Self-Employed Expenses: claiming expenses as a sole trader
What Expenses Can I Claim
Whether you’re a bookkeeper, accountant, plumber, or a a mobile hairdresser you will incur costs as a result of running a business. We have put together a quick summary of the expenses that you may be able claim, however you should be aware that they are a ‘simplified’ version of HMRC’s vast guidance. Further information is available from HMRC.
Basically your ‘profits’ are your income less expenses, and you only get taxed on your profits, so the higher your expenses, the lower your tax bill. If your taxable earnings are £10,000 a month and you have £2,000 of expenses, you would only pay tax on the £8,000 (if you aren’t VAT registered, the total amount spent on the expenses, including VAT, is deductible).
Buying or improving capital items, such as a van, machinery, business premises, a computer, fixtures and furniture which last for several years etc… are not business ‘expenses’ for tax purposes but you may still be able to claim Capital Allowance relief for them as long as they are related to your business. Capital items need to be shown separately on your Self Assessment tax return, but will also reduce your taxable profits.
Any expenses must be applicable to the running of your business. You can't take away any private expenses. The general rule is that a self employed person cannot deduct expenses unless they are ‘wholly and exclusively’ laid out for the purposes of the trade, profession or vocation. It’s worth bearing this in mind, because you may be asked to provide evidence by HMRC that firstly, you actually incurred an expense and secondly, the expense was wholly and exclusively for your business. There is no point making them up just so you can pay less tax - penalties are severe.
There is a guide to record keeping here: Record keeping at a glance Keeping up-to-date and accurate records from the start is important for your business. It makes it easier to complete your tax return. A good record system helps you keep track of your expenses. If you do not keep adequate records or complete your tax return correctly or on time you may have to pay a penalty.
What records to keep Anything to do with your business such as: • cashbooks • invoices • mileage records • bank statements • receipts for purchases • CIS statements.
How to keep your records Either on paper or on computer. For electronic records you must: • capture all the information (front and back) • save information in a readable format • keep a back-up
How long to keep records As a general rule for a minimum of six years. Allowable expenses In most cases it will be clear if something has been incurred wholly and exclusively for the purposes of business - provided a receipt has been kept as proof of purchase, a deduction should be allowed.
A newly established business is often run from home, perhaps using an existing car for any business travelling that is required and an existing mobile phone for business calls. This can cause problems, because of the ‘duality’ of purpose, inherent in many such costs. It is therefore necessary that you can clearly identify and separate the expenditure between business and private purposes. Here we look at these particular elements in detail – you should be aware that such claims are under HMRC scrutiny at the moment so it is important that you understand the rules. Motoring expenses If you use a car both for business and privately, you can claim a proportion of the actual running costs e.g. fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT etc – usually in the ratio of your business mileage to your total mileage. You must keep a log of business mileage as well as copies of all bills/receipts to calculate the appropriate deduction. The concept of business mileage is explored later on. You can alternatively use a fixed rate per business mile to compute vehicle expenses instead of keeping detailed records of actual expenditure. This method is intended to make things simpler for small businesses. It is available if the annual turnover of a business is less than the VAT registration threshold when they first use the vehicle. The amounts to use are: • car or van 45 pence a mile for the first 10,000 miles and 25 pence a mile thereafter • motorcycle 24 pence a mile • cycle 20 pence a mile. Taxpayers can only use the mileage rate basis if they apply it consistently from year to year. They can only change to or from an ‘actual' basis when a vehicle is replaced. The mileage rate covers the costs of running and maintaining the vehicle, such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT. The rate also covers depreciation of the vehicle. So if a taxpayer uses the mileage rate basis then they cannot claim any additional amounts for these expenses. Any deductible journeys must have been made wholly and exclusively for business purposes and a log of business mileage should be kept. Whatever your business and however you work out your motoring expenses, you must keep adequate records to back up your tax return. Please note that costs of motoring for mixed private and business purpose is non- allowable expenditure. An example would be the cost of travelling to town to bank the business takings and do your private shopping at the same time. What constitutes business miles? Where a taxpayer owns or rents separate business premises away from their residence then the general treatment is as follows: The cost of travel between the taxpayer's home and the work base is not allowable (this is ordinary commuting) The cost of travel between the work base and other places where work is carried out, is an allowable expense. There are some types of business where the taxpayer has no separate business premises away from home. For example an insurance salesman who has no office away from his residence, but who visits clients. Provided their base of operations is at their home, the costs of travelling between the residence and the sites at which they work may be allowed. This is because they travel from their home to a number of different locations for a purely temporary purpose at each such place – to complete a job of work. At the conclusion of which, they will attend at a different location. In such cases, taxpayers would normally visit a large number of different premises to carry on business. The position is rather different where a trader works at one or two different sites only during the year – for example a construction subcontractor working on the Olympic stadium. This is the normal pattern of his business, so the one or two sites will be the normal working place for the subcontractor. As such, the cost of travelling between the subcontractor's home and such business ‘bases’ should be disallowed because it is just ordinary commuting. Where the subcontractor travels regularly at their own expense to a work base to receive instructions from a ‘principal’ and then is conveyed (at the principal’s expense) to another location/s, the subcontractor will have no allowable travel costs. It is sometimes possible where a subcontractor’s home is their business base (the taxpayer may at times work there, keep their business records, materials, tools there etc) and works at many different sites during a year that they can be called a ‘itinerant’ trader. Travelling expenses between the taxpayer's home and those sites should normally be allowed.
Use of home as office Where a room at home is used wholly and exclusively for business purposes, a deduction may be claimed for the additional costs of the business use, such as light and heat. Wholly and exclusively means that when part of the home is being used for the business, then that is the sole use for that part at that time. Thus, if the part of the home used for business purposes, e.g. drawing up invoices is also, at the same time, used for some other nonbusiness purpose, e.g. watching television, then no deduction is due. The question is therefore whether there are periods when part of the home is being used solely for business purposes. If part of the self-employed person’s home is set aside solely for business use for a period, they can claim as a deduction the costs they incurred on that part during that period. It will be most unlikely that they have a separate bill for that specific part and usually this exercise will involve apportioning the total relevant bill between the period of solely business use and the remainder of the time covered by the expense. In the right circumstances, it is possible to claim a portion of: insurance council tax, mortgage interest, rent, repairs and maintainence, cleaning, heat, light and power, broadband and telephone – including a portion of line rental. The factors to be taken into account when apportioning an expense include: • Area: what proportion in terms of area of the home is used for business purposes? • Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water. • Time: how long is it used for business purposes, as compared to any other use? The method of apportioning an expense depends on the relative importance of each of these factors. Example Chris is an author working from home. She uses her living room from 8am to 12am. During the evening, from 6pm until 10pm it is used by her family. The room used represents 10% of the area of the house. The fixed costs including cleaning, insurance, Council Tax and mortgage interest, etc total £6600. A tenth of the fixed establishment costs is £660 (representing the room). One sixth (4/24) of the use, by time, is for business, so Chris claims £110. She uses electricity for heating, lighting and to power her computer, which costs £1500 per annum. Chris considers an apportionment of these costs by time and area. A tenth of the costs are £150 and half of these costs by time (4/8) relate to business use, she claims £75. She also uses the telephone to connect to the internet for research purposes. Her itemised telephone bill shows that a third of the calls made are business calls. She can claim the cost of those calls plus a third of the standing charge.
Administrative costs, including mobile phone You can deduct the administrative costs of running your business, including advertising, stationery, postage, telephone and fax. You may also be able to deduct the cost of trade or professional journals or subscriptions. With regards to mobile phones, the simplest way of demonstrating that mobile phone costs are wholly and exclusively for the purposes of trade is to keep a separate contract phone for business and retain your phone bills as evidence that you have two phones – one for business, one for personal. Any claims for significant business mobile phone use of on an otherwise personal mobile phone, are likely to be queried and tested, so again, bills should be kept to demonstrate the personal v work usage.
Disallowed expenses Please note that some expenses are never allowable for tax purposes, for example, entertaining clients, even if such entertainment directly led to new business. And, private expenditure - private expenditure is non-allowable expenditure - you can't get tax relief for it. Here are some examples: • Ordinary ‘civilian’ clothing. Expenditure on ordinary clothing worn during the course of a trade is disallowable. This remains so even where particular standards of dress are required by, for example, the rules of a professional body. The cost of clothing that is not part of an ‘everyday' wardrobe faces no such bar to deduction. A deduction for protective clothing and uniforms is therefore normally allowed.
Food for sustenance. The cost of food and drink is not in general an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live. They are normal costs of living incurred by all and not as a result of trading. It is immaterial that the physical demands of the taxpayer’s occupation require a greater consumption of food or that the location of the work place imposes a greater cost. Where occasional business journeys outside the normal pattern are made, so that extra costs are incurred in having to lunch away from home or the normal work base for example, modest expenses incurred in these circumstances may be deducted from business profits.
Having somewhere to live. The cost of domestic living accommodation is not allowable, notwithstanding that the expenditure allows the taxpayer to do more work. For example, Andrew is a self employed CIS contractor living in Coventry. He claims the costs of weekly travelling to and from, and living during the week in Kent (200 miles away) where he has been working on a contract for at seven years. All deductions are likely to be denied. The choice of where you live is a personal choice. Where a business trip necessitates one or more nights away from home, the hotel accommodation and reasonable costs of overnight subsistence may be deductible.
The East Midlands continues as the UK’s fastest growing economy outside London in a recent report highlighting its top 200 growth companies. In addition to analysing local companies’ profits over three years, interviews have also been used to establish the key drivers behind growth. View the full report here.
On average the companies featured grew by 22% year on year compared to the UK average growth of just 1.4% per year. Much of this growth has been fuelled by entry into new markets and investing in people, Research & Development and new plant. Companies reported an emphasis on quality, an increasing use of apprenticeships and the importance of attracting and retaining talent.
Ashfield and Mansfield punches above its weight, with 14 companies featured in the top 200 list, compared with just 8 from Chesterfield and 5 from Worksop. Indeed Paul Cook, Director at TIS (no. 109 on the list) is set to speak at Thursday’s Mansfield 2020 networking meeting. Find out more about 2020 and TIS.
Ashfield and Mansfield growth companies helping to fuel economic prosperity are:
- F. Switchgear (Holdings) Limited
- Hughes Construction Limited
- Merritt Holdings Limited
- Mansfield Sand Company Limited
- Clarke Holdings Limited
- Vision Automotive (UK) Group Limited
- Television Installation Services (Mansfield) Limited
- Belton Massey Limited
- Romo (Holdings) Limited
- S.D. Wholesale Limited
- Pendragon PLC
- Roy Lowe & Sons Limited
- Ron Brooks Limited
- Standard Motor Products Europe Limited
Invest Ashfield & Mansfield helps local companies grow through a business growth grant, apprenticeship grant and account management programme. Our business growth grant offers up to £5,000 to local companies at a rate of 50%. Our Apprenticeship Grant for Employers (AGE) offers businesses taking on a new apprentice up to £1,500 on top of the national grant. Contact us to find out more about the help that we can provide, including our account management programme. - See more at: http://invest.ashfield-mansfield.com/ashfield-and...
Author: Caroline Cox
Caroline is the Operations Manager for Mansfield 2020. The most important part of this role is to listen, support and act! Through monthly focus groups we identify opportunities and challenge key bodies to provide a partnership approach to avoid duplication and monitor efforts to fulfill our philosophy which has always been firmly centered on our business community, growth and skills.
New dividend tax: how it works – and how to avoid it
Here are answers to some of the worrying questions arising out of new tax changes on share dividends
George Osborne’s new tax on share dividends, announced in last week’s Budget, has been the cause of both dismay and confusion.
Readers have written to say they expect their retirement incomes to be severely affected by the new tax, while others are baffled about how it will work – particularly whether abolition of the old “dividend tax credit” will affect their Isas and pensions.
Here we answer their questions – and offer some tips about how to pay as little dividend tax as possible.
How will the new tax work?
The first £5,000 of dividend income in each tax year will be tax-free. Sums above that will be taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers. The new tax takes effect on April 6, 2016. No tax will be deducted at source; taxpayers must use self-assessment to pay any tax due.
How does this differ from before?
Under the current system, basic-rate taxpayers pay no tax on their dividend income, while higher-rate taxpayers pay an effective rate of 25 per cent and additional-rate taxpayers pay 30.56 per cent. So taxpayers in all bands pay less than they would on earned income. This is because dividends are paid out of company profits that have already suffered corporation tax.
Will everyone be worse off under the new regime?
No. While it’s true that many will pay more, such as basic-rate taxpayers who receive more than £5,000 in dividends, there are others, such as higher-rate taxpayers with £5,000 or less in dividend income, who will gain – currently they pay 25 per cent on the whole sum (or £1,250), while under the new regime there will be no tax to pay, thanks to the £5,000 allowance.
What if some of my dividend income is within the tax-free personal allowance?
Dividend income is still eligible for the personal allowance. So if next year you had £16,000 in dividend income, the first £11,000 would be covered by the personal allowance and the other £5,000 by the new dividend allowance. As a result, you would pay no tax.
Will this affect my Isas?
Some investors think they will receive more dividend income within their Isas under the new rules – but they won’t. This is because they expect the abolition of the old dividend tax credit to mean that, after next year, dividends will be paid “gross”.
But this “credit” was entirely notional and could not be reclaimed in hard cash even within tax-efficient vehicles such as Isas.
Instead, the following is what happened. A company declared a dividend of (say) 90p from its (already taxed) profits. This was “grossed up” to 100p – using a “notional” process under which no money changed hands. When the dividend was handed over to shareholders it was “netted” back to 90p, along with a “tax credit” that meant a basic-rate taxpayer had no further tax liability.
Both the notional grossing up and netting down will be abolished and shareholders both within and outside Isas will continue to receive 90p under the new system. Inside Isas nothing will change; outside them the new tax outlined above will apply.
Or my pensions?
Pensions plans, whether occupational or personal, were also unable to reclaim the “tax credit” so nothing will change to the dividends they get. Any dividends received won’t be taxed while they remain in the pension but will be taxable as pension income in line with existing rules when withdrawn by the pension saver. No £5,000 allowance will apply because the recipient of the dividend is the pension scheme, not the beneficiary.
What can I do to minimise the effects of the new tax?
The most obvious idea is to transfer shareholdings into Isas. However, a portfolio that produces £5,000 in dividends is likely to be worth roughly £130,000. Even if you hold very high-yielding shares you would need about £63,000 to generate £5,000 a year, according to calculations by Claire Walsh, a financial adviser at Aspect 8.
With the annual Isa allowance at about £15,000, it would take at least four years to transfer all your shares to Isas. Married couples could use both allowances, however.
You can’t simply move shares to an Isa: you have to sell them, deposit the proceeds in an Isa and then buy them back within the tax-free scheme. One trick is to do this when markets fall, as you can sell more shares and still stay within the Isa limit.
Even if your dividend income is less than £5,000 now, you may want to start switching to Isas because the payments could rise in future, Ms Walsh said.
Specialised investment plans called onshore and offshore bonds, which allow you to defer tax on income, are another option, especially for those who pay the higher rates of tax, she added.
Abraham Okusanya of Finalytiq, a financial planning consultancy, said business owners might want to draw as much as possible in dividends before the new rules took effect in April next year.
Case study: 'This is a £2,000 hit to our pension income'
Owen Evans expects his retirement income to fall by about £2,000 a year as a result of the new tax.
Mr Evans, 71, who lives near Swansea with his wife, Veronica, 68, invested several hundred thousand pounds in high-yielding shares when he retired as a businessman six years ago.
“It was the first time that I had a substantial capital sum to invest, as, during most of my self-employed career, profits had to be reinvested for business reasons, and I did not have a large pension fund,” he said.
“The new tax seriously affects people like myself, and the £5,000 allowance is derisory. The allowance should be at least £20,000.”
Transferring a large portfolio such as his into Isas would take a great many years. “The Chancellor has forgotten retired people,” he said. “I hope MPs will attempt to amend the law to give them a better deal as the law goes through Parliament.”