Deductible expenses for self-employed worker

What are “allowable” expenses?

There are certain inherent costs involved in running a business as a self-employed worker. These range from paying rent on business premises, buying supplies and stock, travelling to see clients and paying invoices on a wide range of goods and services. HMRC often does not tax self-employed workers on the expenses they incur that are essential to keeping the business running. 

As a result, self-employed workers (like anyone else running a business) need to keep track of these expenses in order to deduct them from their gross income and calculate how much tax they have to pay. An expense which can be deducted by self-employed workers is known as an “allowable” expense.

HMRC is very clear about the kinds of costs that can be considered allowable expenses.

Some of the more common allowable expenses include the following:

• Travel costs (fuel, parking fees, train tickets, etc.)
• Office supplies (stationery, ink, paper, photocopying costs, postage, phone bills, etc.)
• Clothing expenses (uniforms, including branded corporate clothing)
• Staff costs (paying subcontractors and/or salaries)
• Stock and supplies (raw materials, etc.)
• Advertising and marketing (website, newspaper adverts, etc.)
• Business-related training courses
• Financial costs (such as legal fees, bank charges, insurance fees)
• Costs of premises (heating, lighting, rates etc.)

Let’s take an example:

Robin is a self-employed plumber. His turnover is £46,000, but he spends £13,700 on buying plumbing supplies, setting up a website and on fuel for his work van. He should then deduct that amount from his turnover and only pay tax on the remaining £32,300, an amount referred to as his “taxable profit”.

Other expenses, such as meal allowances and relocation allowances are covered under different HMRC provisions and may also be incorporated into the tax calculation.

Capital allowances

Capital allowances come into play when a self-employed worker buys certain assets that are to be used for the business and when they use a traditional accounting method. These items are considered to be assets as they are longer-lasting than other items, such as raw materials. For self-employed workers, these may include such things as equipment, machinery and business vehicles. In the above example of Robin, if he uses the traditional accounting method, he can claim capital allowances for the purchase of his work van and the soldering equipment needed to run his plumbing business.

Other examples which apply to more specific types of business include research and development costs, intellectual property, patent rights, renovating business premises in disadvantaged areas of the UK, extracting minerals and dredging allowances.

Capital allowances are claimed in addition to other allowable business expenses, as explained above. Most self-employed workers, however, use the cash-basis accounting method and claim these types of items under their expenses.

Personal and professional use

The general rule for identifying tax-deductible expenses is that they must be incurred “wholly and exclusively” for the purposes of the business.

However, for many self-employed workers, the line between personal and professional use is not always easy to establish. A self-employed worker may often work from home, may use the same vehicle for professional and personal reasons and may have a single mobile phone contract. In all of these cases, it is essential that they are able to “apportion” the amount of the expense that is incurred for business reasons.

The calculations for apportioning personal and professional expenses can be complex, and it may be best to seek the advice of your accountant or contact HMRC for more details.

Working from home

Many self-employed workers use their homes as their professional base. This means that many of the costs of running their business will overlap with the costs of running their home. Expenses such as electricity, heating and rates are apportioned according to the surface area of the home used for business reasons and the number of hours per day spent working in the home. When working from home, self-employed workers can also claim for full repairs to the room from which they run their business and a portion of any work needed to repair the whole building (such as a roof repair).

It is often worth investigating the portion of these costs that can be claimed as allowable expenses, as this will have an impact on the amount of tax to be paid.

In order to calculate the proportion of expenses dedicated to professional use, you need to calculate the proportion of time spent on business use compared to personal use. For example, if you use your mobile phone for business approximately half of the time, then you can deduct half your mobile phone bill. The same holds for electricity, rates and so on. Receipts and invoices for any expenses being claimed should be kept in the event of a tax inspection.

Simplified expenses

Because many self-employed workers are limited in terms of the amount of time and energy they are willing to spend on calculating their exact allowable expenses relating to working from home, many opt for the HMRC “flat rate” to calculate their simplified allowable expenses. 

The HMRC flat rates apply depending on the amount of time spent working from home each month. They are as follows:

• 25–50 hours per month = flat rate of £10 / month
• 51–100 hours per month = flat rate of £18 / month
• 101+ hours per month = £26 / month

The government has an online simplified expenses checker, which allows you to compare your simplified allowance with your actual expenses to decide which is the best fit for your business.

Conclusions

Running your own business is full of opportunities and potential. However, sometimes it is easy to get bogged down in red tape and paperwork. Tracking and reporting your allowable expenses can seem like one of the tasks that get on top of you. Mooncard corporate cards can help ease the burden of monitoring and reporting your allowable expenses, freeing you up to spend your time on what you do best. Find out more by booking a free, no-obligation demonstration!

Read our other articles on the topic : 

• Expenses cards : all you need to know