Self Employed Expenses and Tax Relief

Part of the appeal of being self-employed is having the option to claim allowable expenses before calculating the tax you need to pay.

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This reduces the amount of tax you need to pay as your tax is calculated based upon a lower amount of income than those who aren’t their own boss.

When self-employed individuals set up a limited company, they can take home even more of their income by claiming these expenses to reduce their corporation tax bill, leaving company profit left over to spend as they choose.

Expenses typically fall into three categories: Capital, Business and Private. Each has different implications for the amount of tax a company needs to pay.

Allowable capital expenses

While employees can only claim relief for expenses incurred in the service of their employer (eg, mileage and subsistence), many more business-related costs are allowable for companies, including assets.

This type of purchase is known as capital expenditure and can be defined as:

money spent by a business or organisation on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

The purchase of a company car or company van falls into this category, with this transaction being one of those we are most frequently asked about. The good news is tax relief is available to companies making these purchases, particularly if the vehicles are modern and efficient.

The most significant form of relief that can be claimed on these types of purchases is Capital allowance. As an example, if the vehicle meets the appropriate criteria for relief, the company could claim up to 100% of the cost of the purchase.

As capital expenses tend to be higher in value, these are likely to be taxed more heavily than other expenses.

Allowable business expenses

Allowable business expenses are where the bulk of tax savings may be made. If your expenses meet HMRC’s criteria of being wholly and exclusively for business use, these may be claimed back in full before calculating the tax you need to pay.

Accountancy, Legal and Professional Fees

Accountants, Solicitors and Architects fees are allowable expenses. Legal Fees also cover payments made for Professional Indemnity (PI) premiums.

Legal costs incurred as a result of purchasing property or large items of equipment are not allowable.

Fines and legal fees/costs incurred as a result of breaking the law or tax disputes are not allowable.

Advertising, Marketing and Entertainment Costs

Advertising and marketing costs across any media are allowable.

Entertainment costs including staff parties or corporate gifts are allowable, with annual parties being eligible for exemption if they cost less than £150 per head per annum.

Expenses incurred while entertaining clients, suppliers or customers are not allowable.

Bank, Credit Card and Financial Charges

Bank, Overdraft and Credit Card fees are allowable expenses, as are payments and interest paid on leasing agreements or alternative financial arrangements.

Allowable expenses Excluded expenses
  • Transaction fees
  • Leasing payments
  • Repayment or Capital portion of loan, overdraft or other finance payments

Car, Van and Travel Expenses

Expenses incurred while running, insuring and maintaining a vehicle are allowable. Travel-related costs, such as using public transport and accommodation, are allowable expenses.

Allowable expenses Excluded expenses
  • Vehicle Repairs, Insurance, Servicing, Fuel
  • Parking
  • Hire costs
  • Licencing costs
  • Roadside assistance memberships
  • Train, bus, taxi and air fares
  • Hotel costs and meals (travel requiring overnight stay.)
  • Private usage/proportion of any expense
  • Fines
  • Purchase costs of vehicles (these may be claimed under capital allowances)
  • Travel between your home and office
  • Non-Business travel meals

Communications, Stationery, Phone, Internet

Costs of running a connected office are allowed as expenses. This includes phone, internet, postage, stationery and more.

Allowable expenses Excluded expenses
  • Phone, Mobile, Internet
  • Email and fax running charges
  • Stationery and Postage
  • Printing costs
  • Small office equipment costs (ie, cheaper equipment with no resale or asset value. Computers may be claimed under capital allowances)
  • Computer software
  • Any proportion of private use of expenses
  • Purchase of new equipment which should be under capital allowances

Construction Industry – Payments to Subcontractors

If your business is in construction, pre-tax payments made to subcontractors are an allowable expense. Pre tax payments for any work done are allowable.

Cost of Goods – Stock

Stock costs, including raw materials for manufacturing are an allowable expense.

Allowable expenses Excluded expenses
  • Goods purchased in order to resell
  • Cost of raw materials used in manufacturing
  • Direct costs of producing goods
  • Private usage of any goods
  • Depreciation of any equipment

Insurance

Insurance policies taken out to cover items within the business are allowable expenditure.
Any insurance premium is allowable, however, recoverable costs are not allowable.

Interest on Loans

Interest paid on Bank and other business loans are allowable expenditure.

Repayment portions of loans (including mortgage interest) are not allowable.

Debt Write Offs

Any amounts which have been included in business turnover but have not been paid as they are not recoverable can be written off as an allowable expense.

Any amount already included in the turnover figure that cannot be recovered can be included in this category as a debt write-off.

Professional Journals

Payments made to professional agencies or clubs for subscriptions to journals are allowable expenditure.
Payments made to clubs, charities or political parties are not allowable.

Rent, Rates, Power, Water

Costs associated with the operation and maintenance of your business premises are allowable expenditure. This includes Rent, Rates and Utilities.

Allowable expenses Excluded expenses
  • Rent for business premises
  • Business and water rates
  • Electricity, heat, power
  • Insurance and Security
  • Home as Office costs (proportioned)
  • Non-business usage of premises (proportioned)
  • Costs of purchasing business premises

Uniform and Safety Wear

Expenses incurred while purchasing and maintaining uniforms bearing business identification are allowable, as are those for clothing worn for health and safety requirements.

Costs of any ordinary clothing or non-safety related clothing are not allowable.

Staff Costs

Costs associated with hiring and remunerating employees (including benefits) are allowable.

Any costs associated with hiring and remunerating staff are included, such as:

  • Salaries, wages, bonuses (pre-tax)
  • Staff pensions or benefits
  • Employment agency fees
  • Subcontracted labour cost
  • Employers National Insurance Contributions

Payments made to yourself are excluded as are your personal pension and national insurance payments. Any wages or dividends paid to yourself are not allowable.

Paid to yourself or private spending with no element of business use.

Allowable private expenses

Private expenses are the least likely to be allowable of these three types of expenditure as they do not meet meet HMRC’s criteria of being wholly and exclusively for business use.

In some scenarios, a proportion of the expense can be claimed, however, this may be disputed by HMRC if there is no clear link between the expense and its business use.

One common mistake self-employed individuals make is attempting to claim for fuel used to commute to their place of work. While relief is available for journeys that are clearly for business purposes – including travelling to a business meeting or delivering a package on behalf of your company, it will not be awarded for any private use.

How we can help

A significant number of company expenses are allowable, however, knowing exactly what you can claim is often unclear and completing your tax return can be a confusing process.

Having an accountant to advise exactly how much tax you need to pay and what you’ll have left over to use for your company will help avoid any confusion or unpleasant tax bills. Our accountants are experienced in guiding self-employed individuals through the company formation process and helping identify the allowable expenses they can claim.

Cobia Accounting specialise in fixed monthly rate accounting services and tax advice for sole-traders, contractors and small businesses. Our friendly and flexible team of accountants are experienced in reducing tax bills, so you’ll have more left over to invest in growing your company. To learn more about how we can help, contact us today.