Self-Employed expenses – Self-Employed (Sole Traders) are entitled to claim business-related expenses when calculating their net profits for the tax year and declaring the income in the Self-Assessment Tax Return. Every business is unique in its own way, as even two businesses in the same industry unlikely have have the same business structure, management, how it operates and what type of expenses it incurs.
So, every business has different ongoing overheads which for the purpose of income tax can be used to offset against the income. This is important for tax payers who wants to legally pay as little as tax possible, so it would make sense that business would claim as much as possible to reduce the tax burden and be as tax efficient as possible.
However, as not all businesses have the same type of expenses, many wonder what expenses are actually allowable expenses? First of all we need to understand the meaning of “allowable expenses”.
Accounting expenses vs HMRC allowable expenses?
Expenses used for taxation purposes are determined by HMRC. Although for the purpose of accounting, any expense related to business can be reported in the financial statements, however for the purpose of tax, HMRC determines which expenses are allowable and which expenses can not be used to offset against the income.
An example of this is the depreciation of any asset, which for the preparation of Sole Trader accounts and Limited Company accounts is an acceptable expense and included within the Financial Statement of Profit or Loss Statement, however for the purpose of income tax or business tax, it is removed (added back to profits).
Additionally, HMRC does not allow tax payers to claim for expenses used for private purpose. Any expense that is actually taken from the business to pay for private purchases such as groceries will be considered as disallowable expenses.
This does not mean any groceries expenses are disallowable expenses, for example, if the business is in the hospitality sector, such as restaurants, any groceries or food shopping for the business are allowable expenses (provided these were for the business and not personal grocery shopping). So in many cases, the type of expenses a business is allowed to claim will depend on the “nature of the business”.
Costs you can claim as allowable expenses
There are typical Self-Employed expenses most Sole Traders (Self-Employed) can claim, these include:
- Home office
- Office costs, for example stationery
- Phone bills
- Travel costs, for example fuel, parking, train, bus fares
- Clothing expenses, uniforms
- Staff costs, for example salaries or subcontractor
- Stocks for resale, raw materials
- Financial costs, for example insurance or bank charges
- Business premises costs, for example heating, lighting, electricity
- Business rates
- Advertisement or marketing costs,
- Training courses or CPD (Continuing professional development)
Home office – Working from home
If you need to work from home, you can claim £6 per week, up to a total of £312 for 2020/21 tax year (previously £4 per week, up to £208). Also, HMRC does not require tax payers to keep the receipts and proof of this expenditure, so you can claim up to up £312 and reduce your total tax by £62.40 as a basic rate tax payer and £124.80 as a higher rate tax payer.
Private use of Expenses
What happens if a Self-Employed individual uses his phone mainly for private use and some for business use. Can he claim the full amount of phone bills? The short answer – No. Businesses to have to ensure to only claim a proportion of the expenses if the total costs are used for both private and business use. For example, if the same individual pays £20 each month (£240 for a year) for his phone bills and he only uses 25% for his business calls, then he can claim up to £60 (25% of £240).
What if a business does not have any expenses it can claim?
HMRC allows £1,000 tax free “trading allowance”. So if a business has less than £1,000 total business expenditure, it can claim trading allowance of up to £1,000. The same applies for Property Income, Landlords who have incurred nil to less than £1,000 are allowed to claim up to £1,000 tax-free allowance.