If you’ve just set up yourself up as a sole trader or limited company, you’ll undoubtedly have a range of expenses that you’ll need to pay to keep your business up and running. A proportion of these expenses will be classified as ‘allowable expenses’, meaning that they’re tax deductible on the basis they’re incurred ‘wholly and exclusively’ for the business. You may wonder; “how does this work in practice?”. The benefit comes from these expenses being deducted from your turnover at your year end. This, in turn, reduces your taxable profit, reducing your tax liability. For instance, if you make £50,000 in sales and incur £10,000 of allowable expenses, you would only pay tax on the remaining £40,000.
Expenses claims of a limited co vs. a sole trader
Both can claim allowable expenses; the key thing to remember is that the expense is incurred ‘wholly and exclusively’ for the business. For limited companies, this is straightforward, as expenses are incurred in the name of the business, so often 100% is claimable e.g. a company water bill. However, sole traders are more likely to incur expenses with a dual element of business and personal usage. As such, HMRC advise that such expenses need to be apportioned into personal and business elements, then only the business element can be claimed. For example, a sole traders’ mobile phone bill for the year is £300. Of this, £180 were personal calls, so only £120 can be claimed as a business expense.
What expenses can I claim for that are allowable?
There are many running costs of a business that are allowable in the eyes of HMRC. Here are some of the more common expenses incurred by most businesses at some point or another:
- Mileage – covers the costs of running and maintaining a vehicle, such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT. For personal car usage, you can claim 45p for the first 10,000 business miles and subsequent miles at 25p in a tax year.
- Subsistence – £5/£10 per day can be claimed if you’re out of the house for 5/10 hours respectively (including travel)
- Home office work – £4 per day, but you must be able to prove lots of time is spent there for business purposes
- Business premises expenses – e.g. rent, utility bills, repairs & maintenance, but not buying a business premises
- Office expenses – e.g. phone bills, stationery, postage
- Legal and financial costs – e.g. accountancy fees, solicitors’ fees, insurances
In the run up to Christmas, you may want to check out the Annual Event Allowance. If you’re running an annual function, that’s open to all your employees, you’re entitled to £150 per head that is 100% allowable.
What expenses can’t I claim for?
Whilst it’s important to be aware of the expenses you can claim to help lower your tax bill, it’s equally important to know what you can’t claim for. In a nutshell, HMRC will not validate any claim that isn’t ‘wholly and exclusively’ for business purposes. Below are some examples where claims would be rejected:
- Ordinary commuting between your home and permanent place of work
- Entertaining clients, suppliers and customers
- Everyday clothing
- Training courses that help you start a new business or expand into a new area of business
I’ve incurred business expenses, but need help claiming them
If you’d like advice on which expenses you can (or can’t) claim for, or help with the ongoing admin of running your business, then you might want to consider whether you would benefit from a dedicated accountant. No matter the size of your business, an accountant will prove a valuable resource, taking the leg work out of searching for answers yourself, such as the topic discussed above. This will result in you spending less time scouring the internet, and more time focusing on the day-to-day operations to help your business thrive. Click here to find out more about our services.