Let's start going through the costs you can claim if you are a Sole Trader.
Office Costs
You can claim for the costs of running your office. This includes:
- Your phone and internet bills
- Postage and stationery
- Printing, including ink cartridges
- Computer software (where it's used for less than two years OR you are making regular payments for it)
- Rent for business premises (we will cover using your home as an office below)
- Utility bills
- Business and water rates
- Property insurance and security.
Travel Costs
You can claim the costs of your travel. You have a variety of options here.
If you are using a car, it will probably prove more beneficial for you to claim mileage which means you claim 45p per mile (25p after the first 10,000 miles) instead of claiming separately for insurance, repairs, and fuel.
If you use a bicycle you can claim 20p a mile.
On top of this, you can also claim for:
- Parking, motorway tolls, and congestion charges
- Hire charges - but this is limited if you are using a high CO2 emissions car. (if you normally claim the mileage rate, you must use that).
- Vehicles licence fees
- Breakdown cover
- Train, bus, air and taxi fares
- Hotel rooms
- Meals on overnight business trips
If you buy a car and choose to claim the various expenses separately rather than claiming mileage, you can claim "capital allowances" on the car (a set percentage of the cost each year). But how much you can claim depends on the CO2 emissions so you should get as environmentally friendly a car as possible to maximise what you can claim here.
Unfortunately, you cannot claim for parking fines (unless for an employee) or travel between home and work.
It is very important that whether you claim for the 45p mileage rate, or if you are claiming separately for fuel, insurance, repairs e.t.c, that you keep detailed records of all your journeys.
Subsistence
You are not normally allowed to claim for meals and drink, except in the case where you are travelling for business to somewhere you wouldn't normally travel to, i.e. you cannot claim meals at home or your ordinary place of work. It should be outside the normal pattern of where you go. You can claim for making visits to suppliers and clients (but not if eating with them), occasional on-site working or travel to and from events and training courses.
The expense must be reasonable and incurred as a direct result of being required to travel for your work.
A place is classed as an ordinary place of work if you spend more than 40% of your time working there or are expected to be there for at least 24 months. If you are a contractor and it's less than 24 months, it's still classed as your normal place of work and meals cannot be claimed for.
You can claim for a special meal with an employee, but not any meals with customers or clients.
Clothing
You cannot claim for normal business clothing such as a suit, however, there are some circumstances where you can claim for clothing. These are for:
- Uniforms
- Protective clothing needed for work e.g. high visibility jackets, safety boots
- Costumes for acting or entertaining.
Staff Costs
If you employ someone, you can claim all the costs for doing so, including:
- Salaries and bonuses (but not your own wages)
- Pensions
- Any benefits (but be careful because your employee will pay extra tax on these)
- Agency fees
- Subcontractors
- Employer's National Insurance
As a self-employed person or a partner, you cannot claim for drawings or salary for yourself (nor any interest you claim on money you put into the business).
Any salary paid to a family member must be at market rates - if you try to pay them over the normal pay rate for that job, you cannot claim it as an expense.
If you employ someone else, not just yourself, you are entitled to claim up to £3000 a year "Employment Allowance" towards the National Insurance you pay for them.
Costs of Sale
Often in a business, you will buy materials/ stock which you will then sell on to the customer at a profit, or you will use to make your own product which you sell to a customer. These materials/ stock are called "Costs of Sale."
You can claim all the costs for raw materials and stock, as well as any other costs directly involved in the making of those goods. However, it is important to note that if you take any of the products for your own personal use, you cannot claim for those.
Legal and Financial Costs
If you hire the services of an accountant, architect, surveyor or solicitor for business reasons, you can claim these expenses.
You can claim for any insurance policy for your business, as well as professional indemnity insurance.
You can claim for most financial costs such as:
- Bank, overdraft, and credit card charges
- Interest on bank and business loans
- Hire purchase interest
- Leasing payments
- Alternative finance payments e.g. Islamic finance.
- Royalties
You may also be able to claim for any bad debts where a customer is not going to pay you...as long as you are 100% sure they won't be paying you.
If you have any legal costs related to the buying of buildings or machinery, some of these can be claimed as capital allowances.
Marketing and Entertainment Costs
When it comes to advertising and marketing your business, most expenses can be claimed but there are a few important caveats.
The costs that can be claimed here are:
- Advertising
- Website Costs
- Free samples
- Entertaining/ Gifts to employees can be claimed.
You can claim for Christmas decorations as long as it is at an office away from your home.
You can claim for gifts to customers but only if they fulfil the following criteria:
- They cost less than £50 a year per person
- The gift is not food, drink, tobacco or vouchers and
- The gift includes an advert for your business on it
You CANNOT claim for entertaining clients, suppliers, subcontractors or customers. Nor can you claim for any event hospitality.
Subscriptions and Donations
You can claim for a subscription to a trade or professional association e.g. a membership fee of a professional organisation. This also includes for trade or professional journals. You cannot claim for your gym membership.
When it comes to making donations, the key thing to remember is that as a Sole Trader or a Partnership, there is no distinction between you as an individual and you as a business in law. Therefore any donation is treated as you, rather than the business, giving money. It is treated as your "drawings," and this means that there is no benefit to your business from the donation. You cannot claim it as a business expense.
There is one exception to this. You can claim it as a business expense if you meet two criteria:
• Donation is to a local charity (not a national one)
• Your business gets a direct benefit in some way e.g. your business name on some publicity.
Another tax-efficient option, if you do want to give something personally, is by doing so through the Gift Aid scheme (as long as you're earning enough to pay the tax that covers the tax relief), the charity is entitled to claim 25% tax relief on top of your personal donations. If you are a higher rate taxpayer, you can also claim some of this gift aid donation against your income tax bill.
It is also important to remember that donations don't need to be money, they could also be gifts of shares, land, or volunteering. Your employees can also give through a payroll giving scheme.
Working From Home
Many business owners work from home, at least some of the time, and therefore you are entitled to claim expenses for that.
The expenses you can claim include:
- Utilities such as heating and electric (If you run a home-based business that uses a lot of water e.g. car washing business, you can claim for water too)
- Council Tax
- Mortgage interest or rent
- Internet/ Telephone (these can be in your own name but only the business calls are claimable)
- Home repairs
Property Insurance and Security
Please note that you cannot claim the whole of these bills, but you can claim a proportion of these costs based on how many rooms you have in the house and how often they are used for business. Alternatively, you can choose to just use a basic flat rate depending on the number of hours you work at home:
Work 25-50 hours a month - £10/month
Work 51-100 hours a month - £18/ month
Work 101+ hours a month - £26/ month
It is also important to never designate an entire room only for business purposes as this would cause you to have to pay capital gains tax if you ever sold the home.
Capital Allowances
When you buy a more permanent object such as computers, cars or machinery, you can claim what is called "Capital Allowances." This is instead of claiming "Depreciation." There are different types of capital allowances depending on what is being claimed for and, in the case of cars, what their CO2 emissions are. In particular, all businesses can claim up to £200,000 for expenditure on things like machinery and equipment (but not cars.)
Other Expenses
If you have incurred any expenses related to your business, in the seven years prior to setting up your business, you can claim these as expenses for your business.
You can claim for training courses if the skills are needed for your business (but you cannot claim for training courses on starting a business or on expanding the business into new areas).
You can claim for an eye test for an employee where they have to use a computer, or one private health assessment/ health screening each year. You cannot claim for health insurance or gym membership.
If you decide to sell your business, as long as you have owned it for more than one year, you can qualify for Entrepreneurs Relief which means the tax rate is only 10%. If you are selling shares, and you have at least 5% shares in the company, and were an employee of the company for the 12 months prior, you can also claim Entrepreneurs Relief on the sale of these too.
If the business owns a building or machinery and wants to sell it, they will not have to pay tax on it provided the money is reinvested fully in a new building or machinery for the business.
If you gift a business asset to someone else such as a family member, you do not have to pay tax on it as long as you both claim gift relief. However, the person you gift it to will eventually have to pay that extra tax you would have paid, when they sell it.
In the unfortunate situation where your business makes a loss, you can claim that to offset the tax you would pay on future (or past profits).
In our next post, we will go over what expenses are claimable if you run a limited company rather than a sole trader or partnership business.
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