For answers to any other questions with regards to your sole trader accounting, please contact us to book a free consultation.
There are various responsibilities that all self-employed individuals (often referred to as a sole traders) must take into serious consideration:
- You must keep an up to date record of all business income.
- You must be able to provide a receipt/invoice for income received.
- Expenses claimed must be reasonable and for business purposes, and an up to date record should be kept.
- Records must be kept for at least 5 years after the 31st January submission deadline of the relevant tax year. For example, your 2019-20 return is due online by 31st January 2021, you must keep your records until at least the end of January 2026.
- You must complete a tax return annually.
TAX RETURN OVERVIEW
A Self-Assessment Tax Return reports all your personal income, from all sources, from the 6th April to the 5th April, in order to calculate your total taxable income. The profit of the business is subject to tax, this is calculated by deducting all tax-deductible expenditure from your taxable income. Once all taxable allowances and reliefs have been considered, we can then assess the tax due to HMRC.
It is now compulsory to keep such records of income and expenditure as you go along, as HMRC has the right to inspect them they must be correct and up to date. Hence it is a good idea to get it right and log it down from the start.
A record of income is compulsory, but how you keep it is up to you e.g. invoice book, list of monies received etc.
HMRC will expect all income to be included as gross before deductions. And income legislation means income can be included as earned, whether invoiced or received or on a cash basis.
On investigation HMRC can review ALL your bank statements so do mark/ note non-business income, or they may think it needs taxing e.g. gifts, winnings, insurance claims etc.
BUSINESS BANK ACCOUNT
A separate bank account for business income is a great idea as it allows you to easily differentiate personal from business transactions, although this is not compulsory.
Cash is almost a dirty word with HMRC especially with regards to VAT so the less cash income the better. It is also best (but not compulsory) to bank all income intact i.e. before deduction of any expenses. If you need cash, then draw it separately. However, we understand this is not always possible and at the end of the day running your business as efficient as possible is always the most important factor.
Consecutive invoice numbering and recording of credits, bad debts is also recommended and compulsory if VAT registered. Also, as you are preparing a tax return, all your income will need to be noted (not just business income). So, you need to keep interest certificates etc. too.
WHAT EXPENSES CAN I CLAIM AS A SOLE TRADER OR A PARTNERSHIP?
The main rule on expenses is that they must be ‘wholly and exclusively’ for business purposes. This means would a reasonable person, in your trade/sector, incur such an expense that is business related. However, if you are ever unsure, we are only a phone call away.
When claiming business expenditure, the more evidence the better (i.e. receipts) and you MUST keep an ongoing record of what you are going to claim.
There is no comprehensive list of expenses but please see below for a summary of allowable expenditure under direct headings used by HMRC.
ACCOUNTANCY, LEGAL AND OTHER PROFESSIONAL FEES
Costs of getting professional help in the running and maintaining of your business.
- Solicitors fees for business work
- Professional Subscriptions
- Financial Advisors fees (if it includes business advice given)
- License/registration fees
ADVERTISING, AND BUSINESS ENTERTAINING
Any costs incurring in promoting your business, directly or indirectly.
- Social media/Google ads
- Promotional products/gifts with your name on (max value £50 each)
- Website costs
- Mailshot costs
- Networking events/clubs
- Sponsorship – race night, newssheets etc.
- Donations – raffle prizes (should be local or small)
- BANK, CREDIT CARD AND OTHER FINANCIAL CHARGES
- Costs of getting loans, running bank accounts, being paid etc.
- Overdraft arrangement fee
- Credit card membership fees
- PayPal fees
- Fees charged for collection of income via credit/debit card
- eBay charges
If you have a separate broadband contract for your business, then the whole cost will be an allowable expense. However, if you use your home broadband for both business and personal then you can only claim for the business use percentage. An estimate of business and personal use must be taken and can be included.
HOME USE AS OFFICE
If you work from home you can claim a proportion of your electric, gas, water, council tax, insurance and mortgage interest or rent. If you are lucky enough to have a cleaner you can also claim the business proportion of their costs. The amount to claim is based on the amount of rooms in your house used for business purposes and the amount of time working from home.
A proportion of your own home costs is allowed – both fixed costs (mortgage interest, rent, council tax, insurance, broadband) and variable costs (gas, electric, cleaning). Up to £6 per week needs no backup; but over this, and you should have detailed calculations for apportionment, as well as copies of bills to substantiate costs.
CAR, VAN EXPENSES
Cost of running business vehicles – bought for the purposes of the business.
Costs for vehicles used both for the business and personally, will need apportioning.
If you have access to a second vehicle (i.e. car) for personal use, then you may be able to have all your business vehicle costs. However, it is usual to apportion costs between business and personal use. (If you have any personal use then 100% is wrong).
The official method of such apportionment is mileage, but it is rare for someone to keep all mileage records both business and personal use. A reasonable estimate is therefore usually acceptable.
Costs are usually:
- Road Fund License
- Repairs and servicing
- Cleaning and accessories
- Vehicle leasing payments (but not HP payments)
- Speeding and parking fines are not allowed!
You do not have to put any vehicle costs though; you could choose the mileage alternative instead as this is quite often the most tax efficient route.
You can get tax relief on some charitable donations. However, these are not to be included as a business expense, they are taken into account separately in your tax return.
Generally clothing is not an allowable expense. However, there are a few exceptions. If you must wear a uniform or costume as part of your business, then these can be claimed. Clothing which has a logo is also an allowable expense. Protective clothing (such as safety helmet, high vis jacket, steel toe cap boots, aprons, etc.) can also be claimed as an expense.
COMPUTER EQUIPMENT, CONSUMABLE AND SOFTWARE
Computer Equipment will not be classed as an expense but will be classed as an asset and you can claim capital allowances for the costs. You can also claim capital allowances for secondhand equipment and equipment you owned personally then brought into the business. If you use the equipment for personal purposes as well, then only the business percentage can be claimed. Software and consumables are classed as an expense, and only the business percentage of the these can be claimed if there is any personal use.
COST OF GOODS BOUGHT FOR RESALE
These are any costs recharged on to the client either directly or indirectly.
- The product itself
- Parts that make it up the product
- Work subcontracted to others who may have done the job in your stead
OR GOODS USED
Any costs incurred because you did work for the client, but which are not recharged.
- Purchase of samples or brochures
- Consumables, for tools etc.
- Tendering costs
- Franchise fees
Entertaining clients – unfortunately, you cannot claim any expense for entertaining clients.
Entertaining employees – this is allowable for tax relief, but only in certain circumstances. To ensure it is a qualifying event and not a taxable benefit for your staff it must be an annual event (i.e. Christmas party), open to all staff, and cost less than £150 per guest present.
FOOD AND DRINK
Food and drink have always been a tricky one, as HMRC argue you need food and drink to live, and, therefore, it is not an allowable expense. However, there are a few occasions when you can claim the costs as an expense.
At your home or office – if you don’t have any staff then you can’t claim the cost of food and drink you buy for when you are working at home or in your usual office. If you do have employees, you can claim the cost of basic food and drink for them (and free meals at a canteen) – if they are available to all staff.
While travelling – you are only able to claim for food and drink when making a journey outside of your normal working pattern, or for when you are staying away from home overnight for business purposes.
Generally, furniture cannot be claimed as an expense, but will be classed as a capital asset and capital allowances can be claimed. Furniture includes your desk, chair, filing cabinet, etc., and must solely be used for business purposes (i.e. if you work from your dining room table you can’t claim the cost of your table and chairs!).
Gifts to employees – you can make a gift of goods and services of less than £50 to employees but it cannot be readily convertible to cash (no premium bonds!).
Gifts to anyone else – as long as the gift is prominently marked with your business’ name or logo and isn’t food, drink, tobacco or vouchers, and costs less than £50 per recipient then you can claim the cost as an expense.
Policies that are solely for business purposes can be claimed. Medical Insurance is not classed as a business expense.
INTEREST ON BANK OR OTHER LOANS
Allowability of interest depends on purpose/use of money/loan. Security does not affect tax status. A business cannot get tax relief on loans in excess of the business capital, the money invested in the business.
Interest must also have been properly charged – you cannot include interest on money owed to yourself (you and the business are one and the same for tax purposes). e.g.
- Bank overdraft interest
- Loan interest
- HP interest
- Interest on overdue bills
- But not interest on credit card debt
If your customer will not be paying you, or they have ceased to trade you can include the amount of their invoice as an irrecoverable debt.
Anyone who wears a uniform (including clothing with a logo), or protective clothing for work can claim a fixed rate laundry expense from £60 – £165 per year. This covers the cost of washing the clothing.
If you use your own car or bicycle for business journeys, then you can either claim the business proportion of the total costs or claim mileage. Mileage covers the cost of fuel, running costs, and wear and tear. Business journeys include any trips for solely business purposes – seeing a customer or supplier, deliveries, going to meetings, going to the bank etc. You must keep a mileage log, and the rates are 45p for the first 10,000 miles and 25p thereafter and 5p per passenger.
NATIONAL INSURANCE – CLASS 2 AND 4
Your national insurance payments are not included as an expense as some people like to believe. Class 2 National Insurance is a flat weekly amount and Class 4 are paid as a % on your profits. Both are now paid as part of your tax return with effect from tax year 2015-16.
If you work from an office you can claim all the associated costs – electric, gas, water, rent, business rates, cleaning, etc.
Any contributions to your own personal pension are not classed as an expense. However, you will gain tax relief in a separate part of your tax return. If you pay contributions into a workplace pension scheme for your employees, then these are an allowable expense.
PHONE, STATIONARY AND OTHER OFFICE COSTS
Day to day administration costs for the business.
- Stationery – Paper and ink cartridges
- Mobile phone costs – business calls in excess of monthly costs where it is a personal contract
- Business line telephone costs (extra/separate line)
- Proportion of calls on home line
- E-mail account/charges
POSTAGE AND OTHER COURIER COSTS
You can claim any postage or courier costs as part of your business as an expense. This includes posting paperwork to customers and suppliers, delivering goods, etc.
You can claim subscriptions to professional bodies as an expense if membership gives you the right to use a qualification and you use the qualification in your business. For example, a nurse can claim the costs of subscriptions to the Nursing & Midwifery Council, teachers can claim their NUT costs, etc. You can also claim subscriptions to trade associations like your local Chamber of Commerce.
When an expense is incurred by an individual partner then this should be reimbursed from the partnership bank account (an expense claim) and the partnership then includes this in their tax return submission. This is the simplest way to deal with the expense.
Sole traders may have a separate business account to do this or they may not, but the criteria is not as strict as for partnerships.
RENT, RATES, POWER AND INSURANCE COSTS
Any costs incurred due to the business working from a particular location.
- Use of home charge – see Business Use of Home
- Storage facilities
- Business Rates
- Business Utility bills
- Business insurance (contents, PI etc.)
REPAIRS AND RENEWALS OF PROPERTY AND EQUIPMENT
Repairs and maintenance costs, including small items of equipment, not large enough to be considered assets.
- Protective clothing
- Office furniture under £250 per item
- Computer accessories – mouse, printer
- Software updates
- Equipment repairs
- Ambience costs e. what makes the work environment
- Fixtures and fittings – shelves
- Maintenance contracts
- Health and safety equipment – virus software, alarm
Any stationery you buy for your business can be claimed as an expense. This includes business cards, letter heads, pens, paper, printer ink, notebooks, files, folders etc. You can only include items purchased solely for business purposes. So, if there is any personal use then you cannot claim for the cost.
SUBCONTRACTORS – CONSTRUCTION INDUSTRY
Amounts paid to subcontractors under CIS.
TELEPHONE (LANDLINES & MOBILE)
If you have a separate contract for business only then the whole cost of the contract (line rental & calls) can be claimed as an expense. However, if you use your home phone or personal mobile for business use then only the business calls can be claimed for.
TRAINING & PERSONAL DEVELOPMENT
You are only able to claim training costs for courses that update your existing skills or expertise. You are not able to claim costs for any new skills or knowledge.
If the main purpose of your travel is for business purposes, and you can separate any personal costs, then you can claim the cost of your travel, including flights, train tickets, tolls, parking costs and hotel/accommodation.
This is any business travel costs other than a business vehicle.
- Public transport
- Mileage – 45p per mile for the first 10,000 miles and 25p thereafter
- Tolls & Congestion charges
- Hotel Bills
- Meals whilst travelling away – see Food & Drink
If you purchase your car or van through your company then it will be classed as a capital asset and you can claim capital allowances, based on the CO2 emissions. If the vehicle is purchased through the company then you would claim the actual running costs rather than mileage. If the vehicle is used for personal journeys too, then only the business proportion of the running costs can be claimed, and the capital allowances will also reflect the business use only.
WAGES, SALARIES AND OTHER STAFF COSTS
Amounts paid to staff. Any costs for yourself are not allowed. Work must have been done; staff must have been paid.
- Payroll taxes and National Insurance
- Staff benefits such as childcare vouchers
- Agency workers
The build of your website, hosting fees, domain fees, email hosting etc. are all allowable expenses.
OTHER BUSINESS EXPENSES
Any other business expenses you deem to be ‘reasonable’ and do not fall into the above categories.
Likely to be tax deductible if you own Jurassic park, only kidding dinosaurs do not really exist!
As you can see the list could become endless as different businesses have very different costs.
TALK TO A SOLE TRADER ACCOUNTING EXPERT
If you have any questions or require further clarification on any of the expenses you can or can’t claim as a sole trader or partnership, then please do not hesitate to contact us.