2016/17 Edition ebook by JF Financial Management Ltd

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1 2016/17 Edition ebook by JF Financial Management Ltd

2 Contents Disclaimer... 4 Introduction... 5 Self employed sole traders general information... 6 What is a self employed sole trader?... 6 Sole trader tax and national insurance... 6 Examples of tax and national insurance calculations... 7 Sole trader profits... 8 Business Expenses general points... 9 Allowable vs non-allowable expenses... 9 Mixed use between personal and business... 9 VAT Bank accounts Receipts and record keeping Book-keeping systems Profit and loss and balance sheet Profit and loss Balance sheet Cash or Accruals method of accounting Accruals basis of accounting Cash basis of accounting Why we don t like the cash basis of accounting (as a general rule) Business expenses Travel What journeys are classed as allowable business travel? Home to work travel Base of operations Examples of business travel Cars and vans Method 1 mileage claim Method 2 actual costs less private element deduction Motorbikes and bicycles Other travel costs trains, taxis, parking etc Subsistence JF Financial Management Limited Page 1

3 Accommodation Entertaining Entertaining clients and other third parties What about entertaining yourself?! Staff entertaining Gifts Gifts to employees Advertising / marketing / PR Advertising and marketing Allowable advertising and marketing costs Sponsorship Hospitality Working from home Use of home as office Simplified HMRC rates Apportionment of home running costs Broadband / internet / phone Renting an office, shop or desk space Training and development Stationery, printing and postage Software Subscriptions and publications Professional subscriptions Newspapers and magazines Books Professional fees Accounting fees Legal fees Insurance Clothing and uniforms Uniforms Protective clothing Costumes for actors and entertainers Employees and subcontractors JF Financial Management Limited Page 2

4 What is the difference between an employee and a subcontractor Sales commissions Fines & penalties Loans, interest and bank charges Interest on loans Bank charges & interest Bad & doubtful debts Charitable donations Pension contributions Goods purchased for resale Equipment Computers and office equipment Tools Capital allowances Capital assets vs revenue expenditure Cars Cash basis accounting and capital allowances Disallowable expenses Your own time Tax & national insurance Student loans Childcare costs Gym costs Medical costs eye tests/glasses etc School fees JF Financial Management Limited Page 3

5 Business Expenses general points Allowable vs non-allowable expenses There is a difference between expenses that are costs for your sole trader business compared to costs that are actually allowable for tax purposes. This will mean that sometimes the profit of your sole trader business is different to the taxable profit on your tax return. This ebook will cover many of the typical sole trader costs which are allowable for tax purposes and which aren t. Mixed use between personal and business Some costs will be used by both your sole trader business and also by you personally, if this is the case you must only claim the business use proportion. The first step is to make sure the cost in general is allowable (see specific expenses covered in this ebook). Once you re happy the cost is allowable, you then need to claim only the business use element. For example if you use your mobile phone for both business and personal use. What you should in theory do is go through your mobile bills each year and highlight your business use vs personal use, and use that as a basis for what % of your total bill to claim as a business expense. In reality you may want to be a bit more pragmatic and perhaps take a sample of some month s bills to use as a basis for what percentage to claim. Typically, with mobile phones if you use your mobile phone heavily for business and just a bit personally then to claim 80% of the total costs for business would usually be fair and justifiable. However, if you use it quite evenly for business and personally, then we would suggest claiming 50% of the total costs. What you need to remember is that you might have to justify this percentage to HMRC in the event of an enquiry, so keep a note of your workings of any personal vs business use and lean on the side of caution when it comes to what % to claim. JF Financial Management Limited Page 9

6 Profit and loss and balance sheet Profit and loss A businesses profit and loss account reports the turnover (sales), the business costs (usually split by category), and at the bottom the profit (turnover less costs). An example profit and loss account is shown below: Turnover 43,000 Less expenses Telephone and internet (1,000) Stationery and printing (500) Advertising and promotion (2,200) Travel (1,750) Profit 37,550 We recommend that all sole traders keep a profit and loss account updated on a regular basis not only will this make your tax return simpler, but it will make sure you have control over your finances. Balance sheet A balance sheet will show the value of the assets and liabilities of a business as a snapshot at the date it is prepared to. Assets may be things like: Fixed assets such as office equipment (see capital allowances section of book) Current assets such as o Cash balances o Stock o Trade debtors (customers) Liabilities may include: Trade creditors (suppliers) Loans and overdrafts VAT As a sole trader you do not have to prepare a balance sheet for most simple small sole traders it will be unnecessary, but some sole traders may find it useful. JF Financial Management Limited Page 12

7 Cars and vans When you are a sole trader and use a car or van for your work, you have two different methods of claiming your allowable travel costs (check previous section about what travel is allowable). What you must remember is that once you have chosen which method to use, you must stick with that method for the life of that vehicle. The two options are: Method 1 mileage claim This is the easiest method to use. You simply keep a mileage log of all allowable work journeys. Note the date of journey, start point, end point, purpose of journey and total number of miles. At the end of the year total up your mileage to work out how much you can claim. The rates are: 45 pence per mile for the first 10,000 miles 25 pence per mile thereafter Please note that you can only use the mileage method if at the point the car is first used for the business, your turnover is below the VAT registration threshold, which is 83,000 for 16/17. If you are above this threshold you would have to use method 2, discussed below. When using the mileage method it is still a good idea to keep hold of your petrol receipts which will help provide additional backup to HMRC of the total use of the vehicle, if required. Method 2 actual costs less private element deduction This is a little more complicated but can be more tax efficient, depending on your level of use (in total and the business element). Using this method you keep a tally of all motor expenses which will include road tax, insurance, fuel, repairs and maintenance and breakdown cover. If you have bought your vehicle on a lease, depending on the type of lease, you can usually include the interest costs. Warranty costs can also be included but must be spread over the life of the warranty. The purchase cost of the vehicle itself is a capital item so is dealt with through a treatment called capital allowances (see section later on in ebook). If you have bought a Van it will usually be eligible for a type of capital allowance called the Annual Investment Allowance (AIA) (again covered later) meaning potentially the entire cost of a Van could be offset in the year of purchase. Cars however are not eligible for the AIA. The rate at which you claim the allowances varies depending on when it was purchased and the emissions rate, see capital allowances section. JF Financial Management Limited Page 17

8 Entertaining There are a few different categories of entertaining costs to consider: Entertaining clients and other third parties The cost of entertaining clients, customers or third parties in relation to the business is not allowed as a deduction for tax purposes. It still should be included as a business expense on your profit and loss account (as it is a genuine cost) but it should be separately analysed so that it can be added back for tax purposes. So, if your profit for the tax year is 25,000 but this included 500 of client entertaining, your taxable profit would be 25,500 (assuming that was the only adjustment). If you put on an event where you hire a room and where entertaining also takes place, then it is possible to claim tax relief on the cost of the room, but not the food, drink etc. What about entertaining yourself?! Afraid not! The cost of entertaining yourself or members of your family is not an allowable expense for tax. An exception would be where family members are your employees, in which case the costs can be allowable as long as they are not excessive. Bear in mind, for a family member to be an employee they would need to be added to your business as an employee in the proper way and you would need to run a payroll to pay their wages (see employee section). Staff entertaining Where an employer entertains their staff, this would be allowable as staff welfare costs as long as they are not excessive. Please note that subcontractors / freelancers are not staff any entertaining of these is actually classed as business entertaining and not allowable for tax. JF Financial Management Limited Page 21

9 Advertising and marketing Allowable advertising and marketing costs If you spend money on advertising and marketing your business these will be allowable, such as: Pay per click advertising (PPC) Direct mail Newspaper ads Website costs for your business will be allowable, such as: Design and build of website Ongoing hosting costs The initial cost of the website design/build may be treated as a capital asset under capital allowances, depending on how much it costs, see later section. Sponsorship Sponsorship will be an allowable expense as long it is wholly and exclusively for the business, however there are some exceptions where it is not allowed: It must not be for the benefit of a relative There should not be any other non-business involvement between the two parties The sponsorship spend should not be wildly out of line with the potential benefits being received by the sole trader business Hospitality What you cannot claim for is hospitality at an event or the entertaining of third parties such as clients and suppliers (see entertaining section) JF Financial Management Limited Page 23