If you are in business is your own right, buying and selling goods or services for profit, then you are a sole trader and need to report to HMRC to pay both tax and national insurance on those profits.
A Sole trader has an obligation to declare all trading income, gross before deductions. But tax is calculated on taxable trading profits i.e. after the deduction of allowable business expenses.
So what are allowable business expenses? The easy answer is expenses incurred because you are in business. But there is more to it than that
Allowable expense fall into three categories
- Costs incurred in running your business
- Costs incurred in servicing clients
- Costs in looking after your staff
Let’s start with setting up in business and look at all the things that you are doing because of business, and hence identify the costs you have that you can claim a deduction for.
You start with some planning
Costs of research, training, a computer to work on.
But where are you doing this – you need a desk, chair, mobile phone – what about rent or use of home to store these things
Then there is software, virus checkers, stationery, office decoration.
Maybe you need to arrange loans or finance
Don’t forget travel.
Now you know what you are going to do
You need to set out your wares. Is this a shop, a website, social media? Rent, rates, insurance, utilities, domain names, licences. Maybe trademarks and a logo.
You need to present your products or services, maybe get shop fittings or integrated selling software on your website. Maybe even purchase a franchise, or your own branding or patents.
How are potential clients going to find out about you? Where are you going to advertise? Sign writing, adverts, social media, networking, business cards. How are people going to contact you or find you? A telephone, e-mail address, signage.
Once you have got a client
What do you need to do to take them on? This could be health and safety, data protection or money laundering – you need to check them out. Have you the appropriate procedures or licences in place. Will you produce quotes – have you the tools.
If you can take them on, then what do they need to do to become your client? – Quote acceptant, Contracts, licences check, safety equipment etc. Have you got facilities for creating, or recording etc
What tools do you need? Training, certificates, ladder, software etc
Where do you need to be and how are you getting there? Travel and accommodation
How do they pay you? Do you need software to raise an invoice, will you take card payments, use online payment systems etc.
Finally – recording
All this needs recording and reporting – systems, bookkeepers, accountants etc
And then you need to pay taxes so budgeting, tax returns etc. maybe financial planning and insurance.
The first step was identifying what you are selling, so have you everything to be able do that job – tools, certificates, licences, login’s
What products or services are you selling? You may need to source, buy or create, transport, store, package, ship – the product itself and/or materials.
May be you need to do research, get samples, trial goods or services so you can appear professional once in front of the client.
There may be customs documents or licences to create or obtain or deliver. You may employ agents. There may be certification or checks by yourself or others – licences, authorisation etc.
On the job
What have you incurred as part of the specific job? Research, quotes, samples, travel, materials, subcontractors.
Have you had to incur costs to get this client? Commission, cash collection or selling fees
What are you using up? Consuming but not listing on your sale invoices – paper bags, sandpaper, fuel, manuals, delegate supplies.
What subsidiary costs have you incurred? Insurance, waste disposal, cleaning
Firstly you need to identity staff. This can include yourself, employees, agency workers and subcontractors. But it can also include family members who may work for you for free.
You are totally responsible for employees, providing a salary package including wages and benefits, but also being subject to employment rights and discrimination rules etc – hence insurance and advisors can be a very good idea.
You are a worker in your business but not an employee, so some of the following apply to you as a worker
All workers, subcontractors and employees are subject to health and safety, which is your responsibility – signs, training, certification, protective clothing
You are responsible for paying employees – they need paying a wage (minimum wages rules apply unless they are members of your family)
You are responsible for looking after yourself and employees – training, tools, protective clothing, insurance etc.
Most employees need to have a pension provided (under autoenrollment)
Employees are entitled to benefits including tea and coffee breaks etc
Employees are entitled to sick pay and paid holiday, funded by the employer
There are a huge range of benefits that you can give to staff, all of which are tax deductible for you as the employer but some of which are taxable on employees e.g. a company car.
The above is not an exhaustive list but just an indicator. If in doubt then do ask.
A receipt is the best way to show that the cost was incurred, what it was for and how much, but not the only way. Some costs are obvious as to what makes them a business expense, others may need some explanation.
Please note that entertaining is not tax deductible although considered a business expense.
Assets i.e. equipment that lasts some years, have special tax rules
Keeping records of business expenses is a must, they need to be kept for up to 7 years.
Collecting the information on a day to day basis so these records can be kept is the challenge, and for that we recommend a separate business dedicated bank account with a debit card you use for business purchases, but not personal purchases.
The basic rule for claiming expenses when a sole trader or partnership is that expenses must be reasonable. The more receipts the better to justify what you claim
However HMRC have offered us a second alternative by way of simplified expenses for some costs, that we may choose to claim without receipts – as long as we have some such expense.
HMRC would like you to keep a log of business trips and hence business mileage so you may apportion your vehicle costs between business and personal (if you remember to read the vehicle mileage at the end of the year too).
HMRC have offered us the following sums that may be claimed instead of keeping a record of all vehicle costs.
Cars & Vans – 45p per mile for first 10,000 miles in the tax year
– 25 per mile thereafter
Motorcycles – 24 per mile
Of course higher costs can be claimed but must then be evidenced in detail for your vehicle.
Use of home
If you work more than 25 hours a month at home, then you may choose to claim these simplified expense rates instead foe cording and apportioning your household bills
25 to 50 hours – £10 per month
51 to 100 hours – £18 per month
Over 101 hours – £26 per month
A third option that HMRC offer is to claim the £1,000 allowance instead of putting together any business expenses at all.
£1,000 is available in place of claiming expenses against rental income unless that rental income includes income from your employer
£1,000 is available in place of claiming sole trader expenses unless that income includes income from your employer
If you have any queries for your business expenses then do contact us to discuss.