The big question we get asked by the self employed is ‘can I allow this expense against tax?’ Some of the answers are obvious but there are some tricky ones, just to trip us up, despite best efforts to be honest and logical. We have put together our top 10 that applies to the self employed (sole traders). Some different rules apply to limited companies.
The basic rule is that you can claim expenses that are wholly and exclusively for the purpose of carrying out your trade. The most obvious ones are cost of materials or stock, and payroll costs. Typical ones that can be claimed, but need a bit of thought include the following:
Working from home. You can claim in two ways, either based on a proportion of the house you use or at a fixed £4 per week. This can either be if you work from home full time or even if you say do your books from home. We have put together a useful excel tool to allow you to work out how much you can claim – just take out a free 14 days trial with Adzuki and the working from home is free for you to use when you close down your accounts at the end of the year (the system prompts you to do it and walks you through it). When claiming as a proportion of the house you can allow percentages based on the proportion the ‘office’ occupies on things including electricity, heating, insurance, mortgage interest (only for sole use of part of your home), council tax etc.
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Tools. If the tools and equipment are solely for use in the business then they can be claimed.
Hairdryer for a hairdresser
Circular saw for a joiner
If your using the simplified cash accounting system (see our blog on cash accounting v traditional accounting) then you just include them as an allowable expense; if using traditional accounting then unless they’re consumables (e.g. saw blades) you generally have to put them down under capital and claim allowances.
You can also claim for stationery, printer cartridge, pens, postage etc used in the operation of your business.
Telephone / Broadband. If you have dedicated business phones and internet (land and mobile) only for business use and in the business name you can claim the full cost. If you use your home phone and personal mobile and broadband you can claim a percentage of the cost based on how much you use for business. The best thing to do is to keep records of calls and mark down personal and business use, at least as a sample to prove to the tax man if he asks.
You can claim if you need special work clothes such as
- protective clothing needed for your work
- costumes for actors or entertainers
You can only claim for any clothing not on the list above if they are branded with your company name.
Motor Expenses. Transport costs can often be the largest expense for many self employed. If you are self employed you can either:
- Claim a set mileage allowance OR Claim a proportion of total costs of running the vehicle that are for business purposes
Mileage Allowance: You can allow for these costs by either claiming a proportion of the total operating costs of the vehicle including tax insurance, servicing, break down insurance etc based on the percentage of business and personal miles or through claiming for business miles completed. Mileage is calculated at 45p a mile for cars for the first 10,000 miles, and 25p a mile above 10,000 miles. You can also claim mileage for motorbikes at 24p a mile, and for cycles at 20p a mile. Mileage can only be claimed for business mileage, and travel to your normal place of work cannot be charged (so if you work in the same office every day, that is viewed as normal commuting, and is not allowable for tax purposes). We have put together a useful excel tool to allow you to work out how much you can claim – just take out a free 14 days trial with Adzuki and the car miles tool is free for you to use.
Total Running Cost: You add up all the motor expenses during the year and then deduct the proportion that is for personal use.
Business insurance. This can be claimed. Typically this can include professional indemnity and public liability required to carry out your trade.
Website. The costs of maintaining and hosting your web site can be claimed. The cost of developing the site is generally classed as capital but as most sites for sole traders cost around £500 and particularly if you are using a cash accounting basis then you can put down as an allowable expense.
Advertising, marketing and professional fees. You can claim the costs of marketing and advertising but you can’t claim for entertainment (e.g. you take a customer out for a meal).
You can also claim for magazines and subscriptions that are relevant to your work.
Any fees you incur for professional registrations or payments for legal work or accounting fees can all be allowed as a business expense.
Training. If you need to maintain skills for your trade then the costs are allowable.
Food and accommodation. If it’s a normal working day then as a self employed person you can’t generally claim for your lunches or tea / coffee, we all need to eat. If you have to travel away from home for a few days then the costs for accommodation and evening meals can however be allowed against business costs.
The HMRC web site makes it clear what you can claim https://www.gov.uk/expenses-if-youre-self-employed/overview
The main thing is to keep clear records of income and expenditure. Ideally you will do this on a regular basis, so you don’t lose those important receipts and can keep a constant check on your income and expenses to make sure you are in profit. For just £6 per month you can use Adzuki, cloud based software designed for the self employed and small business, it’s as jargon free as possible and can be accessed using your smart phone, tablet or computer wherever you have a phone data signal or wifi. For example, when you buy some tools, materials, petrol etc or receive a payment you can enter this directly on the Adzuki system wherever you are. As the system is cloud based the data is immediately secure and clear. Once you have entered your income or expense keep a record of your receipts, as required by the HMRC, either by a paper file or scanning / taking a photo with your smart phone and storing on a secure PC or a cloud file.
The Chancellor announced in his Autumn 2015 statement that he has a vision for the self-employed and landlords to file returns quarterly. Watch out for a future blog when the details become clearer.
Using cloud based Adzuki software designed for sole traders with a turnover under the VAT threshold of £82,000 per year will lead you down the path to entering your income and expenditure and reflecting your trading profits at a glance. Simple to use, low monthly cost, secure storage of your numbers and profit / loss reports when you want. It also leads you down the end of year process by creating those vital numbers for your tax return, prompting you to enter your income, expenses, capital expenditure, use of home etc. You then have the choice to put them in to your tax return yourself or employ a bookkeeper / accountant.
Check out our other blogs aimed at providing information for the sole trader at www.adzuki.co.uk