Self-employed Expenses And Tax
Summary of Key Points
- The general rule is that business expenses are OK, but not personal ones.
- You need to identify the personal element of all expenses and ensure these are not claimed for tax purposes.
- There are strict tax rules on what motoring expenses are allowable.
- Most business entertaining is not allowable for VAT, income tax or corporation tax.
- The rules on capital expenditure are complex and this is an area usually best left to an accountant.
- There are complex rules on goodwill and like capital this is best left to an accountant.
If you are self-employed – as sole trader or in partnership – you pay tax on your taxable profits. Your taxable profits are sales less allowable expenses. This note sets out which common expenses are allowable and which are not. Note that the rules for limited companies, though similar, have a number of important differences not covered in this note.
The General Rule
If an expense has been “wholly and exclusively” incurred in pursuit of your business, it will normally be allowable. Personal expenditure will not be allowable, so it is better to operate a business bank account and keep business and personal expenses separate as much as possible.
- Direct costs of stock bought and used to make your sales.
- Gross wages and employer’s National Insurance of your staff.
- Sub-contractor costs.
- Costs of utilities which can be attributed to your business – as opposed to your personal use.
- Accountancy and most other professional fees.
- Motoring expenses which are in line with the approved rules in Motoring Expenses below.
- The costs of car hire providing the cost of the car new is under £12,000.
- Staff entertaining costs – for example the Christmas meal. See Entertaining below.
- Training, including training you need to maintain your qualification.
- Subscriptions for business purposes – for example to your trade body.
- Capital allowances in respect of the equipment you use in the business. See Capital below.
- Goodwill amortisation providing certain conditions are met. See Goodwill below.
- Subsistence costs if you are away on business and they are reasonable.
- The costs of writing off specific unpaid customer debts not paid.
- Interest and finance charges on business loans and overdrafts.
- Gifts of under £50 in value providing they are not food or drink or carrying prominent advertising.
- Repairs to your premises or plant which do not amount to an enhancement to the asset concerned.
- The costs of small value items of equipment can be expensed. “Small” might be under £500 in a small sole trader business but could be under £10,000 in the case of Vodafone. The policy on this should be stated in the accounts.
- Depreciation – because you’ll be claiming capital allowances instead.
- Goodwill amortisation which does not meet specific conditions.
- Motoring costs which are in excess of the allowed rates.
- Car leasing costs on the element of the car’s value above £12,000.
- The capital element of mortgage repayments and hire purchase finance.
- Non-staff entertaining except where you are entertaining foreign customers. See Entertaining below.
- Political donations.
- Goods taken from the business for your own use – HMRC will expect to see an element of this in certain types of business, for example restaurants.
- General provisions for bad debts not itemised by customer.
- Clothing even if there is some business use – unless it has a business logo on it.
- Travel from your home to your normal place of business.
- Training which amounts to an enhancement of your personal capital – for example, to qualify in your chosen vocation.
- The costs of non-business premises.
- The personal element of all utility bills.
- Professional fees in connection with work of a capital nature.
- Capital expenditure. This includes repairs which are not “like for like” but enhance the asset concerned.
The standard claiming rates are:
- 45 pence per mile for the first 10,000 miles in the year and
- 25 pence thereafter.
This covers most costs – fuel, road tax, insurance, repairs and so on. The main exclusions are financing costs and parking costs, these can be claimed separately. It often makes sense to use the alternative method which is:
- Identify your actual expenditure on all motoring costs.
- Identify the proportion of business use and claim for that part of the costs.
Whichever method you use, it is worth checking if making the switch is worth it for you, especially when you change vehicles.
Where a vehicle is used solely for business purposes, you can claim 100% of the invoiced costs – but be sure that there is absolutely no private use element as HMRC can be very pedantic about this. 99.5% is not good enough!
The VAT and tax treatment of entertaining costs seems unfair to a lot of people running small businesses – and it is! What could be more of a business expense than taking a customer or supplier out to lunch to discuss a new contract? In many other countries, most expenditure of this nature is allowed for VAT and income / corporation tax.
In the UK until November 2010, all non-staff entertainment was tax disallowable. Only that element which specifically relates to subsistence for your staff (including directors) can be claimed. And the annual Christmas party and other similar staff-only events are also OK.
If your staff parties include their partners, though, beware. Only 50% of it is now allowable, the element relating to your staff. Note that the definition of “entertaining” is “any subsidised hospitality for non-employees” so is a wide one.
The European Courts are not all bad news! They have ruled that entertaining of foreign customers is allowable and this ruling is binding on all member states.
This is a potential minefield. If your business is one which involves a lot of capital spend – on property or machinery – then it’s probably a bad idea to attempt to do your own books:
- The definition of “capital” is complex and never-ending, based entirely on case law going back over 100 years.
- The rules on what capital allowances you can claim have changed a lot in the last 10 years, and seem to be constantly tinkered with in every Budget report.
The main thing to appreciate is that depreciation charged in the books gets taken out for the tax calculation, and replaced with “capital allowances”. There are a wide range of different depreciation policies your business can choose to adopt, but a very strict set of rules on what capital allowances it can claim – albeit those rules are constantly being tinkered with!
If you have bought your business from someone else – or transferred a business from a sole trade or partnership into a limited company or vice-versa – you may well have a goodwill asset on your balance sheet. This topic has been a highly controversial one over the past 20 years – both for the accounting treatment and the tax treatment.
Amortisation is the term used for writing off the cost of the goodwill, usually straight line at 20% per year. Like depreciation, this often has to be added back to profits in arriving at the tax charge for the year. Unlike depreciation if it gets added back there is no allowance to claim, it’s just a disallowed item.
There are some HMRC rules on this. The aim is to avoid the creation of artificial goodwill in a bid to either:
- Pay less tax in the year by having the amortisation charge, or
- In the case of a limited company, reduce the balance owing to the company on director’s loan accounts.
Like capital allowances, this aspect of your accounts is best left to a professional accountant.