Reducing your income tax by deducting expenses is a key part of your tax return, but what are allowable business expenses for sole traders?
As a sole trader, you pay income tax on any profit your business makes. You can, however, deduct allowable business expenses from this profit to reduce your income tax liability. In short, processing your expenses can lower your tax bill – but they must fall under the category of allowable expenses for sole traders.
To be classed as an allowable business expense, the expense must have been wholly and necessarily incurred for the business. For expenses that have a personal and private use, you can only claim the business portion and you need to take a fair and reasonable approach.
As with all your business accounting, you must keep receipts and accurate records for all expenses. These records should be kept for six years from the end of the related tax year.
We’ve highlighted the allowable and disallowable expenses in the following table but as with most tax matters, it isn’t always simple to work out what category your expenses fall under. We have therefore outlined details of some of the trickier to understand expenses below. If in doubt, always check with your bookkeeper or accountant.
If you would like to discuss your personal circumstances with us please feel free to get in touch.
Allowable business expenses for sole traders
Accommodation and subsistence when travelling for business
When travelling for business away from your home and normal place of work, you can claim for accommodation expenses. Also, any overnight meals will be allowable. Remember that you need to take a fair and reasonable approach with expenses – so staying at the Ritz and ordering the most expensive bottle of champagne might be questioned.
Office and working from home costs
You can claim for the office expenses that are used and needed for the day to day running of the business.
Allowable business expenses include:
Stationery
Postage
Phone and broadband
Rent
Utility bills
Insurance
Repairs and maintenance
If you use your home as your office, you can only claim for the business element. Or you can claim the working from home allowance of up to £26 a month (20/21 tax year) for household costs and you do not need to provide evidence for these expenses.
Professional fees
Accountancy and bookkeeping fees in relation to running the business, its everyday finances and year-end accounts are allowable. However, accountancy fees relating to your personal self-assessment tax return are not.
If legal fees are incurred in relation to the running of the business, they are allowable. If, however, fees are in relation to a capital expense (an asset) – for example legal fees for the purchase of a business premises – this will need to be claimed for through capital allowances.
Training courses
Training that is related to your current line of business and is intended to be a refresher is an allowable expense. If the training is designed to start a new business or even expand your current business into new areas, this is not an allowable expense.
Travel expenses
You can only claim travel and related expenses for the business element of the travel and only when away from your normal place of work.
Allowable business expenses include:
Train, bus, air and taxi fares
Fuel
Insurance
Repairs and servicing
Parking
Hotel rooms
Meals on overnight trips
If you use your car for both work and personal use, it’s worth considering simplified expenses for your vehicle.
Vehicle simplified expenses use a flat rate for your vehicle based on the number of miles travelled rather than working out the actual running cost of your vehicle. The flat rate per mile is 45p for the first 10,000 miles and 25p thereafter (23/24 tax year).
Uniform and safety clothing
Branded and safety uniforms are allowable expenses. However, clothes that have a dual purpose – for example a suit – are not allowable.
Disallowable business expenses for sole traders
There are certain expenses which, even though they are costs incurred as a result of the business, are disallowed from claiming against your sole trader profits.
Capital expenditure
Fixed assets such as business premises and equipment – in the main, any item that is usable for over 2 years such as a computer – are disallowable in terms of reducing your profit. Although they can be eligible for capital allowances.
The rules, however, are slightly different if you use cash basis accounting, some capital expenditure can be claimed as a revenue expense. Please speak to you bookkeeper or accountant if you are unsure.
Entertaining customers/clients
Although entertaining clients, customers and suppliers may be a legitimate business expense, HMRC does not classify this as an allowable business expense. Therefore entertaining expenses cannot be used to reduce your profit when calculating your tax liability.
Fines and penalties
HMRC disallow many fines and penalties as claimable expenses. This includes any HMRC fines or penalties as well as parking fines and penalties.
At Lava Sky Accounting we can manage your expenses for you. We offer sole trader bookkeeping and accounting packages as well as self-assessment preparation and submission. Please get in touch today to book your free consultation and see how we can help you.