Self employed expenses - claiming expenses as a sole trader

and a bit of advice if you're running a limited company.

Whether you’re a plumber, journalist, physiotherapist or pharmacist you’ll incur costs as a result of running your business. To help explain all of this, HM Revenue and Customs have produced a rather hefty yet comprehensive 100 page guide (not quite the brief summary you’re probably looking for).

If, like most small business owners you're a bit strapped for time, we’ve put together a quick review of the expenses that you can claim and also a summary of how expenses affect your tax bill.

Firstly how do expenses work if you are a sole trader/self employed business verses a limited company, how do you pay them and how do they affect your tax bill?

1. If you work as a sole trader / self-employed and not a limited company, life is quite simple.

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.

However, these must be expenses that are wholly applicable to the running of your business. It’s worth bearing this in mind as you may be asked to provide evidence you actually incurred the expenses and the expense was wholly necessary for your business if asked by HM Revenue and Customs, so it’s no point making them up just so you can pay less tax.

As a sole trader / self employed one of the most common expenses is your car, simply add up the miles you use for business, the cost of running the car, any payments you have made buying the car, insurance and compare it to the personal miles drove to come up with a business use percentage.

For example, if the total cost of running your car was £10,000 a year and 50% of the use of the car was for business, you could claim £5,000 as an expense. Now there are rules for leasing, buying, depreciating assets and different rules for vans but it’s probably best to have a chat with one of our accountants about this.

Paying expenses is simple, just make the expense, keep the receipt and at the end of the year, add them all up put this amount on your tax return. If you turned-over £50,000 and incurred expenses of £20,000 you will be taxed on £30,000 less any personal allowances.

Special note: To further complicate things, you could also, if your turnover is less that £67,000 a year, use the limited company method below to claim your miles.

2. If you run a limited company, things are very different.

For day to day expenses pay them yourself and claim them back through your company. To do this you’ll just need to do either a bacs transfer from your business bank account or write yourself a cheque from your company bank account cheque book.

Please be aware the next bit is very simplified and doesn’t include everything but it will hopefully help you understand how expenses affect your tax bill, for a more detailed explanation it’s best discussed with your accountant.

Note: this is very oversimplified - Basically expenses aren’t taxed, so if your turnover for example was £10,000 a month and you didn’t have any expenses this month and you withdrew all the £10,000, you would pay tax on the full £10,000. However, if you had £2,000 of expenses, you would now only pay tax on the £8,000 and pay less tax. It doesn't work exactly like this as it doesn't include the affect of your PAYE salary, dividends or even the flat rate VAT scheme (if you're on it) but hopefully it will give you a basic understanding of how expenses affect your tax bill.

Running a car as a director of a limited company is also different; essentially you can claim 40p per mile for the first 10,000 miles and 25p per mile thereafter. Which makes life very simple but may not be as valuable to you as if you were a sole trader especially with the cost of fuel these days.

Remember! You must be able to provide evidence you actually incurred the expenses if HM Revenue and Customs ever asked you.

As a sole trader and self employed anything you buy for your business is considered an allowable expense. This includes things like:

• Cost of goods bought for resale (stock)
• Cost of equipment you need buy
• Advertising
• Delivery charges
• Heating and lighting in your business premises
• Rent of your business premises
• Postage
• Stationery
• Relevant books and magazines
• Bank charges
• Telephone use
• Travel
• Bank charges on business accounts

What can't I claim?
Parking fines, speeding tickets and anything that isn’t related to running your business. 

If you're confused about what you can and can't claim - contact us and we will be more than pleased to help you.

If you want to claim expenses, you need to make sure you keep all your receipts. When you complete your tax return at the end of the year, you declare all your income and all your expenses – HMRC will do the rest! If you’re stuck and need a bit of help you could click the link and Ask us Question call or us on 0500 234111 / 01442 275767.