Tax deductible expenses for the self-employed

This article was written by Steve Connington, Tax Consultant at Page Kirk. It was first published in November’s issue of The Nottingham Post’s Business Monthly.

By far the most common question I have been asked as a tax advisor over many years is ‘what expenses can I claim?’ so I thought it would be useful to detail some of the more common allowable expenses. This article covers the tax allowable expenses for the self-employed and not those for limited companies and employees.

I tend to categorise tax deductible expenses into those which are wholly allowable and do not generally involve any private (non- allowable) elements, and those which are less straightforward, involve some form of record keeping to support the claim, and tend to come under closer scrutiny by HMRC.

Examples of the first category of expenditure will include the following:

• Professional subscriptions – this will cover subscriptions to trade and professional journals and membership of organisations related to your business.
• Staff costs – as well as salaries and national insurance, this will also include training costs, agency fees, pension contributions and providing benefits in kind.
• Accountancy costs – the cost of preparing a personal income tax return must be excluded.
• Marketing and advertising costs – excluding costs of any entertaining of clients, customers or suppliers.
• Clothing – uniforms and protective clothing only, not everyday clothing.
• Stationery – including postage, printer ink and cartridges, paper, computer software licences and computer software used in the business for less than two years.
• Professional indemnity insurance.
• Interest and bank charges – the costs relating to the business transactions. Problems can arise where charges are incurred in financing personal expenditure.

Expenses claims which tend to come under closer scrutiny by HMRC include:

• Business travelling - recent cases determined before tax tribunals have made it more difficult to claim the cost of traveling from home to a place of business, even where the business records are kept at home and the person may genuinely work at home. If the ‘base of operations’ is elsewhere, the cost of travel between the home and that place will not be allowed. Examples of non-allowable travel are a milkman travelling from home to the milk dairy depot, and a market trader traveling from home to a regular market site. HMRC will allow the travelling costs if the home is the true base of operations and the person visits various clients or sites in different locations where none constitute a regular place of business. For example, a travelling salesman, or a bricklayer visiting various sites for a temporary purpose. HMRC will also allow the cost of travelling between two bases of operations, such as an IT consultant travelling between two offices on a business project.
• Use of home – a person who incurs additional expenditure conducting a business from home, whether the home is the base of operations or not, is entitled to a deduction for those additional costs. The costs will include gas, electricity, insurance, mortgage interest (not capital repayments), rent, council tax and water rates. It is then a case of calculating what proportion of those costs would be fair to claim against the business. The most common method is to work on the basis of the rooms in the house and the percentage of time a room is used for business. It is important to bear in mind that the exclusive use of a room in the home for business may result in the loss of the capital gains tax principle private residence exemption on that proportion of the property on a future sale. It is recommended that the room be used for both business and domestic use to avoid this potential pitfall.

In a move to reduce the administrative burden on small businesses, the 2013 budget introduced some fixed rate deductions for expenses, available to all unincorporated businesses from the year 2013/14. These deductions are available for expenditure on vehicles, use of home for business and private use of business premises. The deductions are designed to save the administrative burden of the business in keeping detailed records in support of claims. In many cases it will be beneficial to claim based on the actual costs incurred, but the simplified basis may be useful for small businesses, where costs are modest. Further information on these fixed rate expense deductions can be found at https://www.gov.uk/simpler-income-tax-simplified-expenses/overview

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