Allowable & Non Allowable Expenses - Self Employed
Allowable Expenses (also known as Deductible Expenses)
There are a long list of expenses which you will be able to deduct to arrive at your self employed income subject to income tax when filing your income tax self assessment return. These are called allowable deductions or tax deductions.
The most common expenses which you can deduct (regardless of business structure) include the following:
- Rent
- Utilities
- Rates
- Wages & Salaries
- Travel & Subsistence
- Staff entertainment
- Training & Education
- Advertising
- Stationary & Postage
- Website
- Stock f& Raw Materials
- Insurance
- Professional Fees (Accountants for example)
- Software Subscriptions
- Professional Subscriptions
- Printing & Ink
- Charitable Donations (non cash in form)
Dis-allowable Expenses (also known as Non Deductible Expenses)
What are non allowable expenses you may ask, well they generally are non business element of expenses being claimed for where the expense has a dual purpose (personal and business) or items which are always not allowable for tax purposes.
Items which are always not allowable for tax purposes (regardless of business structure type) include:
- Depreciation (a charge on capital assets held by the business)
- Client Entertaining Expenses
- Fines & Penalties (relating to breaking the law)
- Expenditure on Capital Assets (machinery, shelving, printers, laptops etc)
- Charitable Donations (if made in cash)
- Political Party Donations
An item which is specifically not allowed for those who are self employed (also known as sole traders) is the drawing of a salary from the business.
Even if an expense is one which falls under the deductible category, there are still considerations to be taken into account with regards to the wholly and exclusively expense test used by HMRC to determine it can be deducted in full, in part or not at all.
Wholly & Exclusively Rule
The wholly and exclusively rule is one used by HMRC to determine whether an expense is deductible or not for tax purposes.
S34 Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses prevent a taxpayer deducting expenditure in computing their trading profits unless it is incurred wholly and exclusively for the purposes of the trade, profession or vocation.
What does this rule mean in plain English? It means that expenditure which does have a dual purpose (your traveling to London for a few days to meet friends and attach on a customer visit to add a business element to the expense) is not deductible unless the dual purpose is incidental (you are traveling to London for a few days to attend an important business conference and meet friends who live in London one afternoon for lunch simply because you are there anyway).
Although tax law prohibits deduction of any dual purpose expense,in practice HMRC will allow deduction for the element of a dual purpose expense which was incurred wholly and exclusively for the purposes of trade. It allows this to be done based on a proportion of expense basis which could be based on:
- Number of hours worked (if working from home)
- Number of miles undertaken for business (driven in a vehicle used for private and business use)
- Floor area of work area (of a premises used for private and business use)
We will look at specific areas of tax laws in which there are complexities relating to this rule which, if self employed, you should be aware.
Business Cars
If you are self employed and use your car in order to conduct business (visiting clients or traveling to purchase stock) then you can claim a tax deduction for this for income tax reporting purposes. There are 2 ways you can do this and these are explained below:
(1) Actual Method
Under this method, you would claim actual costs incurred such as fuel, vehicle servicing, MOT and insurance. This would require you to have back up in the form of receipts.
In order to determine the proportion of the above costs to claim in tour income tax return, keep a detailed mileage log during the tax year in question which will allow you to ascertain what percentage of travel was business related.
If the vehicle is only used for business usage , all of the expenses mentioned will be deductible but generally in practice those who are self employed tend to use the same car for both personal and business use.
If you utilise this method, you will also be eligible to claim capital allowance on the car in question and this will generally be on a reducing balance basis. There is more information on this on the capital allowances section of our website.
(2) Simplified Method
Under this method, you can claim 45p per mile for the first 10`,000 miles of business travel in a tax year with any extra miles being claimed at 25p per mile.
It is very important that you maintain a mileage log in order to determine the millage related to business travel.
The mileage rates under the simpilfied method are intended to cover:
- Fuel costs
- Car insurance
- MOT
- Other repairs & maintenance
If you claim a deduction for car costs under the simplified method, you cannot then deduct for the actual costs incurred with regards to items incorporated within the mileage rates.
Using the simplified method also prevents you from claiming capital allowances on your vehicle - you can either claim mileage or capital allowances and not both.
Multiple Cars
If you have multiple cars in use for your business, you can use a mix of simplified and actual method across the cars as long as once a method is chosen for a vehicle it is adhered to consistently whilst .This means that you could have one care on which mileage is being claimed and another on which actual costs and capital allowances are being claimed.
Working From Home
For many small business owners, including many of our clients, a large proportion of your working day is conducted from home, it is therefore important to know which household expenses you can claim a proportion of as a business expense and how this is calculated.
If you are self-employed you can claim a proportion of your fixed and variable household expenses. Here are some examples of such expenses:
- Light and Heat (e.g. Gas / Electric/ Oil)
- Water
- Council Tax
- Buildings & Contents Insurance
- Rent (if you don`t own your home)
- Mortgage Interest (ensure you only include the interest element not capital repayment)
- Property Repairs (if the repair relates solely to a room that is used for your business then you can include the full cost, if it is a general household repair it needs to be apportioned as explained below. If the repair relates to a room only used personally then the cost should not be included)
- Cleaning costs
- Telephone
- Broadband
There are 2 methods which can be used to calculate a proportion of the above home expenses when arriving at your self employed income for income tax purposes and these are discussed below:
Simplified Method
This is a HMRC method which is also known as the flat rate method and gives a business owner a flat rate of household expenses to claim depending on the number of hours which they worked in a given month.
The rates are as follows:
- 25-50 hours: £10 per month
- 51-100 hours: £18 per month
- 101 hours or more: £26 per month
If the number of hours you work varies each month, you can dip in and out of the higher and lower allocations to come to your total annual amount.
The rates above are meant to cover all of the costs listed above with the exception of telephone and broadband. You will need to calculate the proportion of the actual telephone and broadband expense used for the purposes of your business if claiming the working from home expense using the simplified method.
Actual Method
This calculation is based on your actual running costs. HMRC say that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element (relating to you actually living there) – and the business element.
Therefore, it is worked out using two factors;
- the number of rooms in your house that are used for business purposes
- and the amount of the time you use those rooms for business purposes compared to their total use
You then divide your total household running costs by the number of rooms you use for business and the proportion of business use of each room.
There is a key point which you should be aware of if you are utilising only one specific room in your house for work purposes
Just remember that it’s not a good idea to use any part of your home 100% for business activities, because capital gains tax will then be due on the part you use solely for business if, and when, you sell your home. This will also open to you being liable to paying business rates as that dedicated area becomes a business premises.