Expenses explained in simple English
Let’s face it. Expenses can be really confusing, especially if you're just starting out. To start at the very top, every business has running costs, and some of these costs can be deducted from your taxable profit. This means that you have less profit which has to be taxed (yay).
When you work for yourself it can be hard to know what expenses you’re allowed to include. Perhaps it goes without saying, but you probably can’t deduct that new PS4 but can deduct anything that is an ‘allowable business expense’. Now that wonderfully indistinct phrase can sound a bit worrying, but we’ve broken down the main categories of expenses that a business might have with what is and isn’t allowed. Also any expenses have to have been incurred ‘wholly and exclusively’ for the purposes of the business to be allowed for tax purposes. So that’s the PS4 very definitely still out...unless you’re a professional games player, right?
A word of caution before we dive in. Whilst we’ve tried to cover as much as we can, this is not completely comprehensive. It's also been written with a sole trader in mind, so if you’re a limited company or in doubt about what to expense, check the HMRC guidance on how to calculate your taxable profits or contact your accountant if you have one. Or Google. There’s always Google.
- Phone, mobile and internet bills
- Printing (including printer ink and cartridges)
- Computer software your business uses for less than two years
- Using your home as an office (but you can only expense for the part used for business. See below for full info).
- Non-business or private use proportion of expenses
- Fuel (limits listed below)
- Vehicle insurance
- Hire charges
- Vehicle license fees
- Breakdown cover
- Train, bus, air and taxi fees
- Hotel rooms
- Meals on an overnight business trip
- Non-business driving or travel costs
- Travel between home and work
- Other meals
- Protective clothing needed for your work
- Costumes for actors/entertainers
- Everyday clothing eveng if you wear it for work
- Goods for resale (stock)
- Raw materials
- Direct costs from producing goods
- Cost of goods or normal selling price taken for private use
- Depreciation of equipment
- Property insurance
- Hiring of accountants, solicitors, surveyors and architects for business reasons
- Professional indemnity insurance premiums
- Bank, overdraft and credit card charges
- Interest on bank and business loans
- Hire purchase interest
- Leasing payments
- Alternative finance payments
- Repayment of the loans, overdraft or finance arrangements
- Legal costs of buying property
- Costs of settling tax disputes
- Fines for breaking the law
- Rent for busines premises
- Business rates
- Costs of buying the premises
- If you live on the busienss premises, expenses of any private part of the premises
- Advertising in newspapers or directories
- Bulk mail advertising (mailshots)
- Free samples
- Website costs
- Subscription to trade or professional journals
- Trade body or professional organisation membership if related to the business
- Entertaining clients, suppliers and customers
- Hospitality at events
- Payments to clubs, charities, political parties etc.
But I work from home - how the hell do I handle that?!
Ok so if you work from home there are a couple of categories listed about, like office/business premises that might be a bit more complicated. If you're working from home regularly (over 25 hours a month) you can claim a proportion of your household expenses such as heating, lighting, council tax, water rates and rent. They key here is that you can only claim a proportion. To make things simple, imagine your house had four rooms (excluding the kitchen and bathroom) and you use one room for partly business purposes (like the living room for example). That would mean you could claim up to a quarter of your household expenses.
A word to the wise, if you own the home you’re working from you need to be careful. In the future if you’d like to sell your home and you’ve used part of your house exclusively for business purposes, then a proportion of any profit made on the sale would become liable for tax. Normally, rooms aren’t used exclusively for business purposes so it’s not a problem. Who only uses their living room for business? Well, maybe that professional games player does...
But I hate proportions and maths, isn’t there an easier way?
Luckily for you there is. There’s always the option of using simplified expenses which allows you to claim household expenses using flat rate allowances. So a lot less maths already though it doesn’t include phone or internet expenses. You need to have worked from home at least 25 hours a month to be able to use this system.
For example, if you worked 30 hours from home for 10 months and then for 2 months you worked 60 hours it would work out at:
10 x £10 = £100
2 x £18 = £36
Total you can claim = £136
What about paying for fuel?
Just as with working from home you can either calculate actual costs of buying and running your vehicle for the business or use a flat rate through simplified expenses. If you’re using your vehicle for non-business use as well then a flat rate may well be far easier to use and calculate.
For example, imagine you’ve driven 11,000 business miles over the year.
10,000 miles x 45p = £4,500
1,000 miles x 25p = £250
Total you can claim = £4,750
So there you have it. What you can and can't expense in simple English. To claim these expenses when you file your tax return, make sure to keep records of all your business expenses as proof of your costs. It makes adding up all your allowable expenses for the tax year far easier and whilst you don’t need to send in proof of expenses to HMRC, you need to keep proof and records in case they ask. The trick is to always record your expenses as you go throughout the year to avoid any nasty surprises of not being able to find a big receipt later. Or just automate your invoices AND track your expenses with Albert. Couldn't be easier really.