If you work for yourself, there’s a strong chance you’re a sole trader. As a popular method of setting up a small business, sole traders make up almost 60 percent of all self-employed people in the UK.
It’s easy to see why, as the process of becoming a sole trader is a simple one, with significantly fewer complications than the alternatives, such as setting up a limited company.
Becoming a sole trader also brings many benefits, including tax relief on legitimate business expenses. This allows you to deduct business running costs from your income to arrive at a taxable profit – but claiming for this must be done correctly to keep your business compliant.
Here Joanne Harris, Technical Commercial Manager at Nixon Williams, an accountancy firm that works with sole traders, freelancers and contractors, details what expenses a sole trader can and should be claiming for.
What’s the difference between traditional accounting and cash basis?
A crucial part of running your business is accounting, and the first step is to consider whether you’re better off using traditional accounting or cash basis accounting.
Traditional accounting, or accrual accounting, relies on you recording income and expenses using the date you were invoiced or billed. Using this method, if you were to invoice a customer on 31 March 2021, the invoice would be recorded as part of the 2020 to 2021 tax year, even if the invoice isn’t paid until the following tax year.
Alternatively, cash basis allows you to work out your income and expenses for your annual self-assessment, which is often popular with sole traders. This method also allows small businesses to plan ahead, as you’ll only need to declare income when it comes in and expenses when they are paid out of the business.
Using the cash basis, you also won’t have to pay income tax at the end of the year on money that wasn’t received during your accounting period.
What can you claim for?
Once you’ve decided on your accounting method, you also need to know what you can claim for, as this ranges widely from travel, to uniform and training.
For lots of sole traders, travel expenses will be one of the most common occurrences on a self-assessment tax return. Generally, genuinely self-employed sole traders can claim expenses for:
- Vehicle insurance
- Repairs and servicing
- Hire charges
- Vehicle license fees
- Breakdown cover
- Train, bus, air and taxi fares
- Hotel rooms
- Meals on overnight business trips
However, you cannot claim for:
- Non-business driving or travel costs
- Travel between home and work
While the rules are clear on what you can claim for, you have a choice when it comes to claiming business mileage expenses. You can claim for full running costs, or use HMRC’s business mileage flat rates for the journeys you take.
When claiming for full running costs, this includes insurance, servicing and repairs, with a percentage taken off for any personal use of the vehicle. If you use flat rates, these are calculated at 45p per mile for the first 10,000 miles and 25p per mile above that.
The flat rates option is often used by sole traders, unless the vehicle is a specific tool of the business, such as a delivery van or motorbike for takeaways. In these circumstances, full running costs can be claimed with a potential percentage for personal use taken out.
If your business uses an office, you can claim office supplies as allowable expenses, as long as the expense will normally be used for less than two years. Examples of this include stationery, postage and printing costs.
Equipment used only for business purposes can also be classed as an expense, and items can include computers, phones, and software. If you do use these personally, bills can be apportioned to take this into account.
The day to day of operating an office falls within the rules too, meaning renting costs, utility bills and property insurance can be claimed for.
If the time comes to expand, you can’t claim when purchasing new premises, but any costs for repairs and maintenance can be included as expenses.
Working from home
Working from home has become the new normal, with more than half of the UK’s workforce now working remotely following the pandemic. This has in turn led to a rise in claims for tax deductions based on business use within a household.
If your address is named for residence and business, you can claim a proportion of costs for expenses such as utilities, mortgage interest, rent and broadband use. However, as some of these costs will include personal use, only business costs are eligible.
For sole traders, this means calculating the costs on a reasonable basis, which can be down by dividing bills by the number of rooms used for business purposes, or the amount of time spent working at home.
Growing your business
You may incur costs when it comes to promoting your business, especially when utilising marketing and advertising work.
While not all marketing methods can be claimed for, some of the most common choices for sole traders are included, such as:
- Advertising in newspapers or directories
- Bulk mail advertising (mailshots)
- Free samples
- Website costs
- Trade or professional journals
- Trade body or professional organisation membership, if related to your business
The following cannot be claimed for as an expense:
- Entertaining clients, suppliers and customers
- Event hospitality
- Payments to political parties
- Gym membership fees
- Donations to charity (sponsorship payments can be claimed for these)
Training and development
As you build your business skills, you may decide to invest in training courses to advance your knowledge and services. Training courses are recognised as an allowable business expense, qualifying you for tax relief if the course is related to the trade of the business and geared towards enhancing existing skills.
However, training that would help you take your sole trader business into a new marketplace will not be eligible for tax relief. For example, a plumber would be allowed to claim for a refresher course to understand the latest safety regulations, but couldn’t claim for classes to learn another language.
Take the right steps to keep your expenses correct
It is important to claim the expenses that you are able to as it will lower your tax liability and keep your business in the best possible position.
This is why it’s so important to claim properly, and for the right expenses, to avoid any queries or potential fines from HMRC. When it comes to claiming your expenses, take the time to consult an accounting expert to ensure your claims are accurate in line with business needs and costs.
More on sole trader accounts and limited company expenses.
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