As a sole trader you are obliged to submit a Self-Assessment Tax Return each year. This is how HMRC establishes your tax position and calculates any Personal Tax liability. The income received by your business, less allowable expenses incurred in the course of running your business, is your profit. This is the income assessed for Personal Tax and National Insurance Contributions (NICs) purposes. Claiming the right expenses can help to optimise your tax position, minimising the income tax and Class 4 NICs you will pay, while ensuring you work compliantly within HMRC rules.
HMRC will only allow you to claim tax relief on expenses which are 'wholly and exclusively' for carrying on and earning the profits of your business. Any costs you want to set against income to reduce your taxable profits must be for the benefit of your business.
In practice, the expense may have both a business and a personal element. As a basic rule of thumb, if an expense is partly for business and partly for personal use you should only claim the proportion that relates to the business.
It is important to understand from the outset what allowable and disallowable expenses are. There are some expenses that you may consider for business but HMRC states are simply not allowable, such as entertaining, even when it’s for existing or potential customers.
Keeping Accurate Records
In order to keep a clear separation between your business and personal affairs you should maintain a bank account specifically for your business. You can then maintain better control over your business finance and demonstrate to HMRC that you are properly separating your personal and business expenses.
Keep records of your expenses with supporting documentation such as invoices and receipts. You must, by law, keep business records for at least six years after the end of the tax-year the records relate to. Should HMRC raise an enquiry into your business you must be able to support the expense claims you have made.
Goods bought for resale
You can claim the cost of goods such as materials or equipment that you sell on to your customers alongside any services you provide.
Wages, salaries and other staff costs
These include salaries, wages, bonuses, pensions, other benefits for staff or employees; agency fees for recruiting employees or employer’s NICs to name but a few. The costs of employing staff are allowable for tax purposes providing they are not significantly in excess of market rates.
Staff expenses are not recorded by submitting an expense claim form. (how are they recorded?) There are other implications when taking on an employee around employment law and employer responsibilities.
Subcontract labour costs
Recorded by submitting an expense claim and attaching an invoice as proof of supply. You need to be aware of employment status issues (where can I find out more on this?) when taking on an unincorporated subcontractor.
Car, van and travel expenses
Relevant costs under this category would include car and van insurance, repairs, servicing, fuel, parking, hire charges, vehicle license fees, motoring organisation membership, train, bus, air and taxi fares, hotel room costs and meals on overnight business trips. We cover this in more detail on our Travel and Subsistence page.
Rent, rates, power and insurance costs
Rent for business premises, business and water rates, light, heat, power, property insurance and security.
The business proportion of home costs can be claimed if you use part of your home as an office. We consider this further on our Working from Home page. When claiming part of your home running costs as a business expense you need to consider the future Capital Gains Tax and potential business rates implication.
Repairs and renewals
Repair and maintenance of business premises, upkeep, repair and replacement of tools and equipment including computers, but not items such as office desks or chairs which are classed as fixed assets.
Phone, fax, stationery and other office costs
Phone calls made and faxes sent from home and mobile phone call costs. If your business is based at your home address you are allowed to claim the cost of all business calls. You are also allowed to claim a percentage of the line rental based on the amount of business use. The same approach is taken when determining the allowable expenses associated with Broadband. Where there is mixed business and non-business use, a reasonable percentage of business use should be used for expense purposes.
Where a combined telephone and broadband package is being used, the level of apportioned business expenditure should be carefully considered and a flexible approach taken. If you have a dedicated business line or broadband connection, then all of the cost is an allowable business expense. This applies if you have separate business premises or dedicated lines at your residential address.
This covers advertising in newspapers, journals or directories, mail shots to potential customers, free samples given away to attract customers or the cost of setting up and maintaining a website.
Interest on bank and other loans
Interest on bank and other business loans and on any alternative forms of business finance such as invoice discounting, factoring or hire purchase agreements.
Bank, credit card and other financial charges
Bank, overdraft and credit card charges or arrangement fees for setting up business finance.
Irrecoverable debts written off
Amounts included in turnover but unpaid and written off because they will not be recovered.
Accountancy, legal and other professional fees
Accountants, solicitors, surveyors, architects and other professional fees incurred by your business. It would also include any insurance costs (other than property related insurance) your business incurs such as professional indemnity insurance premiums. If the fee is in connection with purchasing a capital asset, the tax treatment will follow that of the asset required.
The cost of work-related training courses is allowable if it relates to the trade being carried out by the business. So a course to enhance you existing knowledge which relates to your trading activity will be allowable. However, a course to retrain you with a new skill to enable you to branch out into new sectors or offer a new service will not be allowable.
It is therefore important to be able to demonstrate that the training is directly related to the income which is currently being generated by your business.
Subscriptions to Professional Societies
Annual subscriptions paid to certain approved professional bodies or societies, where their activities are relevant to the type of work you undertake. A claim may also be made for certain statutory fees where paying them is a pre-condition of being able to do the work. A list of approved institutions is published on the HM Revenue & Customs website.
Upkeep, repair and replacement of protective clothing and uniforms are allowable.
Expenses designated as disallowable
Certain travel and subsistence costs
There are specific rules relating to what is and isn’t allowable in relation to business Travel and Subsistence.
Business entertainment and hospitality
Meals or events involving more than one person that are held with third parties such as clients or customers are described as business entertainment. Business entertaining includes dinner, theatre trips, sports events etc.
Business bad debts
You cannot write-off of general amounts.
Costs involved in breaking the law
Fines imposed for breaking the law (for example, speeding fines) or the settling tax disputes.
Payments to clubs, charities or political parties
Charitable or political donations to registered charities such as RSPCA, Oxfam, and NSPCC. If your business makes a contribution to a ‘local concern’ and has been given advertising space in a programme or a brochure relating to that concern, and it can be proven that your business has benefitted from that advertising, this contribution is allowable.
Capital Expenses and Fixed Assets
Any items of equipment you have bought or leased for long-term use are called "fixed assets". These might include furniture, computer equipment, cars or vans necessary for the business or professional fees incurred in connection with the purchase of such assets. They cannot be deducted from your taxable profits in the same way that expenses can. Their treatment is explained in our section on Capital Allowances.
Capital payments, such as the repayment of loans or overdrafts or other capital finance, are not allowable in determining the taxable profits of your business.