What business expenses can self-employed people write off against tax? HEATHER ROGERS explains

One of many questions most frequently requested of tax practitioners when somebody is beginning out in enterprise as a sole dealer is: ‘What bills can I declare in opposition to tax?’

All practitioners have invariably in some unspecified time in the future of their skilled profession been seated in entrance of a shopper who fortunately asserts that somebody they know claims ‘every little thing’, after which had the unenviable job of placing the more and more crestfallen shopper straight on what’s permitted.

So, I’ve laid out a basic information on bills and customary areas the place many individuals get caught out.

I’d advise anybody beginning in enterprise to have an hour with an accountant in order that they have the details clear of their thoughts.

I’ll focus primarily on sole merchants right here, however there are some ideas for sole director restricted firms beneath and I’ll cowl these in additional element in a future column as there are various variations.

What’s a sole dealer?

A sole dealer is an unincorporated enterprise that’s owned by one particular person, versus a partnership, or an integrated enterprise, akin to a restricted firm.

Sole merchants report their earnings by finishing a self-assessment tax return yearly.

This states earnings and allowable bills, and so they pay tax and nationwide insurance coverage on their earnings annually, after deduction of any tax allowances.

Sole merchants may declare allowances for tools bought – these are generally known as capital allowances.

It’s vital to maintain ample books and data, together with invoices, receipts, cashbooks, financial institution statements and so forth.

These have to be stored for 5 years after the date the return was due – so for 2022/23, due 31 January 2024, it is advisable to hold them till 31 January 2029.

I like to recommend conserving them for six years from the top of the tax yr – it’s simpler to recollect and provides an additional couple of months of knowledge.

What bills can a sole dealer declare in opposition to tax?

Broadly talking you may declare the next.

– Renting an workplace or business unit: This covers lease, charges, fuel, electrical, insurance coverage, cleansing and safety.

If what you are promoting workplace is at residence, slightly than renting separate enterprise premises, there’s extra on this subject beneath

– Different insurance coverage associated to what you are promoting: For instance employer’s legal responsibility or skilled indemnity.

An necessary observe on insurance coverage although is that when you use your regular car for what you are promoting, be sure to have enterprise cowl. When you don’t, you received’t be lined if in case you have an accident and this might trigger you to be prosecuted.

– Items for resale (value of gross sales)

– Printing, postage and stationery

– Workers prices

– Phone and web

– Computing and software program

– Travelling prices: Notice this doesn’t embody fines.

– Subsistence (see extra on this beneath)

– Coaching; This solely covers coaching related along with your current enterprise, not coaching to begin a very totally different enterprise or which is unrelated to what you are promoting.

– Protecting clothes and uniforms (see extra on this beneath)

– Advertising, promoting, web site and leisure (see extra on this beneath)

– Subscriptions

– Authorized and accountancy charges: An attention-grabbing observe on accountancy charges is that the price of getting ready your self-assessment return shouldn’t be tax deductible.

What about personal use of things you employ in what you are promoting?

For sure objects, akin to phone or motor bills, you will have a personal use ingredient.

You’ll need to work out how a lot of the associated fee is enterprise and the way a lot is personal and deduct from the bills the personal ingredient (or add again to the revenue when you deduct the entire value).

For motor bills, conserving a mileage log is one of the best ways. 

What expense claims can get you in bother with the taxman?

Clothes and food and drinks bills are areas that do trigger issues as they are often complicated and are sometimes flagged up in a tax enquiry.

Clothes

Once I was doing my exams to qualify as an accountant a few years in the past, one of many instances that caught in my thoughts – and I’ve quoted typically at purchasers – is that of a barrister (Mallalieu v Drummond 1983) who solely wore sombre garments for courtroom appearances as she a lot most popular vibrant garments in her abnormal life.

She claimed the price of her sombre courtroom garments as an expense as she stated she would by no means purchase them for herself.

The case ended up within the Home of Lords the place she misplaced, because it was decided that her garments didn’t fulfil the ‘wholly and solely’ precept, however had been required for regular heat and decency (duality of goal), along with being applicable for skilled work.

The take a look at is basically whether or not the clothes which the particular person needs to assert might be worn as a part of somebody’s ‘on a regular basis’ wardrobe.

If that’s the case, no matter whether or not you solely put on it for work, it will not be allowable as an expense in opposition to tax.

Uniforms and security workwear or protecting clothes don’t kind a part of somebody’s ‘on a regular basis’ wardrobe and so are allowable in opposition to tax.

If you’re an actor or an entertainer, then you too can declare the price of any costumes.

Foods and drinks

The principles on food and drinks had been additionally set following a courtroom case and are very comparable.

The case Caillebotte v Quinn 1975 within the Excessive Court docket concerned a carpenter who couldn’t go residence for lunch when he was working, as he labored inside a 40 miles radius of his residence.

He subsequently bought a lunch for 40p every day versus what he would usually spend on a house lunch which was 10p.

He claimed an even bigger lunch as he wanted the power to hold out his work.

The judgement handed down was that you simply eat to reside and subsequently, once more, this declare failed the ‘wholly and solely’ take a look at – one other expense with ‘duality of goal’.

Nevertheless, you may declare subsistence when you make an occasional enterprise journey exterior your regular enterprise sample and declare a breakfast or a dinner on the way in which or means again from, say, Manchester to London for a gathering, convention or comparable.

You may as well declare affordable subsistence if you must keep in a single day at a lodge, or the place what you are promoting is ‘itinerant’, in different phrases when you work at a distinct location each week.

Utilizing your private home as enterprise premises

Funnily sufficient, the carpenter who incorrectly claimed his lunches is partly chargeable for this allowable value.

The choose who handed down the judgement in his case used the truth that the prices of operating a enterprise from residence may simply be recognized as ‘wholly and solely’.

Due to this fact, you could possibly declare a proportion of your prices for the next issues.

– Gasoline/electrical energy

– Council Tax

– Mortgage curiosity or lease

– Web and phone use

You’ll must discover a affordable technique of dividing your prices, for instance by the variety of rooms you employ for enterprise or the period of time you spend working from residence.

It’s possible you’ll must notify your insurer and your mortgage firm.

Nevertheless, you would get caught out with capital positive factors tax whenever you promote your private home if a part of it has been used solely for enterprise functions.

If there’s some residential use as properly of the room or rooms used for enterprise then the unique use wouldn’t apply.

What about claiming leisure as a enterprise expense?

Leisure shouldn’t be allowable besides within the following circumstances.

– It’s employees leisure, the place you may declare as much as £150 per employees member (together with their partner) however when you spend extra, it may grow to be a taxable profit on them.

– Leisure is offered as a part of a contractual settlement.

– Items of lower than £50 per yr are given to prospects/suppliers with enterprise title displayed on the present.

What about pension funds?

A sole dealer makes a separate declare within the tax return for his personal pension contributions. They don’t kind an expense of his enterprise. He can declare employees pension contributions as a value of the enterprise.

Tax ideas from Heather Rogers

A number of variations to notice between sole merchants and sole director restricted firms

If you’re the only real director of a restricted firm, then you aren’t a sole dealer.

A restricted firm is a separate authorized entity from that of its director.

The corporate pays company tax, versus earnings tax on its earnings.

Any earnings taken from the restricted firm by the director is taxed on him personally. The reporting guidelines are extra complicated too.

The director could possibly declare again bills for leisure incurred wholly, solely and essentially for enterprise functions from his restricted firm if he paid for them personally, in the identical means an worker can declare again the associated fee from his employer, however the prices shall be disallowed for company tax functions.

Nevertheless, a sole director could make a pension fee from his restricted firm for himself, which is a tax deductible expense for company tax.

The director received’t obtain any tax aid personally, as he didn’t make the fee.

There are lots of different variations, which I’ll cowl in a future column.

Ask Heather Rogers a tax query

Tax knowledgeable Heather Rogers solutions our readers’ questions

Heather Rogers, founder and proprietor of Aston Accountancy, is our tax columnist. She is able to reply your questions on any tax subject – tax codes, inheritance tax, earnings tax, capital positive factors tax, and rather more.

If you need to ask Heather a query about tax, e mail her at taxquestions@thisismoney.co.uk.

Heather will do her finest to answer to your message in a forthcoming month-to-month column, however she will not be capable to reply everybody or correspond privately with readers. Nothing in her replies constitutes regulated monetary recommendation. Printed questions are generally edited for brevity or different causes.

Please embody a daytime contact quantity along with your message – this shall be stored confidential and never used for advertising functions.

If Heather is unable to reply your query, you’ll find out about getting assist with tax right here, together with sources of free skilled recommendation if you’re aged and/or on a low earnings.

You may as well contact MoneyHelper, a Authorities-backed organisation which provides free help on monetary issues to the general public. Its quantity is 0800 011 3797.

Heather provides tips about methods to discover a good accountant right here, together with when to hunt assist, hiring the correct kind of agency and typical prices.