This guide is brought to you by Albert - the highest rated invoices & expenses app in the UK. EXPENSES: A Handy Guide to Help Cut Down on Taxes - SIMPLIFIED EXPENSES SCHEME Vehicles Working From Home Living at Your Business Premises - CAPITAL ALLOWANCES - CASH BASIS - A LIST OF ALLOWABLE SELF-EMPLOYED EXPENSES Office / Property / Equipment Travel Clothing Expenses Staff Expenses Reselling Goods Legal & Financial Costs Marketing / Entertainment / Subscriptions - HOW TO CLAIM EXPENSES?
Expenses are the business costs you can deduct from your income, in order to calculate your taxable profit. They can only relate to sums of money you ve actually, already paid - not money you owe, or that has been taken from your business profits to pay for private purchases. (Please note: If you run a limited company, there are different rules you will need to follow, but similarly you can deduct business costs from your profits before tax and will need to report any items you make personal use of as a company benefit 1. There are different accounting methods you can use when it comes to calculating your expenses before tax. Read on to find out about a few that sole traders can use in their Self-Assessment: SIMPLIFIED EXPENSES SCHEME For the 2013 to 2014 tax year onwards, the option to use Simplified Expenses became available for sole traders. This is a way of calculating your allowable expenses using a flat rate system. 2 What this means is that you don t have to work out the proportion of personal and business use of your home, ie. how much of your utility bills are for business/pleasure; or the actual costs of buying and running your vehicle, ie. insurance, repairs, servicing, fuels - but can instead use a flat rate for mileage. The 3 main categories that Simplified Expenses can be used for are: Vehicles Working From Home Living at Your Business Premises VEHICLES:- Vehicle Cars & goods vehicles first 10,000 miles Cars & goods vehicles after 10,000 miles Motorcycles Flat rate per mile (with Simplified Expenses) 45p 25p 24p Example: You ve driven 12,000 business miles over the year. Calculation: 10,000 miles x 45p = 4,500 2,000 miles x 25p = 500 Total you can claim = 5,000 * Note: Once you have used the flat rate for a vehicle, then you must continue to do so as long as you use that vehicle for your business. Equally, you can t claim Simplified Expenses for a vehicle you ve already claimed Capital Allowances for; or if you ve included it simply as an allowable expense (by its actual cost) when you ve worked out your business profits. Also, you can claim all other travel expenses eg. train journeys and parking, separately and on top of your vehicle expenses. 1 If you re an employer and provide expenses/benefits to employees, HMRC might deem it appropriate for you to pay tax/national Insurance on them. This includes things such as company cars, health insurance, travel/entertainment expenses and childcare. You can check what the rule is for whatever you have to report/pay depending on what type of expense/benefit you are providing for the employee(s). Check here: Expenses and Benefits A-Z 2 You can use the Simplified Expenses Checker to compare what you claim using Simplified Expenses with what you can claim by working out the actual costs. Please Note: You cannot use this tool if you use the Cash Basis accounting method and have already deducted your costs, such as your vehicle/rent as a Capital Cost.
WORKING FROM HOME:- Hours of business use per month 25 to 50 10 51 to 100 18 101 and more 26 Flat rate per month Example: You ve worked 60 hours from home for a total of 8 months, but worked 40 hours for 4 various months. Calculation: 8 months x 18 = 144 4 months x 10 = 40 Total you can claim = 184 *Note: You can only use Simplified Expenses if you work 25 hours or more a month from home and it doesn t include telephone/internet bills as you can still claim those via their actual costs. LIVING AT YOUR BUSINESS PREMISES:- Number of People 1 350 2 500 3+ 650 Flat rate per month Example: You and your partner run a bed and breakfast and also live there throughout the entire year. Your overall business premises expenses come to 20,000. Calculation: Flat rate: 12 months x 500 per month = 6,000 (this is your Personal Use) 20,000-6,000 = 14,000 (this is what you can claim) *Note: The difference between this and Working From Home is that this is when your business premises also doubles as your home eg. guesthouse, B&B, small care home, etc. This is also calculated by establishing what the total expense of the property is, then based on the amount of people that live there (using the flat rate above) and multiplying it by how many months they live there - and then minusing the total of that from the original total expense of the property. The resulting number counts as your Personal Use of the property, and the remaining amount is a business expense you can claim. **Note: If someone else also lives at the property, even for a portion of the year, then this should be included within the calculation and deduction for Personal Use, depending on however many months they live there.
CAPITAL ALLOWANCES Capital Allowances are used within traditional accounting, and they are assets that you buy and keep to use in your business - which are also known as Plants and Machinery 3. They tend to relate to more expensive items, that are expected to have a useful life of 2 years or more, and tend to more or less fall into 3 main categories: Equipment Machinery Business Vehicles eg. cars, vans, lorries. Other capital allowances include: Renovating business premises (particularly in disadvantaged areas of the UK) Extracting minerals Research & Development Know-How (intellectual property about specific industrial techniques) Patents Dredging Things you cannot claim Capital Allowances on: Things you lease - you must own them. Buildings, including doors, gates, shutters, mains water and gas systems Land and structures, eg. bridges, roads, docks Items used only for business entertainment You can use the following HMRC link to work out your capital allowances and what you can claim on your Self Assessment tax return: work out what Capital Allowances you can claim. To work out the value of an item, you base it either on what you paid for it, or in the event that you owned it before you started the business or it was a gift, then what the market value of the item is if you were to sell it now. If an item qualifies for Annual Investment Allowance (AIA) 4 then you can deduct the full value of that item before tax. Note: If you later sell that item after already claiming AIA, you may need to pay tax on it. You can claim AIA on most things that are considered Plants and Machinery except for cars, gifts or items owned for another reason before being used in your business - these things you can claim using Writing Down Allowances. 5 Note: You can also use Writing Down Allowances if you ve already claimed AIA on items worth a total that surpasses the AIA limit for the accounting period, or if you don t want to claim the full value of an item, but only part of it. If an item qualifies for First Year Allowances, you can also deduct the full cost from your profits before tax. Note: This is separate and will not count toward the AIA limit. Please Note: If you re a sole trader with an income of 150,000 or less a year, you may be able to use a simpler accounting system instead called Cash Basis. 3 This term most often refers to: cars, costs of demolishing anything, integral parts of a building known as integral features, some fixtures such as fitted kitchens or bathroom suites and any alterations to a building to install anything. Note: Repairs are not included. 4 You must make sure you claim AIA for the correct accounting period in which you bought the item, ie. when you signed the contract or when the payment is/was due, as there is a new allowance for each accounting period. The AIA amount and limit is 200,000 from January 1st 2016 for 12 months. 5 Writing Down Allowances
CASH BASIS Cash Basis is another way to record income and expenses, in order to work out your profit and how much tax you owe. It s a method which only requires you to record income you actually received in a tax year - notmoney you re owed or haven t yet received. If you run a small business, Cash Basis accounting may be easier and better suited to your business. Cash Basis will not suit your business if you: Claim interest/bank charges of more than 500 as an expense. Run a bigger business with high levels of stock, etc. Are looking to finance your business with a bank, as they might ask to see your accounts using traditional accounting, before agreeing to a loan, ie. to see what you owe and/or are due. Have losses that you wish to offset against other taxable income (colloquially known as sideways loss relief ). Find out if you re eligible to use Cash Basis.
A LIST OF ALLOWABLE SELF-EMPLOYED EXPENSES OFFICE / PROPERTY / EQUIPMENT With items you would use for less than 2 years eg. stationary, rent, rates, power and insurance costs - you can claim these as normal allowable expenses. For any equipment you intend to keep and use within your business for 2 years or more - use Capital Allowances (for traditional accounting) or simply include it as an allowable expense if you use Cash Basis accounting. Note: Be sure not to include any non-business use of premises, phones or other office resources. Stationery Expenses include: Phone, mobile, fax and internet bills. Postage Stationary Printing Printer Ink and cartridges Computer software (for business use less than 2 years) Computer software with regular payments to renew the license (for business use even if for longer than 2 years) Note: Claim any other software expenses for your business as Capital Allowances - unless you use Cash Basis accounting. Rents / Rates / Power / Insurance include: Rent for business premises 6 Any associated rates (such as water/business rates) Utility bills Property insurance Security A portion of your rent or mortgage interest if you use your home as an office (as well as a portion of all the other associated bills such as council tax, house insurance, internet/ telephone use and utilities) 7 6 You cannot claim expenses/allowances for buying building premises for business purposes, but you can claim it for maintenance or repairs of business premises and/or equipment. For integral parts of a building eg. water heating systems or for any major alterations to install/replace equipment, you can use Capital Allowances (unless you use Cash Basis accounting). 7 A reasonable way to calculate the division of costs might be by the number of rooms you use for your business or by the amount of time you spend working from home.
TRAVEL (INCL. CAR, VAN, ETC.) Whilst you are able to calculate your vehicle s (ie. car, van or motorcycle) expenses using a flat rate for mileage (AKA. Simplified Expenses; you can also calculate it via the actual costs of buying and running it. If buying a vehicle whilst using traditional accounting, then you can claim it using Capital Allowance. If you use a Cash Basis accounting instead, and buy a car for your business, you can also claim this as a Capital Allowance - as long as you re not also simultaneously using Simplified Expenses to calculate its costs. All other types of vehicles can just be claimed as allowable expenses. Allowable expenses in the category of travel include: Vehicle insurance Repairs / Servicing Fuel Parking Hire charges Vehicle license fees Breakdown cover Train / Bus / Air / Taxi fares Hotel rooms Meals on overnight business trips You cannot claim for: Non-business driving / travel costs Fines Travel between work and home CLOTHING EXPENSES Whilst you cannot claim expenses on everyday clothing (even if you wear it for or to work!) - you can claim allowable expenses for the following: Uniforms Protective clothing needed for your work Costumes for actors / entertainers STAFF EXPENSES You cannot claim expenses for carers or any kind of domestic help, such as nannies. However you can claim for the following: Employee and staff salaries Bonuses Pensions Benefits Agency fees Subcontractors Employer s National Insurance RESELLING GOODS You cannot claim expenses for any goods / materials you have bought for private use, or for the depreciation of equipment. You can however claim allowable business expenses for: Goods for resale (stock) Raw materials Direct costs from producing goods
LEGAL & FINANCIAL COSTS Accountancy, legal and other professional fees can all count as allowable business expenses. The things you can claim for are: Hiring accountants, solicitors, surveyors and architects for business reasons Professional indemnity insurance premiums The thing you cannot claim for are: Legal costs of purchasing property / machinery (if you use traditional accounting, you can claim for these costs using Capital Allowance) Fines for breaking the law Insurance policy for your business, eg. public liability insurance Bank, Credit Card & other financial charges If you re using Cash Basis accounting, you can only claim up to 500 in interest and bank charges. You cannot claim for repayments of loans, overdrafts or finance arrangements. However you can claim business costs for the following: Bank, overdraft and credit card charges Interest on bank and business loans Hire purchase interest Leasing payments Alternative finance payments eg. Islamic finance / Microfinance When your customer doesn t pay you If you re using traditional accounting, you are able to claim for amounts of money you include in your turnover but won t ever receive (known as bad debts ). However you can only write off these debts if you re sure they won t be recovered from you customer in the future. Please Note: Bad debts cannot be claimed if you use Cash Basis Accounting, due to the fact that with Cash Basis you only record income on your return that you ve actually received. Otherwise, you also cannot claim for: Debts not included in turnover Debts related to the disposal of fixed assets, eg. land, buildings, machinery, etc. Bad debts that aren t properly calculated, eg. you can t just estimate that your debts are equal to 5% of your turnover.
MARKETING / ENTERTAINMENT / SUBSCRIPTIONS You can claim allowable business expenses for the following: Advertising in newspapers or directories Bulk mail advertising (mailshots) Free samples Website costs Subscriptions to trade / professional journals Trade body or professional organisation membership if related to your business You cannot claim allowable business expenses for the following: Entertaining clients, suppliers and customers Event Hospitality Payments to political parties Gym membership fees Donations to charity (but you may be able to claim for sponsorship payments if you re a limited company) 8 HOW TO CLAIM EXPENSES? Keep accurate records as well as receipts of all your business expenses, as a proof of purchase and cost. Add up all your allowable expenses for the given tax year, as you will be asked to include the total amount when filling out your Self-Assessment Tax Return. 9 8 Charity sponsorship payments are different from donations because your company gets something related to the business in return. Therefore you can deduct sponsorship payments from your business profits before you pay tax, by treating them as business expenses. However payments only qualify as business expenses if the charity: Publicly supports your products / services Allows you to use their logo in your own printed material Allows you to sell your goods or services at their event / premises. Links from their website to yours. 9 Note: You will not initially be asked to send in proof of your expenses when submitting your tax return, however you must keep them as proof, should you later be asked to provide them by HMRC.
This guide is brought to you by Albert - the highest rated invoices & expenses app in the UK. The information contained in this document is only intended as a general guide. Given the changing nature of laws, rules and regulations there may be delays, omissions or inaccuracies and as such, it should not be used as a substitute for any official HMRC guidelines and/or for consultation with professional accounting, tax, legal or other competent advisers.