The self-employed have numerous business expenses — however, some of the expenses are deductible to calculate the taxable profit on which tax is payable. These expenses are called allowable expenses.
Example:
Sales | £75,000 |
Allowable Expenses | £21,000 |
Taxable profit | £54,000 |
Tax is charged on the taxable profit.
The following explains what an allowable expense is for the self-employed. Different rules apply to a limited company.
Non-allowable expenses
Private expenditure is not an allowable expense.
Items that are used for both business and private purposes are only allowable to the extent that the item is used for business purposes. For example, if a mobile phone is used 50% for business purposes, 50% of the cost is an allowable expense.
You cannot claim expenses or capital allowances if you use the £1000 tax-free trading allowance. The £1000 allowance is a tax-free allowance for property and trading income. If you have both property and trading income, the £1000 allowance can be claimed for both income streams. The £1000 allowance will be discussed in a following feature.
A deduction is not allowable where traditional accounting is used (that is not simplified expenses nor the £1000 trading allowance) and a capital item is purchased. Capital items include equipment, machinery and vehicles.
Simplified expenses
The simplified expenses option avoids the need to make complicated calculations for deductions. Simplified expenses provide flat rates for vehicles, working from home and living on business premises.
Capital allowances
Where a capital item is purchased, a capital allowance is claimed rather than the full cost of the capital item. This is to spread the expense over a period of years, to reflect the use of capital item in the business.
For items that cost up to £1 million, a full deduction can be claimed as an Annual Investment Allowance (AIA). The AIA cannot be claimed on business cars, items owned for another reason before being used in the business or items given to the business. Writing down allowances should be claimed instead on these items. Writing down allowances are complex — professional advice should be sought to ensure these are claimed correctly.
Essentially, items that are purchased are grouped into “pools”. There are three types of pool:
- the main pool where a deduction of 18% can be claimed each year
- a special pool where a deduction of 6% can be claimed
- a single asset pool with a rate of 6% or 18%.
Most items of plant or machinery are placed in the 18% pool. The 6% pool is used for parts of buildings, items with a long life (over 25 years) and cars with CO2 emissions over a certain threshold.
A 100% allowance can be claimed for certain specified items. This includes electric cars and cars and goods vehicles with zero CO2 emissions, gas refuelling stations, equipment for electric charging points and plant and machinery in Freeports or Investment Zones.
However, a sole trader or partnership with an income of £150,000 or less can use a simpler system — the cash basis. Where a cash basis is used, income and expenses are only accounted for when income is received and where expenses are paid. It may not be suitable for complex businesses or where finance is needed and the bank or finance company wants to see traditional accounts. Allowable expenses include the day-to-day costs of the business, the goods purchased for resale and capital items such as machinery, computers and vans. Only £500 of finance charges and interest can be claimed in tax years up to 2024. Also, losses cannot be offset against other trading income.
Changes have been introduced for the 2024/25 tax year (and onwards). From this year, the cash basis has become the default method for sole traders and partnerships, unless an election is made to use traditional accounting, or the cash basis cannot be used. The £150,000 threshold no longer applies and the £500 restriction on interest deductions has been removed. Furthermore, any losses can now be offset against any other trading income.
Allowable expenses
Allowable expenses include office costs, travel, clothing, staff, goods for resale, financial costs, property expenses, advertising and training.
Office costs
Items such as stationery, rent, computer software, power and insurance, that are bought with an expected life of less than two years, are allowable in full. Longer life items are allowable if cash accounting is available and used, otherwise capital allowances can be claimed.
Car, van and travel expenses
Allowable expenses include vehicle insurance, repairs and servicing, fuel, parking, hire costs, breakdown cover, bus, air and train fares, hotel costs and subsistence on business trips. Fines, non-business driving expenses and travel between home and work are not allowable. A capital allowance should be claimed where a car or other business vehicle is purchased.
Clothing
The cost of everyday clothing cannot be claimed, even if worn in the course of the business. Uniforms, protective clothing and costumes for entertainers are allowable.
Staff costs
Staff costs are allowable but carers or domestic help is not allowable.
Goods for resale
Goods bought for resale, raw materials and the cost of producing goods are allowable. Goods and materials bought for private use are not allowable. Depreciation of equipment is not allowable but the cost may be allowable as a capital allowance and the cost may be deductible under the cash accounting scheme.
Legal and financial expenses
Costs for legal, accountancy, architects or surveyors’ fees and professional indemnity insurance premiums are allowable. Finance costs and interest are allowable deductions. The legal costs for buying property or machinery are claimable as capital allowances if traditional accounting is used but claimable if cash accounting is used. Fines are not claimable.
Marketing and subscription costs
Allowable expenses include advertising costs, free samples, website expenditure, the cost of trade and professional journals and trade or professional body membership fees if related to the business. Non-allowable expenses include payments to political parties, gym memberships, donations to charities (but sponsorship is allowable), event hospitality and entertaining clients or suppliers.
Training costs
Allowable expenditure includes training to improve skills, updates of knowledge, improving skills to support the business. Non-allowable are expenses to start a new business or to expand into new areas of business.
Claiming allowable expenses
Records, receipts and invoices need to be maintained to support any claim for allowable expenses. The total of allowable expenses can be claimed on a self-assessment tax return. Whilst proof of expenditure does not need to be submitted with the return, it should be retained in case of a query from HMRC.
To find out more about how this will affect your company and employees please contact your KKVMS advisor.