With an ever increasing number of fantastic small businesses popping up in and around Plymouth, we wanted to reach out and provide some advice on allowable expenses for the self employed.
If you are a self employed sole trader then you may have wondered what you can and can’t claim as an allowable expense – so we’ve put together a quick guide which covers some of the most common allowable expenses for the self-employed.
Remember that rules for limited companies are different to those included here!
If you need to pay for accommodation then you can claim the expenses as tax deductible if they are exclusively incurred for the purposes of your work. If you are using the accommodation for a mix of business and personal use then you must calculate the proportion of business use.
If you are staying overnight in a hotel when travelling on business for example, then the expenses are allowed for tax purposes.
The new Moxy Hotel in Plymouth – credit – marriott.com/en-us/hotels/nqypo-moxy-plymouth/photos/
“Entertaining” can involve eating, drinking and other hospitality. But what is allowable?
Royal William Yard Plymouth – Credit – Royal William Yard | Home
This is allowable for tax purposes as staff welfare. This only applies to official employees, not freelancers/subcontractors.
Entertaining clients, customers or third parties
You should include this as a business expense, but this is not an allowed expense. If you hire a venue for an event then tax relief may be claimed on the cost of the venue.
Home office costs
Tantrum Tattoo Plymouth – Credit – Jamie Parr Photography – Jamie Parr Photography
Work from home? Make sure you offset your costs using one of these methods:
Simplified HMRC rate
No need for any evidence to be kept for your return – just use a simple rate of £4 per week. This is a low rate so only use this if your home working is minimal.
Apportion your home running costs
Calculate the actual running costs for your home and apportion these fairly based on how you use your home to run your business. Start by calculating the number of rooms you have in your home, minus kitchens, bathrooms and hallways. Then you need to work out the percentage of time any of those rooms are used for your business.
For example, you may have four rooms; two bedrooms, a living room and an office. You use one of the four rooms, your office, 50% of the time for your self-employed work. Your total household running costs are £5,000 per year. You would calculate your business usage as 50% x 1/4 x £5,000 to get a figure that could be classed as the rental cost for your business using a workspace in your home, which in this case would be £625. This would mean that you submit £625 on your tax return as your costs for working from home.
- Do not allocate a room solely for business use – ensure that there is also an element of personal use to avoid any capital gains tax implications
- You can include mortgage interest (but not repayments) in your calculations. If you rent, just use the rental charge. If you are in a house share, calculate your expenses using only the rooms that you can access (not your housemates’ bedrooms!)
- You can only include bills you contribute to – for example if you have an arrangement where your partner/housemate pays the entire electricity bill then you cannot include this in your calculations, but if you share bills you can include your proportion of the cost
- Be sure to include all expenses – gas, electricity, council tax, insurances, cleaning bills…
If you use your mobile phone for business purposes then you can claim some of your costs.
Get yourself a few months worth of itemised bills each year and grab a highlighter to work your way through, marking your business use so that you can work out your average monthly use. Calculate your percentage of business use and that is the amount of the cost you can claim for your mobile phone.
Be sure to keep a note of how this has been calculated as HMRC may want to see some evidence of your workings.
If you are travelling to carry out your work then reasonable food and drink costs can be claimed. The rules on this are similar to travel expenses – the travel must be allowable and qualify as business travel and you must be away from your normal place of work (or “base of operations” – see the “Travel” section).
An allowable scenario for a subsistence claim would be if you were staying away from home overnight to work the following day in a location you do not normally visit – you cannot avoid incurring some subsistence costs in order to carry out your work and therefore these would be allowable.
Looking to upskill or expand your knowledge? In some cases the expenditure is allowable.
If you are looking to continue your professional development, building on already acquired skills, knowledge and professional expertise then the costs are allowable for tax purposes.
If you are learning a new skill or undertaking a new qualification then the cost of the training/qualification, and all associated expenses (travel, subsistence) are not allowed. This is because the new skill or knowledge is an asset which cannot have a value placed on it – it is a benefit to the individual and is judged as not being “wholly and exclusively” for the purposes of the existing trade or occupation.
When thinking about claiming for travel costs you need to consider your “base of operations”.
The “base of operations” is where you carry out the bulk of your work. If you mainly work from home or your work is “iterant” in nature (for example a plumber, or a sales person who is required to visit clients) then all travel costs will be allowable.
Travel expenses are not usually allowable when you work partly from home, but there are patterns in your work that are regular and predictable, for example attending a company meeting each Wednesday afternoon. Travel expenses are also not usually allowable if tools or equipment are stored at a site and you pick them up before travelling elsewhere. In those two examples, the “base of operations” is not actually your home, and only onward travel from your actual base of operations could be considered an allowable expense.
You may need to justify your travel expenses to HMRC, so make sure that if you are claiming that your home is your base of operations you can evidence any of the following that are applicable:
Drive for work? Certain your travel costs are an allowable expense? Then there are two different methods for claiming your vehicle costs. You need to work out which makes most sense for you because once you claim using one method then you must use that method for the life of your vehicle.
Keeping it simple – keep a log of all business journeys, with details of the date, distance, purpose of the journey and the start and end points. You can then claim 45 pence per mile for the first 10,000 miles you drive in a year, and 25 pence after.
More complicated – but you must use this method if your business is above the £83,000 VAT threshold.
Using this method involves keeping records of ALL expenses relating to your vehicle, including;
- Include fuel costs, breakdown cover, tax, insurance, repairs and maintenance
- Include the interest costs if the vehicle has been bought on a lease
- Spread warranty costs over the life of the warranty
Vehicles are capital items and so the purchase cost is dealt with under “Capital Allowances” and the costs can be offset. Vans are eligible for the Annual Investment Allowance (AIA), but cars are not. If you sell the vehicle then the proceeds will be taxable.
You may need to justify your claims to HMRC and so it is important to calculate the percentage of time your vehicle is used for personal use – keep a careful log of any personal use over a period of at least three months to ensure that you are not over claiming your vehicle expenses.
Remember, for all expenses – keep hold of your receipts and keep solid records of what you were doing to incur the expense. Records must be kept for at least five years after the 31st January of the tax year they were submitted for.
For more information on what to keep see https://www.gov.uk/self-employed-records