When you operate as a sole trader you are subject to some specific sets of rules around what you can and can’t claim against your tax. These rules have been tried and tested over the years and are generally very clear, but some are open to interpretation and are almost always being tested in the courts.
This blog will set out what you can and can’t claim against your taxes. It will break down each type of expense and provide guidance.
Included in this guide is:
- Generally – The Overriding Rule
- Motor Expenses
- Working from Home
- Training Costs
- Repairs and Renewals
- Employing Family Members
- Business Gifts
Generally – The Overriding Rule
The overriding rule is that expenses have to be wholly and exclusively for the business’s use. This means no personal expenses. That said, some expenses can be split if there is a personal use element.
If it looks like a duck and it quacks like a duck, then it’s probably a duck…. the same can be said of expenses…. if it looks like a business expense, it is probably a business expense and is allowable.
There are specific rules and nuances, some based on your specific circumstances, for all of these categories and our job is to make sure that your taxes are correct so that you don’t have to.
There are two ways of claiming motor expenses if you are self-employed. You may claim:
- Actual expenses incurred, adjusted for any disallowed private expenses.
- A mileage allowance based on business mileage.
Actual Expenses Incurred
You can claim tax relief on the running costs of any vehicles that you use in your business.
If your vehicle is used partly for private purposes, you need to make a tax adjustment to disallow a proportion of your running costs that relate to that private use.
In disallowing a proportion of running costs, you must adjust your claims for capital allowances too.
Speeding, parking and congestion charge fines are not tax-deductible.
Special rules are provided for the costs of the vehicle whether it is purchased outright, finances or leased.
You can claim a mileage allowance instead of claiming your actual expenditure and capital allowances.
The allowance is 45p for the first 10,0000 miles in any tax year and 25p thereafter. This resets each tax year.
The allowance is only to cover business journeys not personal journeys – business journeys do not include travelling from your home to your place of business, unless your home is your permanent base of the business or your business is one where you travel a lot.
Can I claim VAT?
Yes, VAT can be reclaimed for motor expenses subject to certain restrictions for private use.
Whichever method of claiming you use; you will need to keep records – actual receipts for the expenses incurred for the former and a mileage log for the latter.
Subsistence is the food and drink you consume paid for by the business. It can also be the cost of accommodation and associated costs.
Subsistence expenses can be claimed in conjunction with business travel and the taxpayer either:
- Is engaged in an ‘itinerant’ trade (this means travelling from place to place)
- Only travels to the destination occasionally and the journey is outside a normal pattern
This means you are not regularly going to a place – if this was the case this would be considered a place of work. So, staying away to work for an extended period of time would mean you cannot claim subsistence.
How much can I claim?
As long as the rules are met a claim for reasonable subsistence can be made:
- A claim is made on the basis of expenses actually incurred.
- HMRC expect receipts or evidence of expenditure to be retained.
Actual receipts for the expenses incurred for subsistence claims are required.
Can I claim VAT?
Yes, VAT can be reclaimed for subsistence.
Working from home
If you are self-employed and work from home, you can claim any costs that are wholly and exclusively incurred for business purposes.
Where you incur costs that are required for both business and personal purposes, you may claim a proportion of those costs.
For example, if you work from home, you may claim a proportion of the costs of running your home, such as light and heat, insurance, council tax, water rates, repairs, cleaning, rent and/or mortgage interest.
There is no set method of apportioning these other costs. It depends on what work is carried out at home. An element of judgement is needed but any amount claimed must be reasonable. The Tax Tribunal has the final say in deciding what is reasonable.
Alternatively, you can use HMRC standard fixed-rate allowance, but this is only £6 per week.
Be careful though
If you claim that you use a proportion of your home 100% of the time, then you will be liable to capital gains on that proportion when you sell the home.
You would think that all training cost are fully allowable, but this is not the case.
There are two main rules that apply in order to claim tax relief on the cost of training incurred to self-employed individuals:
- An expense must be incurred wholly and exclusively for the purposes of the trade, vocation or profession in order to qualify for tax relief.
- An expense will be disallowed if it is capital expenditure.
To decide if the expense is allowable, we must look at the nature of the training.
|Nature of Training||Tax Treatment|
|To learn a new skill or qualification
|To maintain work-related training and professional development
|To assist the business, but where there is personal benefit
Training employees for skills related to their work or job is generally allowable for tax.
Repairs and renewals
The tax treatment of repairing or renewing an asset generally follows the same rules used for the accounting treatment.
- Costs related to renewing or repairing an asset, even if it means substantially replacing it with modern materials and using modern techniques, tends to be a revenue expense.
- Costs designed to enhance, improve or change the nature of an asset tends to be a capital cost.
Even if the costs of improvements are deemed to be capital – tax reliefs may still be available via the capital allowances regime.
Employing Family Members
You can employ your spouse or other family members subject to certain conditions.
Wages must be equal to, or be above, the current National Minimum Wage (NMW).
HMRC may challenge the rate of remuneration paid to family members if they consider that the expense is not ‘wholly and exclusively incurred ‘ for the purposes of the business.
Ensure that remuneration paid is reasonable for the work undertaken on the ‘arm’s length principle’.
Employers’ National Insurance Contributions (NICs) stand at 13.8%. So, it may be cheaper to bring a spouse into the business as a partner so that profits can be shared.
Subject to certain rules you can pay minors to work in your business.
Entertaining clients, customers or third parties
This is disallowable for tax purposes. When a room is hired for an event and entertaining also takes place it can be possible to claim tax relief on the cost of the room.
Entertaining one’s self
The cost of entertaining yourself or members of your family is not deductible. It is excluded under the general principle of ‘wholly and exclusively’.
Where an employer entertains their staff, the cost is not treated as entertaining but must follow the rules for employee entertainment to avoid being a taxable benefit for the employee.
Be aware that HMRC will challenge any deduction if it considers that the primary motive for incurring a cost is private.
To avoid potential tax penalties, it is important to ensure that records are retained to demonstrate:
- Who was entertained
- What advantage this gave to the business
- Evidence of incurring the cost.
The general rule is that there is no tax relief given on the cost of making business gifts, as by default they are treated as Entertaining. There are a number of exceptions to this:
- A person can give away a promotional item provided the primary purpose is to advertise e.g., a free sample.
- Something worth less than £50 per annum with a visible advert on it as long as this is not to the same person.
- No relief is permitted for food, drink, tobacco or an exchangeable voucher.
How we can help
As you can see there are many different rules regarding what is, and what isn’t, allowable. We help you by staying up to date with the changes and making sure you are claiming for everything you are legally allowed to claim under self-assessment you can incur penalties for getting this wrong.