A Guide to Allowable Business Expenses for the Self-Employed

Posted by on Jan 17, 2016 in Guides, News Alerts | No Comments

Much like a Limited Company, if you are Self-Employed, either as a Sole Trader or in Partnership, your business will have various allowable business expenses.

These expenses are deducted from your turnover in calculating the taxable profit. Therefore, if the turnover is £60,000 and there re £25,000 of allowable expenses, tax is payable only the remaining £35,000.

The guide is designed to cut through the myth and misunderstanding to explain what is an allowable expense for a Self-Employed business run on traditional accounting methods.

Broadly, the business running costs fall into the following categories:

  • Working from Home
  • Purchases for Resale such as stock and raw materials
  • Advertising and Marketing
  • Staff costs
  • Business Premises
  • Vehicle and Travel costs
  • Office costs
  • Professional fees
  • Finance costs
  • Clothing expenses
  • Bad debts
  • Subscriptions

In addition, capital allowances are available for the purchase of:

  • Equipment
  • Machinery
  • Business Vehicles

Working from Home

Many in Self-Employment work at least part of the time from home. If this is the case, you are entitled to claim a proportion of the costs of:

  • Mortgage interest or rent
  • Council Tax
  • Heating
  • Utilities
  • Internet and telephone

The key is to find a reasonable method of allocating the business element of these costs.

For example, if your mortgage is £8,000.00 per year and your office and facilities cover 25% of the area of the property, it would be reasonable to claim £2,000.00.

However, if you only work from home for two days a week, this would reduce to £571.42 as two sevenths of the £2,000.00.

For costs that have both a business and personal purposes, you can claim the business element. For instance, if the quarterly landline phone bill is £200.00 and it is used 60% of the time for business, you can claim £120.00.

Purchases for Resale

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Goods for resale (stock) Goods or materials bought for private use
Raw materials Depreciation of equipment
Direct costs of producing goods

 

Advertising and Marketing

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Advertising in newspapers or directories Entertaining customers and suppliers
Advertising online Event hospitality
Bulk mail advertising (mailshots)
Free samples
Website costs

 

Staff Costs

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Employee and staff salaries Carers
Bonuses Domestic Help
Pensions Nannies
Benefits
Agency fees
Subcontractors
Employer’s National Insurance

 

Business Premises

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Rent for business premises Any non-business use of the premises
Business and water rates Costs of buying a business premises
Utility bills
Property insurance
Security
Repairs and maintenance

 

The costs of any structural alterations to install or replace equipment or to replace integral parts of the building would qualify for capital allowances.

 

Vehicle and Travel Costs

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Fuel Non-business driving or travel costs
Repairs and servicing Fines and penalties
Vehicle insurance Travel between home and work
Vehicle licence fees
Parking
Hire charges
Breakdown cover
Train, bus, air and taxi fares
Hotel rooms
Meals on overnight business trips

 

The costs of buying a vehicle for your business would qualify for capital allowances.

Alternatively, you can calculate your car, van or motorcycle expenses using a flat rate for business mileage instead of the actual costs of buying and running your vehicle as follows:

Vehicle Flat rate per mile
Cars and goods vehicles first 10,000 miles 45p
Cars and goods vehicles after 10,000 miles 25p
Motorcycles 24p

 

Office Costs

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Phone, mobile, fax and internet bills Personal use of phones and stationery
Postage
Stationery
Printing
Printer ink and cartridges
Computer software for under 2 year’s use
Computer software licence renewal

 

The costs of buying office equipment and long-term computer software would qualify for capital allowances.

 

Professional Fees

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Legal fees Legal costs of buying property or machinery
Accountancy     (these are claimed as Capital Allowances)
Professional fees Fines, penalties and surcharges
Consultancy fees
Professional indemnity insurance
Public and employer’s liability insurance

 

Finance Costs

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Bank, overdraft and credit card charges
Interest on bank and business loans
Hire purchase interest
Leasing payments
Alternative finance payments

 

Clothing Expenses

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Uniforms Everyday clothing (even if it is bought for work)
Protective clothing needed for your work
Costumes for actors or entertainers

 

Bad Debts

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Unrecoverable debts included in turnover Debts not included in turnover
Debts related to the disposal of fixed assets
Bad debt provisions

 

Subscriptions

ALLOWABLE EXPENSE DISALLOWED EXPENSE
Trade or professional journals Payments to political parties
Trade or professional body membership Gym membership fees
Donations to charity

 

Self-employment turnover and expenses information is recorded and submitted to HMRC as part of the annual personal tax return.

There is no requirement to send proof of expenses with the tax return. However, you must keep proof and records should HMRC request them.

An alternative is to use the ‘Cash Basis’ to work out your income and expenses for your tax return. For full details on this and to see if it would suit your business, please click here.

At CooperFaure, we have helped our clients follow their dreams by making this process as painless as possible. If you would like to discuss your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.