- It's a question I get asked time and time again
as a self-employed business
that is a sole trader or partnership
that is not incorporated,
what expenses can you legitimately claim
through your business that gives you income tax
and national insurance relief?
In this video I'm gonna cover what do I mean
by tax deductible or allowable expenses?
How much is it worth to you and your business,
the wholly and exclusively principle,
common tax deductible expenses themselves,
HMRC simplified expense checker, recordkeeping,
and finally how to claim these expenses
on your self-assessment return.
Now, if you're in the thinking or planning stage
of starting as a self-employed business,
then go and watch my video
on sole trader versus limited company,
five benefits of each and how to decide.
A useful and informative watch that will definitely help you
make an informed decision as to which way to go.
So you're self-employed sole trader or partnership business
will incur expenses, essentially money
your business pays out to suppliers,
professionals, software providers and so on
in the ordinary course of your business.
So firstly, from a commercial point of view,
your business needs to incur these expenses
in order to practically keep it going,
to be able to provide whichever products or services
that you do in order to earn revenue,
that is money into your business.
And secondly, these expenses can either be tax allowable
or non-tax allowable.
There is this misguided assumption
that if you have to incur costs in a business,
you will automatically get tax relief on all of them,
but that is not the case for all types of expenses.
And that is where the concept of wholly and exclusively
is important for you to understand,
which I'll explain shortly.
Let's examine this with a simple example.
As I always make a point, that you need to know your numbers
and how material it is to you financially,
before perhaps expanding your time and energy
to go into more depth.
Ultimately, what is the value to you?
So let's assume
your self-employed sole trader business's accounting year
is from the 6th of April to the 5th of April,
which is very, very common indeed.
And you generated the following figures,
there's annual revenue of 80,000 pounds,
tax allowable expenses incurred of 30,000 pounds,
providing trading profits of 50,000 pounds.
As a result, your tax calculation looks as follows.
Income tax after deducting a personal allowance
of 12,570 pounds at 20% is 7,486 pounds.
Class 4 National Insurance for the 21/22 tax share
as an example is payable on any profits
between 9569 and 5270, so in this case, amounts to 3639.
For now, just to keep things simple,
I'm gonna ignore Class 2 National Insurance
and any other applicable allowances.
So your total tax and National Insurance bill
is 11,125 pounds, annual disposable income,
that is your take home pay is 38 in this example.
Now imagine if the 30,000 pounds of tax allowable expenses
was taken away as they no longer are classified
as tax deductible expenses,
then your declared profits increase to 80,000 pounds
and your tax and National Insurance bill
goes up to 23.
Annual disposable pay goes down to 26, 3.
To the delta, that's the difference,
is quite significant in this scenario.
As an average, for every one pound of expenses
your business incurs,
you can save anywhere between the amount shown on screen
of tax and national insurance as a decent guide,
but obviously it's dependent on the level of your profits
that you declare in a year.
So hopefully now, you can visualize by knowing your numbers,
how beneficial a legitimate claim for expenses can be
for your financial wealth.
But don't get things the wrong way around here.
Don't just go and incur expenses
for the sake of saving some tax and national insurance.
But if they are valid commercial expenses,
for example, to operate or enhance your business,
then a good understanding of the guidelines will assist you
at the point you need to decide
as to whether to incur a particular expense or not.
This is a really important principle
that is worth your understanding
as a self-employed business owner.
You see, there is no prescriptive list
that HMRC will publish as to what expenses are tax allowable
and even those that are not.
So it all comes down to whether
the expenses you are incurring are wholly and exclusively
for the purpose of your trade or business.
And the keywords here are wholly and exclusively.
So for example, one self-employed business could have spent,
say 10,000 pounds on clothing items,
and it is allowed as a tax allowable expense.
Is because it was incurred wholly and exclusively.
Whereas another business
could have done likewise in clothing items
and it is not tax allowable.
And there could be a few reasons for this.
For example,
the clothing could have had a duality of purpose
or it could have been everyday wear
as opposed to uniform costume or protective clothing,
thus under the wholly and exclusively principle,
rendering it not allowable for tax.
So you can go to more depth on this particular expense
in HMRC's business income manual, that's BIM37910,
where they set out the principle
and historical case law to support.
For this section, I put together a tiny and a handy download
for you to take away that lists out
all the most common tax allowable expenses
and also examples of expenses or circumstances
when it is unlikely your business expense
will be tax-allowable.
A link is in the description box below
where you can head over
and download this now, completely free.
A very useful tool HMRC provide
is a simplified expenses checker
for your self-employed business.
And the basic premise
is that for the following common allowable expenses,
that is business cost for vehicles,
so typically your vans, cars and other vehicles,
working from home and living on your business premises,
you can use flat rates to ease
the administrative burden of reporting.
By the way, living on your business premises relates
to businesses like guesthouses, bnbs,
where you actually live on your business premises.
So HMRC allows you to select between a flat rate
or use your actual expenses
if these are higher and more material.
You can head over to the tool and have a look
and the link is in the description box below.
I am in the process of producing
a separate more in-depth video on simplified expenses,
as it is a method that can drastically reduce your admin
and thus save you time, energy and pain.
So hit that notification bell to get an update
when I do release it very soon.
Now it goes without saying that sufficient record keeping
is paramount to evidence in your expenses.
And if your self-employed business is ever audited by HMRC
and it does happen, then you will definitely need
to show invoices, receipts,
and possibly even bank transactions
to prove tax deductible expenses you are claiming,
especially the material, higher numbered ones.
What I strongly recommend,
and if you're not already doing so
is to use a reputable piece of accounting software,
such as Xero or QuickBooks and an expense capture software
such as Xero's Hubdoc or even Receipt Bank.
Most receipts and invoices are now digital,
but if you do have paper receipts,
take a pic and get them uploaded as you go along.
So for your self-employed business,
the process of claiming tax relief on your expenses
is when you essentially file
your self-assessment tax return,
this is where it's all done.
And typically you'll do this at some point
from the end of the tax year in question
up until the 31st of January deadline for any tax share.
So in your self-assessment return,
there's a section called self-employment.
And if your turnover for the year
was more than 1,000 pounds,
then you need to declare your revenue
and allowable expenses.
So for you're allowable expenses,
you can either declare these as a single total value,
and then enter your total expenses
in the total allowable expenses box as shown on the screen,
or you can opt to declare your total allowable expenses
on a line-by-line basis,
ranging from car, van and travel expenses
all the way through to other allowable expenses.
From my own experience and with that of my own clients,
my team and I often opt
to complete this section line-by-line
and provide a little more transparency to HMRC.
We found statistically, it resulted in fewer compliance
and accuracy checks by HMRC.
If you want to go into more depth with self assessment,
including self-assessment for the self-employed,
then head over to my membership area,
The Accounting & Tax Academy,
where we have some great courses
that we'll break this down for you.
This is Tony Dhanjal for The Accounting & Tax Academy,
as always, thanks for tuning in.
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