Having to pay tax on your hard-earned income is certainly one of the less-welcome aspects of being a self-employed sole trader or freelancer. It's made slightly more palatable by the fact HMRC allows you to claim a wide range of expenses (hence "allowable expenses"), which reduces your tax bill (often significantly).
If you're a self-employed sole trader or freelancer or you're considering becoming one, here are 32 things you should know about claiming tax expenses.
What are "allowable expenses"?
1. Allowable expenses are business costs that HMRC allows self-employed people, sole traders and freelancers to claim as tax expenses against their profits.
2. Expenses are only allowable if generated "wholly and exclusively" for business. Personal costs can't be claimed as allowable expenses. If you use something for business and personal reasons (eg your mobile phone), you can only claim allowable expenses for the business proportion.
3. HMRC can ask for proof of all allowable expenses that you claim. Deliberately making fraudulent allowable expense claims can have serious consequences.
4. If your allowable expenses are less than £1,000 a year, claiming the £1,000 a year tax-free trading allowance is more cost-effective. But if you do, you can't claim any allowable expenses.
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What costs can be claimed as allowable expenses?
5. The cost of buying stock and/or raw materials that you use to do repairs, maintenance work, provide a service or make things to sell are allowable expenses.
6. Agency fees, any money you pay to subcontractors/freelancers, wages to staff, benefits, bonuses, pension contributions and employers' National Insurance contributions can all be claimed as allowable expenses. Staff training is also an allowable expense.
7. Allowable expenses can also include rent or mortgage interest (but not capital repayment) on commercial premises, as well as business rates, water rates, gas, electricity, business insurance and security costs.
8. Computers, mobile devices, printers and other equipment you buy and keep within your business is an allowable expense, but only if you use "cash-basis accounting" (ie you record your income/costs in your financial records when you're paid or make payments). If you use traditional accounting (ie you report your income and expenses on date of invoice rather than payment), you must claim them as "capital allowances" (another type of tax relief).
9. You can also claim allowable expenses for equipment repairs, office furniture, business stationery, printing and website costs, postage, computer software and ink cartridges. Professional cleaning costs can also be claimed as an allowable expense.
Allowable expenses when running a business from home
10. If you operate your business from home, you can claim a proportion of your domestic utility bills to cover business use.
11. You can also claim a proportion of your mortgage interest payments (not capital repayments) or your rent, as well as a proportion of your Council Tax, business rates where payable (eg where you've converted part of your home into premises that welcome paying customers), maintenance and repair costs for rooms you use for business or a proportion for a bigger repair job (eg fixing a roof).
12. If you have an exclusive business telephone landline phone, you can claim for the whole cost, or a proportion if you also make personal use of it, which would probably be the case if you operate your business from home some or all of the time.
13. The same is true of your broadband and mobile phone costs. If genuinely used for business only, you can claim for all of the costs. If there's mixed usage, you can only claim for a proportion based on actual business usage.
14. Rather than work out exact costs, you can claim a flat rate for running your business from home (£10 a month if you work 25-50 hours a month; £18 a month 51-100 hours a month; and £26 a month if you work 101 hours or more a month). You can still claim the business proportion of your telephone and broadband costs as allowable expenses.
Allowable expenses: finance costs, marketing and professional fees
15. Interest on bank loans is an allowable expense, as are overdraft and credit card charges, hire-purchase interest and leasing payments.
16. Allowable expenses can be claimed for advertising your business in newspapers, magazines, directories and websites.
17. You can also claim for trade or professional journals and membership of a trade body or professional organisation.
18. Fees paid to accountants, solicitors, surveyors, architects and other professionals can be claimed as an allowable expense, as can professional indemnity insurance payments.
Allowable expenses: vehicles, travel, accommodation and clothing
19. Allowable expenses also include expenses related to your company vehicle such as car and van insurance, vehicle servicing and repair costs, fuel (only for business-related journeys), vehicle hire charges, vehicle licence fees and breakdown cover.
20. If you use traditional accounting and buy a vehicle for your sole trader business, you claim this as a capital allowance.
21. If you use cash basis accounting and buy a car for your sole trader business, you claim this as a capital allowance, but only if you're not using simplified expenses (ie using a flat rate rather than calculating actual costs). All other types of vehicle costs should be claimed as allowable expenses.
22. You can also claim for parking, train, bus, air and taxi fares, hotel room costs and (modest) meals for overnight business trips.
23. Staff uniforms and protective clothing can both be claimed as allowable expenses.
Disallowable expenses: what can't you claim?
24. Parking or speeding fines aren't allowable expenses, neither are legal fines and the cost of settling tax disputes. Legal costs that result when buying property and machinery are disallowable, but, if you use traditional accounting, they can be claimed as capital allowances.
25. You're not allowed to claim allowable expenses for fuel or mileage for travel between your home and normal place of work. This is just your commute and you have to pay for it yourself as everyone else. If you travel to different locations for work, costs can be claimed as allowable expenses.
26. You can't claim for non-protective or non-uniform work wear, such as a new business suit, footwear or a winter coat.
27. Any money you pay for care or domestic help (eg a childminder) isn't allowable. Neither are donations to political parties or charities. If you want to join a gym, you'll have to pay for it out of your own pocket (unless you use it for work as a sports trainer).
28. Capital repayment of loans, overdrafts or finance arrangements aren't allowable expenses.
29. Contrary to popular misconception, entertaining clients cannot be claimed as an allowable expense. Event hospitality (eg taking a client to a football match) is another disallowable expense.
30. Time to bust another common myth. You cannot treat yourself to a daily meal-deal on your business. Like everyone else, you must buy your own lunch. In exceptional circumstances, for example, where you travel to a trade show, you're allowed to claim reasonable costs for food.
Need to know! If you don't know whether a cost is an allowable expense, HMRC advises that you contact the Self Assessment helpline.
Claiming your self-employed sole trader or freelance allowable expenses
31. As a sole trader, you claim your allowable expenses by summarising them within supplementary page SA103, which you file with your main SA100 Self Assessment tax return.
32. You're not required to submit proof of your allowable expenses when filing your annual tax return. However, HMRC can later ask for proof. There can be serious consequences for fraudulent allowable expenses claims.
Copyright 2023. Sponsored post by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self assessment.