Allowable Expenses as a Sole Trader
Allowable expenses as a sole trader can be confusing. If you are a sole trader, your business will have a variety of running costs. As long as these are allowable expenses, you are able to deduct some of these costs to work out your taxable profit. For example, if your turnover is £20,000 and you claim £10,000 in allowable expenses, you will only pay tax on the remaining £10,000 which is known as your taxable profit. This will appear on your Self Assessment Tax Return.
This Article outlines:
- What is a Sole Trader
- What is an allowable expense
- What happens if you purchase something personally through the business
Sole Trader Detail
Before understanding what a sole trader can claim for as an allowable expense, we must examine what a sole trader is including any implications on the individual.
A sole trader Is where one individual run’s and owns the entire business. The sole trader is one in the same with the business and keeps all the profits after taxes. A sole trader is required to submit a self-assessment tax return each year to declare the profits and pay any tax liabilities that become due.
Sole traders, as they are one and the same as the business will be liable personally for all business liabilities.
To learn more about other business types available Click Here
What is an allowable expense
Allowable expenses that can be claimed must be wholly, exclusively and necessary for business purposes. There are some exceptions to this where only 50% of the expenses should be claimed as only 50% of the item was used for business purposes. An example of this might be using a vehicle for both business and personal purposes.
Examples of what can be claimed for are as follows:
- Office costs
- Stationary, internet and phone bills
- Clothing expenses but these must be branded with your company logo
- Staff costs for example salaries or subcontractor payments
- Purchases of stock or raw materials
- Financial costs, examples include insurance or bank charges
- Costs of business premises including heating, lighting, business rates
- Advertising or marketing
- Website costs
- Training costs related to the business
Please note however, if as a sole trader you use your £1000 tax free trading allowance you cannot claim any expenses.
Costs you can claim as capital allowances
When using traditional accounting, you can claim capital allowances when items are purchased to keep and use within the business. These could include:
- Equipment
- Machinery
- Business vehicles
Purchased for both business and personal reasons
You can only claim allowable expenses for the business cost element. For example, a mobile phone might cost a total of £100 per year. Of this only £70 was used for business purposes (internet, phone calls, text). Therefore only £70 can be claimed as an allowable expense.
Using your home as a work space may allow you to claim a proportion of things like:
- Heating
- Electricity
- Council Tax
- Mortgage interest or rent
- Internet and telephone use
When proportioning the costs, you must find a reasonable way of dividing these. For example, by the number of rooms you use for business or the amount of time you spend working from home.
Simplified Expenses
You can avoid using complex calculations to work out your business expenses by using simplified expenses. These provide a flat rate relief that can be used for:
- Vehicles
- Working from home
- Living on your business premises
Learn more on HMRC Click Here
By Mark Lawson
