What business expenses can I claim as a Sole Trader?
If you are a sole trader, then naturally you will be spending some money on running your business. Fortunately, most of your running expenses can be claimed as business expenses. This means that you will be paying less tax and you’ll be keeping most of your earnings. But do you know what can and can’t be considered as an expense? If you are not aware of the wide array of eligible items that can be claimed, then most probably you will be paying more tax than you need to be.
Here, we will give you a list of all the expenses that can be claimed by a sole trader.
What is Tax Relief?
With these allowable business expenses, sole traders can lessen their profits, as a result, they will be paying less Income Tax. Hence, the more allowable expenses the sole trader has, the lesser taxable profit he has. This means that he will have less tax to pay.
It is important that the sole traders must keep accurate records of everything so he will be able to account his expenses accurately. Keep in mind that sole traders must keep these pertinent records for six years since this is required by the law.
Furthermore, you have to consider that HMRC laws can sometimes be complicated, however, they are using concepts that are fair and reasonable most especially with regards to claiming expenses. If you are having doubts, then you can always get some advice from our accountant.
How Can I Claim Business Expenses As A Sole Trader?
Sole traders are given the opportunity to claim back the business-related expenses that they’ve incurred, just like limited companies. There is an important rule that you need to follow when claiming your expenses. You are only allowed to claim for expenses if they were wholly and exclusively spent on performing your duties.
Generally, HMRC will only permit you to claim for expenses if you comply with these conditions. In case the expenses incurred is spent both for personal and business use, otherwise known as dual-purpose, then most likely it will not be accepted. This is because the expense would be considered as a necessity regardless of the business.
For instance, if your monthly bill for your mobile phone is £50, but your business usage is only 50%, then you are only allowed to claim for £25 as an expense. On the other hand, if the dual purpose is only accidental, then it might be considered as a valid claim. For instance, uniforms or protective clothes can also be used for personal purposes.
Claims for their expenses can only be done when sole traders file their Self Assessment. Generally, this is accomplished at the start of each year. For online filing, the deadline will be every January 31st. However, they are still given the chance to file any time starting at the end of the previous tax year which is on April 5th.
How To Monitor Sole Trader Business Expenses?
It is essential that you must monitor your expenses effectively. For instance, when it comes business mileage, you should make a breakdown of your travels and mileage in order to make sure that HMRC will consider your claim as valid.
We recommend that you should put all the details of your business mileage on a spreadsheet and keep it updated throughout the year. If you want to claim tax relief for the fuel of a company-owned vehicle, then you should keep all your receipts.
Other business expenses refer to the cost of the things that are essential in running your business. You will also be receiving tax relief for these. The key is you have to ensure that everything is recorded carefully so you won’t be missing anything out. Contrary to mileage, you don’t have limitations on the expenses for supplies as long as they are reasonable.
If you are not using any online accounting software, then the best way to monitor your expenses whether its supplies, subsistence, or travel, is to use a spreadsheet. Actually, there is no need for you to record each item separately. For instance, if you have purchased 10 boxes of pens and each box contains 100 pens and is sold at £3 per box, then all you need to record is the total quantity which is 1000 pens and the total amount which is £30. Nevertheless, always remember to keep all the receipts of your purchases. You should keep these receipts six years after filing your returns since HMRC might investigate you anytime.
If you were out for the day doing business activities, then you can claim for the cost of your lunch if you work beyond five hours. Furthermore, if you have been working up to ten hours, then you can also claim for your dinner costs. As always, you have to make sure that you keep all the receipts for everything. Also, don’t forget to log all your expenses on your spreadsheet or on your accounting software so you can keep track of the date and total amount just in case HMRC will conduct an investigation. You should be aware that HMRC may closely monitor excessive use of taxis, most especially if they think that they are unnecessary. For instance, if your travel is only very short.
There are a lot of ways of keeping receipts. However, it is advisable that you should keep them in a safe place and back them up digitally as well. You could use your phone and take a picture of it. Receipts could fade away, however, digital backups will always remain clear forever. You could scan them manually, or use a mobile app in recording the details.
Business Accountancy Costs For Sole Traders
You are allowed to claim for the costs of your businesses accountancy fees, as long as the accountants are working on your accounts and not on personal matters. For instance, they are creating your HMRC Self Assessment.
Accommodation Expenses While On Business Trip
Sole traders are permitted to claim full tax relief for their accommodation expenses as long as their trip is business-related. Also, if the expenses are reasonable enough and not excessive. HMRC will probably question you if you stay at an expensive hotel.
Business Mileage For Sole Traders
If you use your personal vehicle in travelling to a temporary workplace then you can claim for business mileage. For cars and vans, the vehicle rate per mile is 45p for the first 10,000 miles in a given tax year. And for every mile over 10,000 miles, the rate is 25p. While for motorbikes, the rate is 24p for the first 10,000 miles in a given tax year. The same rate also applies for every mile over 10,000 miles.
As always, be sure to save all your receipts of everything and always keep a mileage log. Additionally, it is possible that HMRC might question you of your extreme use of taxis.
Sole traders are not permitted by HMRC to claim business mileage if they use a bicycle. This is too bad for cycle couriers and green-minded individuals. Nevertheless, the cost of purchasing a bicycle as well as its consumables could be claimed. For instance, the cost of tyres or maintenance. Avoid personal use of the bicycle since this can cause a reduction in the amount that you can claim. If you have some doubts then you should try to consult an accountant or you can inquire from your local tax office in order to verify what you can claim.
Charitable Donations From Sole Traders
If you are a sole trader, then you and your business will be treated as the same legal entity. Hence, if you are using your business bank account in making donations then it is considered that you personally donated the money.
Unfortunately, this also means that your business won’t be able to obtain any tax relief.
However, if you are using Gift Aid in making your donation, then the receiving charity can get 25p tax relief for every £1 that you have donated. If you want your donation to obtain Gift Aid, then there is a certain Gift Aid form that you have to fill up for your chosen charity. Otherwise, you could simply tick a box to show that you want Gift Aid to be implemented.
If you are a higher rate taxpayer, then you have a chance to redeem the difference between the tax that you’ve paid and the basic rate for the amount that you have donated. For instance, if you have donated £100, then you can redeem £25.
Eyeglasses and Eyesight Tests For Sole Traders
Sole traders have the chance to claim for vision tests as long as it is needed for their initial or recommended use for visual display when doing their duties.
However, you won’t be able to make a claim for glasses which are intended for dual purpose and are not specially made for business use. Unless if they are prescribed to be used only for visual display when you are working.
Fixed Assets Including Office Furnishings and Equipment
You will get tax relief on the amount of anything that is essential and vital to your business. Even though these expenses can’t lessen your profits, you will obtain capital allowances that can reduce the amount of your income tax payment.
This includes software, computers, and printers. You are also allowed to make a claim for a reasonable relief on the cost of business furnishings such as a bookcase, chairs, etc. Although this may serve as dual-purpose, yet this is permitted since the assets are used primarily for business purposes.
General Office Purchases
You are also allowed to claim for the minor purchases that are used entirely, necessarily, and exclusively for the performance of your duties. For instance, computer consumables, postage, and office stationery.
Medical Insurance And Health Costs For Sole Traders
Unfortunately, sole traders can rarely make a claim for their health and medical insurance costs. Most often these costs are not considered as expenses.
Pensions For Sole Traders
For sole traders, the payments to their pension won’t be considered as an expense. However, you can obtain personal tax relief from contributions as long as it is personally intended for your own pension scheme.
Expenses for professional subscriptions including registrations required for trading or membership of a trade body are permitted as long as they are approved by HMRC and are essential to your employment. However, if it is not directly significant then it is not permitted. For instance, if you are a plumber then the membership to your local golf club will not be permitted regardless if you think that this can help your business!
Telephone And Broadband Expenses For Sole Traders
Unfortunately, if you are using your mobile phone or home phone for personal and business calls then you won’t be able to claim for the line rental. This is because it serves as a dual purpose which means that the expenses are not exclusively for business purposes.
Nevertheless, you will be able to make a claim for the expenses of your business phone calls as long as it can be recognized on the phone bill. Another alternative would be to set up an exclusive phone line or mobile contract for your business. Take note that this will entirely be used for the business only.
The same method will be used in figuring out the Broadband expenses that are allowable.
Using Your Home As An Office For Sole Traders
If you need to work at home, not just because you want to conduct extra work outside of the office, then you are entitled to compute your allowable home expenses.
You will be given two options. First, you can choose to redeem the simplified expenses for the self-employed. The second option is working out with the actual costs. This means that you have to compute the proportion of business and personal use for your home. For instance, for your utility bill, how much was used for business? To help you decide what is the best method to use, you can visit Gov.uk since they have simplified expenses checker which can help you in making the best decision.
The simplified expenses method is highly recognized by HMRC. In this method, a flat rate is used in computing the number of hours that you’ve worked from home for a month. Keep in mind that this flat rate does not include telephone or internet expenses. In order to redeem the business proportion of these expenses, you have to work out the actual costs.
Also, simplified expenses can only be used if you have worked from home for 25 hours or more each month.
If your business usage for a month is between 25 to 50 hours, then the flat rate is £10 for each month. For monthly business usage between 51 to 100 hours, the flat rate is £18 for every month. However, if it reaches 101 or more, then the flat rate to be used is £26.
On the other hand, if you prefer to use a more complicated method, then you can compute the costs of running your business based on your home expenses. If you find this too confusing, then you can ask for some advice from your accountant.
Training Expenses For Sole Traders
The expenses for work-related training courses is permitted as long as it is related to the industry that your business is involved with. Hence, a course that can improve your present knowledge of your trading activity will be permitted. On the other hand, a course that lets you gain new skills so you will be able to expand to new areas or provide new services will not be permitted. Hence, it is essential that you can prove that the training is somewhat related to the profit that is presently being generated by your business.
Travel And Maintenance Expenses For Sole Traders
It is allowable to claim for travel expenses provided that the travel is entirely and exclusively for business purposes only. Additionally, it should not be a typical commute to a base of operations. However, you are still allowed to claim sporadic trips to the same place. This is ideal for those who are itinerant workers. Sole traders who do not have any particular base of operations are known as itinerant workers. Most often, their work locations keep on changing from one job to another.
Expenses that are related to ferries, train tickets, and airfares are also permitted under business travel, as long as the above conditions are met and the travel is intended for business purposes only.
Other allowable expenses include parking fees, congestion charges, and tolls, provided that the travel is for business. Unfortunately, parking fine can’t be claimed as a business expense. Although the cost of hotel accommodation and meals on overnight business travels can be claimed.
Also, HMRC allows some additional expenses for food and drink to be claimed as long as the nature of business is itinerant. For instance, a construction worker who works in a variety of locations each week. However, keep in mind that these rules are a bit complicated, hence, it’s best if you should seek some advice from an accountant to verify if these are applicable to your business.