If you are a sole trader you may find the following pages helpful:
- Top ten expenses to claim as a sole trader
- Expenses you may be missing out on
- What you can and cannot claim
- Self employed expenses
As a sole trader you will incur business costs on a regular basis. Whether you are a hairdresser and have the cost of renting a chair in a salon or a DJ purchasing a new set of speakers, some of these costs could be claimed as business expenses.
To explain what expenses you could claim, HM Revenue and Customs have produced a rather hefty 136 page guide. However, if you are a bit pushed for time, take a look at our easy to read guide, which will explain what expenses are, what you may be able to claim and how expenses could affect your tax bill.
Expenses for sole traders
As a sole trader you will only be taxed on your total profits. This is the total amount that you are paid by your clients, with your total expenses and any personal allowances deducted (don’t worry your accountant will explain what these are). Therefore paying for costs through your business as expenses could reduce your tax bill.
It is important to remember that even though purchasing an item and claiming the cost as an expense will be cheaper than if you were to buy the item outright, it is still a cost that will be deducted from your profits. Your profits are ultimately your take home pay, so don’t let yourself get carried away and only make purchases that are absolutely necessary.
Try and always think, do I really need it or would I prefer the cash? If you were to take the cash then you would incur 20% income tax (or 40% for higher earners), but the second sat nav that you expensed is unlikely to be accepted as payment for your gas bill.
How can I claim my expenses?
To claim your expenses you simply need to log your total expenses amount on your annual self-assessment tax return. It is a good idea to keep a spreadsheet and make a note of each expense that you incur throughout the year. This means you won’t need to add up all your expenses at the last minute, which could take quite a while!
All expenses must be for the sole purpose of your business and HMRC can ask to see proof of this, so don’t be tempted to try and get away with claiming any personal items.
Another point to be aware of is that HMRC can ask to see a copy of your receipt at anytime during the seven years after the expense was incurred. So whether they are digital or physical, make sure you have copies of all expense receipts to hand.
What can I claim as an expense?
Business costs that are wholly and exclusively for the purpose of your business could be claimed as expenses.
For example, if you are a Makeup Artist you may be able to claim expenses such as:
- Makeup supplies
- Travel to shoots
- Makeup and beauty related magazine subscriptions
- Relevant training and courses
If an item is for both business and personal use, such as your phone or your car, you can only claim the costs incurred for business purposes. So in the case of your phone, you can only claim the minutes and texts that are work related.
Similarly with your car you can only claim the proportion of the costs that were for business travel. To keep it simple it is best to keep a mileage log, so that at the end of the tax year you know how many miles were driven for work. From this amount calculate the percentage of business use and apply this percentage to the overall cost, the figure you are left with is the amount that can be expensed.
For example, if your running costs are £2,000 for the year including repairs and you used the car for business 50% of the time, you could claim £1,000 as an expense.
Some other examples of expenses that you might claim include:
- PR, marketing and advertising costs
- Utility bills for your business premises
- Rent of your business premises
- Computer software
- Business insurance
- Books and magazines that are relevant to your business
- Bank charges on business accounts
What can’t I claim?
Costs that are not solely for the purpose of your business cannot be claimed as a business expense. For example, parking fines or speeding tickets are not directly related to the running of your business and so are not classed as an expense, even if the fine was incurred during a business trip.
The cost of clothing that could be used for both your personal and business wardrobe such as a suit is not eligible to be claimed as an expense. The exception to this rule is protective clothing such as steel capped boots and work uniform costs.
Unfortunately childcare costs are not eligible to be claimed as an expense. As a sole trader you do not pay your tax monthly, which makes you ineligible to claim childcare vouchers.
You may also find the following pages helpful, if you’re thinking about making the move to self-employment.