A guide to self employed expenses
If you're self-employed, you claim tax back on business expenses. Finance journalist Steve Sims explains what you need to know.
Thousands of workers are turning to self-employment according to the latest official figures.
Around 4.1million workers have gone out on their own and the number is rising by about 10,000 a month, says the Office of National Statistics (January 2016).
This includes contractors, freelancers and consultants, as well as top three jobs – driving taxis, and working in construction or as a carpenter.
However, self-employment comes with responsibilities too. For instance, if you go down this route you’ll need to keep financial records, file tax returns and deal with payroll, national insurance and VAT.
- Advantages of self employment
- What can I claim for being self-employed?
- The difference between capital expenditure & revenue expenditure
- What is revenue expenditure?
- Revenue allowance examples
- What is capital expenditure?
- Capital allowance examples
- Self-employed working at home
- Disallowable Expenses
The main attraction of self-employment is you do the work and keep all the profits – after paying tax.
There can often be a lot more flexibility. You can choose to work where and when you like, which is a big plus for young parents. It’s also comes in handy for older workers with pensions who can supplement their income while enjoying time off with their families.
And, of course, as you are your own boss you get to make all the decisions.
As a self-employed worker, your business will have running costs which you can offset against profits, providing they’re genuine business expenses.
How the expense is claimed depends on the type of spending:
- Revenue costs are day-to-day recurring expenses such as advertising, insurance or travel costs
- Capital costs are one-off expenses such as buying a vehicle, tools, computers or office furniture
Revenue costs are offset pound-for-pound against income during the tax year for when they are incurred. Capital costs are either written-down as a first-year allowance or a capital allowance across the item’s useful life.
One of the most important points about keeping financial records is understanding which business expenses you can claim as a self-employed worker and whether they are revenue or capital spending.
Tax rules are strict about how to offset capital expenses and revenue expenses in your self-employed accounts.
HM Revenue & Customs (HMRC) provides information about the most common self-employed business expenses online. The list doesn’t include every possible expense you could claim. Plus, the expenses you can claim will depend on what type of self-employed business you run.
The yardstick for claiming a business expense is the ‘wholly and exclusively test’.
The test has three parts:
- Was the money spent solely for the business, such as on insurance or advertising?
If so, deduct the whole amount as a revenue expense
- Was the money really personal spending, like meeting someone for lunch where business was discussed for a few minutes?
If so, do not include the expense in your accounts.
- Was the spending partly for business and partly private, like making business calls on your personal mobile phone?
If so, work out a fair amount to claim for the business use of the phone and only include that in your self-employed accounts
Read more about the wholly and exclusively rule in HMRC’s guidance for tax inspectors
Here’s a list of common business expenses for the self-employed:
- Office costs – everything you need to run your business from paperclips, pens and pencils to paper and envelopes
- Travel costs – you can claim the running costs of a car, motorcycle, van or other vehicle, such as fuel, insurance, the vehicle excise licence, repairs and servicing based on the number of miles you travel on business.
Keeping a mileage log detailing the date, time, start and finish place, distance travelled and purpose of each trip is a good way to track business mileage.
For claiming costs for mileage, you can:
- keep receipts for travel costs and claim a pro rata amount against the vehicle’s mileage
- claim HMRC’s flat rate mileage allowance.
For example, you travel 12,000 miles in a year and 6,000 miles are on business. You spend £4,000 on fuel and running costs.
Your travel claim is 50% of £4,000, which equals £2,000 as half the annual mileage is on business.
Alternatively, claim the flat rate as 6,000 miles x 45p, which equals £2,700. You can claim 45p a mile for the first 10,000 miles of business travel, then 25p a mile for any extra mileage.
Some self-employed workers can claim for specialist clothing necessary for work, such as uniforms with a logo, protective clothing and even stage costumes for performers.
The costs of everyday clothing are disallowed.
HMRC publishes a flat rate clothing and uniform expenses list for different trades
These cover PAYE, national insurance contributions, pensions and other costs of employing someone
Sometimes called costs of sale, this includes stock to sell on, raw materials you convert into goods to sell, and costs relating to producing goods.
Expenses for buying goods for personal use or to hold as investments are not allowed.
This category includes renting or buying business premises and working from home.
For renting or buying premises you can claim rent, rates, insurance and utility costs.
If you buy premises, the cost repaying a loan is disallowed, but you can claim interest on the repayments.
Home workers can also claim a wide range of expenses – see below self-employed and working from home.
Advertising / marketing
This covers the costs of running websites, printed marketing materials, giving away samples and advertising online and in print.
Depending on your business, examples include public and employer liability insurance, cover for buildings and equipment, insuring goods in transit, business interruption and professional indemnity policies.
If you employ staff, employer’s liability insurance is a legal requirement for your business.
Capital expenditure is spending on assets you need as a trader, such as vehicles, tools and equipment, computers and office furniture. The tax jargon for these assets is ‘plant and machinery’.
Each business has an annual investment allowance (AIA) each year to buy these assets.
From January 1, 2016, the AIA is £25,000 a year, but the threshold changes from time to time. The Chancellor announces any changes in the Budget.
For qualifying plant and machinery, the value is written off against taxable profits in the year when the asset was purchased.
For assets that do not qualify as plant and machinery, claim capital allowances instead. These allowances write-down a percentage of the value of the asset over a number of years.
Claim tax back on buying a car – claims for cars depend on the CO2 value of emissions. The standard rate is 18%, but this reduces to 8% if the emissions exceed 130g/km.
Claiming tax back on office furniture and a computer – if you buy a desk and chair for £500 and computer for £399 and they are wholly used for business, providing you have not already exceeded the £25,000 AIA for the year, you can claim the entire cost back in the tax year.
The claim is made by entering the amount in the AIA box on your tax return and reduces your taxable profits by £899.
HMRC provides a lot of information about working out home office costs online.
Tax claims depend on the time spent working at home, the space used for business purposes as the percentage of home running costs allocated to a business.
People working from home can claim a share of the fixed costs and running costs for the property, such as:
- Council Tax
- mortgage interest or rent
- internet and telephone
- repairs and maintenance
If you have a house with three bedrooms and two living rooms and two rooms are used for business, you need to:
- Add up the fixed and running costs, say this is £5,000 a year
- Work out the space you use for business – which is 40% (Five rooms x two rooms as a percentage)
- Work out how much time you spend a week working from home – for instance four hours x five days is 12% of the week (20 divided by 168 as a percentage – there are 168 hours in a week)
- Multiply A by C to apportion the costs to business space, which is £5,000 x 40% or £2,000
- Multiply D by C, which is £2,000 x 12% = £240 to give the home office claim for the year
- Do not claim entertainment costs, gym fees or donations to charity or political parties
- Some recent extravagant claims disallowed by HMRC include intimate body waxing and, the costs of keeping chocolate in a fridge overnight
Don’t forget to apply the wholly and exclusively test to every business expense and check whether the amount is revenue or capital.
Spend some time learning what you can and cannot claim as self-employed business expenses because you will save tax.
If your self-employed business turns over less than the VAT threshold in the year, regardless of whether you are registered for VAT, you can take advantage of the simplified expenses scheme offered by HMRC, which offers flat rates for claims.