What expenses can you claim as a sole trader?

It would be easy to assume that all expenses incurred by your business also qualify for tax relief and therefore would automatically reduce your income tax bill- unfortunately that is not the case! The purpose of this article is to outline a number of the common types of expenses that a typical sole trader business may encounter along its journey, as well as their normal treatment from a tax perspective. It is important to note however that there are a multitude of different types of expenses that could be incurred by a business and just because it may not be listed below doesn’t necessarily mean it cannot be claimed.

What are ‘allowable and disallowable’ expenses?

A good question, and one that we have wrote a whole article on here already! These terms are commonly used by and amongst accountants, but are very rarely explained to the sole trader’s themselves. Expenses incurred by a business will either be ‘allowable’ (i.e. allowable for tax relief) or ‘disallowable’ (not eligible for tax relief) and so being able to classify these correctly so as to ensure that your self assessment Tax Return is completed accurately is incredibly important, especially given the now highly aggressive nature of HMRC. Before we outline below typical business expenses that can be claimed, we think it would be in your interest first understand what the key differences are between allowable and disallowable expenses and how this impacts your personal tax:

Disallowable Expenses

At one end of the spectrum we have disallowable expenses. Though these expenses may well have been incurred solely for work purposes in the business’ eyes, HMRC do not allow you to receive tax relief on these items. A prime example of a disallowable expense is that of client entertaining; though it can easily be argued that building a relationship with a client (perhaps in the form of taking them to an event, or paying for a meal and drinks) will be beneficial to the business, HMRC will not allow you to deduct this expense from your taxable profit. Other examples of disallowed expenses that your business may incur could be:

·         Motor fines

·         Late filing penalties

·         Fuel / Mileage between personal premises

·         Professional fees relating to non business matters

·         Capital repayment of loans or overdrafts etc- see below though in relation to interest incurred

·         Donations to political parties or unions

·         Investments

·         Networking/Entertaining

Allowable Expenses

An expense is treated as allowable for tax relief in full if it is purchased ‘wholly and exclusively’ for business use. An easy example of this may be landscape gardener purchasing a rake and lawnmower used solely for their business, or a painter/decorator purchasing a paintbrush and paint. As mentioned above there are a wide range of expenses that your business may potentially incur, but the most common for many businesses will be what we call ‘direct costs’ (or in accounting terms ‘cost of sales’) – these are simply expenses incurred that directly relate to providing the services that has generated business income.

Some examples of direct costs that would be fully claimable could be:

-          Buying goods for resale

-          Material costs

-          Sub-contractor payments

-          Agency fees

What other types of expenses can my business claim?

As mentioned above, this of course will depend completely on the type of business that you have and the industry in which you operate in. That being said, we could expect to see the following expenses incurred by a ‘typical’ business over the course of it’s lifetime:

·         Employee costs such as wages, bonuses, pensions

·         Premises expenses such as rent, business rates, utility bills and council tax

·         Use of home allowance- this may not be as straight forward as you think and so would recommend that you check out our previous blog on this where we discuss options available to both sole traders and Limited companies

·         Telephone, internet and stationary costs

·         Bank and interest charges

·         Marketing costs such as website maintenance, search engine optimisation and social media promotion

·         Professional costs such as accountancy and solicitor fees

·         Vehicle costs for cars etc used for business

·         Travel and accommodation costs

Expenses with Personal Use

As you may have noticed when comparing the expenses that we have listed above to those that your business may at this point in time already incur, some expenses that you incur may have both a business and personal element to them. Should this be the case, it is possible to claim a percentage (so long as there is an adequate method to calculate the business vs personal split) of the cost incurred against the business’ profits, effectively offsetting some element of the cost against the associated tax bill. A perfect example of this would be the running of a vehicle that is used partly for business but also used personally; if a sole trader travels 10,000 miles per annum but of those 8,000 were business related, 80% of the costs associated to running the vehicle (e.g. fuel, service/MOT and insurance etc) would be eligible for tax relief.

With this in mind, there may be (and likely is) a range of expenses that we have not listed above that are both business related as well as having a personal element associated to it. Certain industries, such as media, will contain more of these types of expenses than other industries. It is therefore important to consult a professional if you are not wholly confident that you have accounted for your expenditure correctly.

To summarise, though we have listed a variety of the common expenses that many a typical self employed business will incur or at the very least be familiar with, every business is different (yes, even those in the same industry!) and so expenses and the way they are treated must be decided on a case by case basis and assessed based upon your business’ circumstances. With HMRC’s ever-growing focus on the self employed, it is imperative that you are confident that your tax affairs are in order and you are paying the correct amount of tax. If you feel that you may benefit from chatting with us, please do just get in touch with one of the team and we’d be happy to provide tailored advice to your business.