Claiming for utilities when you’re a sole trader

Running your own sole trader business inevitably creates costs, with many increasing regularly – utility bills included. As reported by BBC News, in October 2021, UK energy bills are set to rise significantly, which will mean…

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Running your own sole trader business inevitably creates costs, with many increasing regularly – utility bills included. As reported by BBC News, in October 2021, UK energy bills are set to rise significantly, which will mean typical gas and electricity customers will see their annual combined gas and electric costs increase by £139 to £1,277 a year.

Not only will this affect an estimated 15m households, including many home-based sole traders, but also many sole traders with commercial premises, who will also see their energy bills rise. Fortunately, if you’re a sole trader, utility costs can be claimed as allowable expenses, which helps to minimise your tax bills.

Wholly and exclusively for trade

When it comes to claiming allowable expenses, HMRC uses a very simple test. The cost or expense must be incurred “wholly and exclusively for the purposes of the trade”. You cannot claim for personal expenses – these are not allowable expenses.

Where a cost results from business and personal use, you can only claim for the business use proportion as an allowable expense. An obvious example would be an electricity or gas bill when you run your sole trader business from your home or operate a home-based office for your sole trader business. You can claim some – but not all – of the cost as an allowable expense.

Claiming utilities

Claiming for electricity and gas is simple if you have your own commercial premises. You simply tot up your electricity and gas bills over the tax year using your bank records or supplier bills and enter the total in your tax return. Job done.

Where utility bills mix business and personal use, you need to reliably and accurately work out the proportion of business use. So, for example, if you use one room in your five-roomed house for business, but only for a third of each day, divide your utility bill by five and then divide by three. This is the amount that you can justifiably claim for.

To make your life easier, alternatively, you can claim a flat rate amount under simplified expenses (you must work for 25 hours or more a month from home). Government website GOV.uk features an online tool that you can use to check if claiming simplified expenses would leave your sole trader business better off. The flat rate ranges from £10-£26 a month.

Allowable expenses: can you claim for water?

There is some confusion on this and some sources provide misleading guidance. According to HMRC, domestic property water rates are not allowable, because they would apply to the property whether or not the sole trader was working from home or not.

Moreover: “Water expenses can only be considered an allowable expense if the nature of the trade meant the sole trader was using more water and so incurring more expense as a result of the trade or profession.

“Increased use of water just because the sole trader is at home more is not likely to be allowable, because this is a domestic expense – the purpose of the water is not linked directly to the trade. However, if the trade/profession involved the use of water, a reasonable proportion of the expense may be allowable.”

Allowable expenses: what about broadband?

As explained on government website GOV.uk: “You may be able to claim a proportion of your costs for internet and telephone use”, as a long as you “find a reasonable method of dividing your costs, for example, by the number of rooms you use for business or the amount of time you spend working from home.” Alternatively, you could claim simplified expenses.

If you install broadband and a telephone line in commercial premises, then, as a sole trader, obviously, you can claim the full amount as an allowable expense, as long as you don’t live on the premises and the broadband isn’t also for personal use.

Allowable expenses: how to claim

Recording all business expenses when you pay them makes completing your Self Assessment tax return much simpler and quicker. And, you won’t forget any expenses for which you could otherwise claim.

When completing your Self Assessment tax return, you add up and enter all of your allowable expenses for the tax year, which is subtracted from your profits to find out your Income Tax liability. You don’t have to provide proof of your expenses, however, you should keep invoices and sales receipts safe, because HMRC can request them.

You must ensure that your financial records and tax returns are accurate. If your tax returns contain a mistake, HMRC can charge a penalty if the error is the result of a lack of reasonable care, deliberate or deliberate and you try to hide it. According to HMRC: “The more serious the reason, the higher the maximum penalty can be.”

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