WHAT BUSINESS EXPENSES CAN SELF-EMPLOYED PEOPLE WRITE OFF AGAINST TAX? HEATHER ROGERS EXPLAINS

One of the questions most often asked of tax practitioners when someone is starting out in business as a sole trader is: 'What expenses can I claim against tax?'

All practitioners have invariably at some point in their professional career been seated in front of a client who happily asserts that someone they know claims 'everything', and then had the unenviable task of putting the increasingly crestfallen client straight on what is permitted.

So, I have laid out a general guide on expenses and common areas where many people get caught out.

I would advise anyone starting in business to have an hour with an accountant so they have the facts clear in their mind.

I will focus mainly on sole traders here, but there are some tips for sole director limited companies below and I will cover these in more detail in a future column as there are many differences.

What is a sole trader?

A sole trader is an unincorporated business that is owned by one person, as opposed to a partnership, or an incorporated business, such as a limited company.

Sole traders report their income by completing a self-assessment tax return every year.

This states income and allowable expenses, and they pay tax and national insurance on their profits each year, after deduction of any tax allowances.

Sole traders can also claim allowances for equipment purchased - these are known as capital allowances.

It is vital to keep adequate books and records, including invoices, receipts, cashbooks, bank statements and so on.

These need to be kept for five years after the date the return was due - so for 2022/23, due 31 January 2024, you need to keep them until 31 January 2029.

I recommend keeping them for six years from the end of the tax year – it’s easier to remember and gives an extra couple of months of information.

What expenses can a sole trader claim against tax?

Broadly speaking you can claim the following.

- Renting an office or commercial unit: This covers rent, rates, gas, electric, insurance, cleaning and security.

If your business office is at home, rather than renting separate business premises, there is more on this topic below

- Other insurance related to your business: For example employer’s liability or professional indemnity.

An important note on insurance though is that if you use your normal vehicle for your business, make sure you have business cover. If you don’t, you won’t be covered if you have an accident and this could cause you to be prosecuted.

- Goods for resale (cost of sales)

- Printing, postage and stationery

- Staff costs

- Telephone and internet

- Computing and software

- Travelling costs: Note this does not include fines.

- Subsistence (see more on this below)

- Training; This only covers training associated with your existing business, not training to start a completely different business or which is unrelated to your business.

- Protective clothing and uniforms (see more on this below)

- Marketing, advertising, website and entertainment (see more on this below)

- Subscriptions

- Legal and accountancy fees: An interesting note on accountancy fees is that the cost of preparing your self-assessment return is not tax deductible.

What about private use of items you use in your business?

For certain items, such as telephone or motor expenses, you may have a private use element.

You will need to work out how much of the cost is business and how much is private and deduct from the expenses the private element (or add back to the profit if you deduct the whole cost).

For motor expenses, keeping a mileage log is the best way. 

What expense claims can get you in trouble with the taxman?

Clothing and food and drink expenses are areas that do cause problems as they can be confusing and are often flagged up in a tax enquiry.

Clothing

When I was doing my exams to qualify as an accountant many years ago, one of the cases that stuck in my mind - and I have quoted often at clients - is that of a barrister (Mallalieu v Drummond 1983) who only wore sombre clothes for court appearances as she much preferred colourful clothes in her ordinary life.

She claimed the cost of her sombre court clothes as an expense as she said she would never buy them for herself.

The case ended up in the House of Lords where she lost, as it was determined that her clothes did not fulfil the 'wholly and exclusively' principle, but were required for normal warmth and decency (duality of purpose), in addition to being appropriate for professional work.

The test is really whether the clothing which the person wishes to claim can be worn as part of someone’s 'everyday' wardrobe.

If so, regardless of whether you only wear it for work, it would not be allowable as an expense against tax.

Uniforms and safety workwear or protective clothing do not form part of someone’s 'everyday' wardrobe and so are allowable against tax.

If you are an actor or an entertainer, then you can also claim the cost of any costumes.

Food and drink

The rules on food and drink were also set following a court case and are very similar.

The case Caillebotte v Quinn 1975 in the High Court involved a carpenter who could not go home for lunch when he was working, as he worked within a 40 miles radius of his home.

He therefore purchased a lunch for 40p each day as opposed to what he would normally spend on a home lunch which was 10p.

He claimed a bigger lunch as he needed the energy to carry out his work.

The judgement handed down was that you eat to live and therefore, again, this claim failed the 'wholly and exclusively' test – another expense with 'duality of purpose'.

However, you can claim subsistence if you make an occasional business trip outside your normal business pattern and claim a breakfast or a dinner on the way or way back from, say, Manchester to London for a meeting, conference or similar.

You can also claim reasonable subsistence if you have to stay overnight at a hotel, or where your business is 'itinerant', in other words if you work at a different location every week.

Using your home as business premises

Funnily enough, the carpenter who incorrectly claimed his lunches is partly responsible for this allowable cost.

The judge who handed down the judgement in his case used the fact that the costs of running a business from home could easily be identified as 'wholly and exclusively'.

Therefore, you may be able to claim a proportion of your costs for the following things.

- Gas/electricity

- Council Tax

- Mortgage interest or rent

- Internet and telephone use

You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.

You may need to notify your insurer and your mortgage company.

However, you could get caught out with capital gains tax when you sell your home if part of it has been used exclusively for business purposes.

If there is some residential use as well of the room or rooms used for business then the exclusive use would not apply.

What about claiming entertainment as a business expense?

Entertainment is not allowable except in the following circumstances.

- It is staff entertainment, where you can claim up to £150 per staff member (including their spouse) but if you spend more, it could become a taxable benefit on them.

- Entertainment is provided as part of a contractual agreement.

- Gifts of less than £50 per year are given to customers/suppliers with business name displayed on the gift.

What about pension payments?

A sole trader makes a separate claim in the tax return for his own pension contributions. They do not form an expense of his business. He can claim staff pension contributions as a cost of the business.

A few differences to note between sole traders and sole director limited companies

If you are the sole director of a limited company, then you are not a sole trader.

A limited company is a separate legal entity from that of its director.

The company pays corporation tax, as opposed to income tax on its profits.

Any income taken from the limited company by the director is taxed on him personally. The reporting rules are more complex too.

The director may be able to claim back expenses for entertainment incurred wholly, exclusively and necessarily for business purposes from his limited company if he paid for them personally, in the same way an employee can claim back the cost from his employer, but the costs will be disallowed for corporation tax purposes.

However, a sole director can make a pension payment from his limited company for himself, which is a tax deductible expense for corporation tax.

The director won’t receive any tax relief personally, as he did not make the payment.

There are many other differences, which I will cover in a future column.

2024-05-30T05:19:23Z dg43tfdfdgfd