What expenses can you claim as self employed?
If you have already read our previous blogs on self-employed and limited you will know by now that when it comes to allowable expenses, there are a number of key differences between these two trading statuses. In this post we bring together the key points from our previous posts to help you compare and contrast the different forms of status, hopefully providing you with some much needed clarity!
Allowable expenses – a brief summary
Despite the differences, regardless of trading statuses the following principles hold for most businesses when it comes to expenses:
Whether you operate as a sole trader or through a limited company, not all expenses can be offset against business profit. HMRC only allows those which are considered to be incurred ‘wholly, exclusively and necessarily’ for the running of the business to be deducted against profit
As a rule of thumb, if you incur expenses which have elements of personal use, only the business-related portion can be deducted against profit. If not possible to split out, HMRC will not allow the expense to be offset – in other words it will be ‘disallowed’. However, it is worth noting that if you trade as a limited company, certain business expenses that do have elements of personal use may be claimed as a legitimate expense but will treated as ‘taxable benefits-in-kind’ to the employee (which in the case of an owner-managed business, would normally also be the director), resulting in additional tax to pay.
It is important that you stay on top of your expenses and maintain all relevant receipts and paperwork – this will allow you (or your accountant) to calculate the correct taxable profit figure for your business, which then means that you pay the right amount of tax. If you’re not sure how to do this, check out our previous post for tips on tracking your business expenses.
Tax deductible expenses when self-employed
We’ve compiled a list of expenses which are typically considered to be deductible against your business profit (and remember, your business is taxed on profit, not how much it earns). However, remember that there is no ‘one-size-fits-all’ approach when it comes to business expenditure! What is and isn’t allowable is dictated by not only your trading status, but also the industry in which you operate and the exact circumstances of your business. Therefore, we would always recommend that you seek professional advice whenever you’re in doubt.
Business premises
Regardless of your trading status, if you have an office space or workshop dedicated to your business, most of the running costs in relation to this are considered allowable – some examples are:
Rent and utilities (heating, lighting and water rates)
Business rates
Cleaning costs
Phone line and broadband internet
Stationery, printing cost and postage
General repairs and maintenance costs
If, however, you utilise a room or space within your own home for work (which has obviously become much more common since March 2020), there are various ways to calculate just how much you are able to claim for using your home as an office. This is, unsurprisingly, worthy of a blog post itself, and so we’d recommend that you check out our previous blog post to see what options are available to you.
Equipment
In general, the costs to purchase equipment and tools required for your business to carry out its trade are usually deductible against business profit, and therefore will reduce your tax bill.
If you trade through a limited company, it is even more important to understand how equipment and tool costs are treated within your business, especially when there are highly attractive tax reliefs available to you subject to you meeting the criteria.
Travelling and transportation costs
When travelling for work purposes using your own vehicle, the business proportion of most vehicle-related costs can be offset against business profit:
Fuel
MOT, servicing and repair costs
Vehicle insurance and breakdown cover
Hire charges
Splitting out the business portions of vehicle costs, however, can be tricky at times; and so HMRC also allows the use of flat rate vehicle expenses which covers all of the expenses listed below. These are:
Cars and goods vehicles: 45p per mile for the first 10,000 miles, and 25p per mile after that
Motorcycles: 24p per mile
As a sole trader, you can either make a claim for business mileage using the rates above, or alternatively calculate your overall motor expenditure incurred in the year and claim the relevant business use. An important note is that this choice will need to be made in your first year and this method will need to be used until there is a change in your vehicle. If you operate as a director of a limited company, you can either travel using your own vehicles and make mileage claims using the above rates, or alternatively use a vehicle that is owned or leased in the company’s name, and reclaim associated vehicle costs with the exception of fuel – please check out our previous post for further details.
In addition to vehicle-related expenses, you can also claim for the following when travelling for business purposes:
Parking
Public transport (e.g. train, bus, taxi) fares
Flights
Hotel rooms (within reason)
Meals when travelling for business, or during overnight work trips
Regardless of your trading status, the following are NOT allowable expenses:
Travel costs for personal journeys
Speeding or parking fines
Travel costs related to ordinary commuting i.e. between home and a permanent workplace
Employee expenses
Most staff-related expenses are allowable business expenses, specifically:
Salary and bonuses for your employees (and including yourself as a limited company director), as well as any associated employer’s National Insurance contributions
Pension contributions made on behalf of your employees
Costs paid to sub-contractors
Training courses and related costs which are incurred wholly for business purpose
Staff healthcare, such as medical insurance, annual health check-up or eye test. It should be noted that in some cases, such expenses will be treated as taxable benefits to the employees
Clothing
As explained in previous posts, clothing expenses incurred for your everyday use, even if you wear these clothes to work, cannot be claimed against business profit. However, there are some notable exceptions, which are:
Protective/specialist clothing required for work
Uniform that can only be used for work purpose, for example shirts with the company logo on
Costumes used by actors or entertainers
Legal, professional and financial costs
Most of the costs in this category can be claimed against business profit as long as they are incurred for business purposes. Some examples are:
Accountancy fees
Advertising and marketing costs
Legal costs, depending on why these have been incurred – please discuss with an accountant if in doubt
Insurance costs for business purposes, such as public liability or professional indemnity policies
Bank, credit card and other financial charges, including interest on bank loans and hire purchase interest (however note that if you use cash accounting, you can only claim a maximum of £500 in interest and bank charges)
Subscriptions and memberships to professional organisations related to your business
Agency fees
As we have already stressed earlier in our post, it really is the case that every business is different, and so the general overview above may not be entirely applicable to your business. In most cases, we would recommend that you seek out the expertise of an accountant who has a deep understanding of the industry you operate in, as this will significantly increase the chances that you are paying the right amount of tax as well as potentially freeing up some of your valuable time! If you would like any further support on claiming business expenses, please do give us a shout and one of our team will be happy to help.