Allowable Expenses for Sole Traders and Partnerships
If you are a sole trader or in a partnership, you have likely wondered which expenses you can claim against your income tax liability.
Different tax rules apply for different types of expenses. The underlying rule is that expenses must be ‘wholly and exclusively’ for the purpose of your business and evidence must be available should HMRC request it. In most cases it is clear which expenses are allowable but not always. We have included guidance to some common expenses below.
The cost of dedicated business premises e.g. rent, rates, heating and cleaning are all allowable expenses.
Working from home – There are two potential methods for calculating the business use of home. The easiest is by using a flat rate depending on the number of hours per month you work at home.
25-50 hours – £10,
51-100 hours – £18
101 hours or over – £26 per month.
The alternative method is to claim for the actual running costs of the property by apportioning the running costs on a ‘fair and reasonable’ basis between the private element and the business element.
Where you have used your own car for business purposes you can claim mileage. Allowance payments are set by HMRC, at 45p per mile for the first 10,000 miles and 25p per mile thereafter. Mileage claims must be backed up by detailed mileage logs which record the date of travel, total mileage covered and reason for the journey. An alternative method is is to calculate the proportion of the cars running costs in connection with business use. This will involve calculating the total running costs for the year and taking the percentage of miles which can be apportioned to business mileage. It is important to note that once a method is chosen it cannot be changed.
You can claim costs incurred for business trips including travel and accommodation. These costs can only be claimed where the trip is exclusively for business purposes. Where an overnight stay is required reasonable costs for meals, including lunches, can also be claimed.
Specialist clothing is allowable in certain circumstances. It must be is used for work and necessary, e.g. safety boots, hard hat and coveralls together with uniforms that clearly define the role of the individual. You cannot claim for clothing which could be classed as part of an everyday wardrobe. For example, this would include a dress purchased by a musician to perform on stage.
Equipment and Machinery
If you purchase new equipment or machinery in order that the business can carry out its work, it is likely that tax relief will fall under the annual investment allowance. This means that the full cost of these items would be deducted from profits before tax.
Advertising and Entertainment
Advertising in newspapers and website costs are allowable expenses. The costs of entertaining customers or suppliers are not an allowable expense.
Accountancy and Legal fees
Where the services of an accountant or solicitor are used in connection with the business these are generally allowable expenses. Costs that are incurred for tax disputes or fines for breaking the law are normally not allowable.
For all expenses it is important to keep records for at least 5 years after the 31st January submission deadline of the relevant tax year. Allowable expenses can be a complex area, please contact us to assist you in ensuring you comply with the requirements of HMRC.