What can I claim on tax? A guide to self-employed expenses

Tax Claim

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    Like other businesses, self-employed business owners have a list of businesses expenses. Some of these expenses are deductible or allowable for tax purposes, and others are non-deductible or non-allowable.

    To know in detail; what comes under allowable or deductible expenses, let’s get inside the article.

    The article covers the following topics:
    What is a tax claim?
    What are allowable expenses?
    Costs you can claim as allowable expenses
    Simplified expenses
    How to claim?
    Self-Assessment and registration
    When can you do your Self-Assessment?
    Points of consideration

    What is a tax claim?

    A tax claim is a refund that you get if you pay too much tax. You can claim tax back if you paid too much on the following:

    • Current/previous salary
    • Pension payments
    • Life/Pension Annuity amount
    • Redundancy Payment
    • Self-assessment tax return
    • Savings/ PPI Interest
    • Foreign Income
    • UK income if living abroad
    • Fuel or work costs

    What are allowable expenses?

    You are not allowed to subtract all of your self-employed expenses. HMRC has a list of costs that you can include, collectively known as allowable expenses.

    A proper definition is to make sure that you only deduct expenses incurred wholly and exclusively for business purpose.

    For example, The business earns £25,000 in a tax year, but the allowable expensesadd up to £5,000. The taxable profit will be £20,000.

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    Costs you can claim as allowable expenses

    Allowable expenses include:

    • Office costs
    • Travel costs
    • Clothing expenses
    • Staff costs
    • Purchases you make to sell on
    • Financial costs
    • Costs of your business premises
    • Advertising and marketing costs
    • Training courses

    Office expenses:

    In case of office, property & equipment, you can claim expenses on items that are in use for less than two years like :

    ○ Stationery
    1. Phone, mobile, internet and fax bills
    2. Stationery
    3. Postage
    4. Cartridges
    5. Computer software

    ○ Rents, Rates, power & insurance costs
    1. Rent for business premises
    2. Business & Water rates
    3. Utility Bills
    4. Property Insurance
    5. Security
    6. Using your home as a part of the office

    You cannot claim expenses for buying building premises. Although, you can claim repairs and maintenance of business and equipment and depreciation.

    Equipment with business use like computers and printers can claim under either allowable expenses or capital allowance.

    Travel expenses:
    Some of the allowable business travel expenses are:

    • vehicle insurance
    • repairs and servicing
    • fuel
    • parking
    • hire charges
    • vehicle licence fees
    • breakdown cover
    • train, bus, air and taxi fares
    • hotel rooms
    • meals on overnight business trips

    You cannot claim for:

    ○ Non- business driving & travel costs
    ○ Fines
    ○ Travel between home and work

    If you go on a journey for business & personal reasons, you should be able to separate business cost. You can also claim for buying vehicles.

    Clothing expenses:
    There is no claim for everyday clothing, even if you wear it for work. Allowable business expenses are available for:

    • Uniforms, for example, personal trainers usually wear a uniform with a company logo.
    • Protective clothing
    • Costumes for actors

    Staff costs:
    Allowable expenses under staff costs are:

    • employee salaries
    • bonuses
    • pensions
    • benefits
    • agency fees
    • subcontractors
    • employer’s national insurance
    • training courses related to business.

    No claim is allowed for carers or domestic help.

    Re-selling goods:
    Raw materials purchased for re-selling are allowed as a deduction.

    You can claim for stock (goods for resale), raw materials and direct costs of production. You cannot claim for goods bought for private use.

    Legal and financial costs:
    Allowable expenses include accountancy, legal and other professional fees. You can claim for:

    • Hiring for accountants, surveyors and solicitors
    • Professional indemnity insurance costs
    • Directors and officers insurance

    You cannot claim fines for breaking the law.

    Banking and other charges  Business costs that come under claim are :
    1. Overdraft charges, credit card & other bank charges
    2. Interest on bank and business loans
    3. Hire purchase interest Leasing payments
    4. Alternative finance payments  
    Insurance policyYou can claim insurance policy like public liability insurance, professional indemnity and employer’s liability insurance.  
    Bad debtsYou can claim:  
    • In traditional accrual-based accounting, you can claim bad debts after you are sure not to recover them in future.
    • In cash basis accounting; you cannot claim because you have not received the money from debtors  

    You cannot claim:
    • debts not included in turnover
    • incorrectly calculated bad debts.  

    Marketing and subscriptions costs:
    You can claim marketing and advertising expenses like advertising in newspapers, bulk mail advertising, social media marketing, Facebooks ads, google ads, other paid media campaigns, free samples & website costs.

    The subscription costs of trade/ professional journals are also allowable.

    You cannot claim for:
    ○ Entertaining clients
    ○ Event hospitality
    ○ Payments to political parties
    ○ Gym membership fees

    Training courses:
    Business requires training that helps to improve the skills and knowledge of employees. Allowable expenses include costs of courses that are related to business.

    Capital allowances:
    In the case of traditional accounting, you can claim capital allowances if you buy something to keep in business like equipment, machinery and business vehicles.

    In cash accounting, if you buy a car for business, you can claim it as a capital allowance. All other items that you purchase & keep in business are to be claimed as allowable expenses.

    Mixed costs:
    If you use something both for personal & business reasons, you can claim allowable expenses for business costs.

    Total O2 mobile phone bill£56
    Less: Personal use(£26)
    Claimable business expense£30

    Work from home:
    In case if you work from home; you may be able to claim a portion of the following:

    ○ Heating
    ○ Electricity
    ○ Council Tax
    ○ Mortgage interest and rent
    ○ Internet and telephone use

    You can apply a reasonable method of dividing costs to arrive at a business-related cost.

    For example: If you have five rooms in your house; one of which you use as an office. The calculation will be:

    Yearly Bill£500  
    Room wise bill£100 (£500/5)    
    Day wise bill (In case if you worked only a day from home)£14.29 (£100/7)    

    Alternatively, you can claim a £6 per week allowance without the need for any bills.

    Simplified expenses

    You can avoid complex calculations by using simplified expenses. Simplified expenses are a way of calculating business expenses by flat rates.

    They are used by:
    ○ Sole traders and
    ○ Business Partnerships

    The flat rates are used for:
    ○ Vehicles
    ○ Working from home- £6 per week
    ○ Living on your business premises

    Simplified expenses are usually suitable for businesses with very low costs.

    How to claim?

    The process to claim the tax is as follows:

    • Firstly, keep records of all business expenses as proof.
    • Secondly, add allowable expenses and put the amount under self-assessment tax return.

    You do not need to send proof of expenses along with your tax return. They are to be kept if asked by HMRC.

    Check our guide on the UK Tax rates, tax thresholds, tax bands, and tax allowances for the 2021-22 and 2020-21 tax years.

    Self-Assessment and Registration

    It is a system HMRC uses to collect taxes. People and businesses have to file a tax return. You can file a tax return online or offline. A self-employed can use the following ways for registration:

    If you have not filed an online return beforeRegister online.  

    Check our guide on How to get a UTR number?  

    • You will receive a letter with Unique Taxpayer Reference (UTR) within ten days.  
    • You will receive another letter with an activation code.  
    • You can file a return online anytime before the deadline.  

    Check our guide on How to set up a Government Gateway Account?  
    If you have filed the return online beforeRe-register using form CWF1 if the work you plan to do now is different from what you did before.  
    If you had filed before but did not use the serviceCreate an account using UTR.  

    You can contact HMRC if you do not know your UTR.  
    Other ways• Fill form online  

    • Post to the HMRC  
    Check out our step by step guide to submit a Self Assessment Tax Return

    When can you do a Self-Assessment?

    The self-assessment tax return deadline for the year 2020-21 is 31 January 2022. You can file the return at any time after the start of the new tax year, i.e. on 6 April 2021.

    Points of consideration

    While filing a claim; make sure that you keep the following in mind:

    • Tax records should be the basis of calculating allowable expenses.
    • Do not miss any bill or receipt.
    • Have a transparent system of accounting. Either it’s traditional or cash basis, make sure calculations are transparent.
    • After completing the tax return, you get the option of a single figure for expenses or breakdown. If you opt for a single figure, make sure that expenses are accurate.
    • Keep the proof of purchase properly.
    • Use accounting software like Xero to keep track of all your business expenses

    Final thoughts

    Accuracy is the focus while calculating deductible expenses. Any mistake means you are claiming less than you are entitled to, and your tax refund claim will be less. Claiming more implies a risk of fines from HMRC.

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