares etc.
• Clothing expenses: uniforms, etc.
• Staff costs: salaries etc.
• Things you buy to sell on: stock, raw materials, etc.
• Financial costs: insurance, bank charges, etc.
• Costs of business premises: heating, lighting, rent, etc.
• Advertising or marketing: website costs, etc
It’s important to know the detail of each category, and HMRC provides some useful guidance: https://www.gov.uk/expenses-if-youre-self-employed .
If you use traditional accounting in your business, you may also claim capital allowances when you buy certain items for use in the business. For example, equipment, machinery, or business vehicles would normally be eligible for capital allowances. Under the capital allowance rules, you can claim an amount (up to 100% of the value of the item) against your taxable income each year.
It’s worth noting that if you use cash basis accounting, you would simply claim the amount the item cost you in the period in which you buy it – just like any other expense. The exception to the cash treatment is vehicles. If you buy a business vehicle, you may still claim this as a capital allowance, even if you use cash accounting.
Business and Private Use
If you use items for both business and private purposes, you are only allowed to offset the expense directly used for business purposes against your taxable profits.
According to the Income Tax (Trading and Other Income) Act 2005, a taxpayer may not deduct expenditure in computing their profits unless it is incurred wholly and exclusively for the purposes of the trade.
This means that you must keep careful records to demonstrate business versus private use and justify the amounts claimed.
Taking as an example a mobile phone bill of £100, of which £40 was spent on personal calls, and £60 on business calls. The mobile owner is only able to claim £60 as an allowable expense, since it was clearly business use.
Any items claimed need to be backed-up by appropriate records/receipts as proof of the costs and when they incurred. While it’s not required to send receipts to HMRC, you are required to keep records for 5 years in case HMRC wishes to verify everything was accurately reported in your tax return.
There are also simplified expense rules that can be used by sole traders, or business partners who are not part of a limited company, and have no companies as partners.
Under the simplified rules, a flat rate is used to calculate the expense you may claim for:
• Business costs for vehicles
• Working from home
• Living in your business premises
Given the rules around record keeping and allocation between private and business use, the simplified expense rules may be a useful route to take for some self-employed people.
How we can help
Optimum Office can help you organise your income and expenses in an accounting system, provide guidance on record keeping, and prepare your tax return. We can take care of as much or as little of your accounting work as you like, to leave you free to run your business.