When it comes to tax relief, sole trader freelancers are entitled to claim business expenses to reduce the tax paid on their self-employed earnings. Unfortunately, a large number of freelancers don’t always claim all that they are entitled to – and that’s largely thanks to the jargon and complexity surrounding tax.
If you’re a freelancer, you’re entitled to claim certain business expenses. From use of your home office to travel arrangements, there are a number of opportunities to lower your tax bill and focus on sustaining and growing your business.
So, in order to help highlight what cost savings you could be missing out on, we’re covering the expenses sure to help freelancers ‘make it’ here.
What types of expenses are there?
There are two types of expenses that you can claim in order to reduce your tax liability. Each of them relate to different assets and purchases.
- Revenue expenses – Unless specified as non-allowable or capital expenditure, business expenses can be used to reduce your tax. For a freelancer, this could be travel to client consultations or internet for your home office – all that’s required of you is to prove that the purchase is wholly for business use, and keep records of all such expenses.
- Capital allowances – This involves the purchase, creation or improvement of a business asset. If you buy any equipment, vehicle or machinery for the purpose of turning a profit, you can claim capital allowances. While the purchases included within capital allowance are typically larger and more relevant to bigger businesses, freelancers can still benefit from the tax relief.
In addition, freelancers will also incur private expenses – personal costs relating to your daily expenditure which do not contribute to your freelancing efforts. As they are non-allowable, none of these personal expenses can be offset against your self-employed income.
But don’t be disheartened – provided your expenditure is exclusively for business purposes, you should be able to claim it as a business expense or capital allowance.
What is classed as a business expense?
When you’re not based in an office, it’s hard to start seeing the items that you would otherwise purchase as expenses. If you’re a creative freelancer, the chances are you might just own a laptop and some stationery. But the pens you write with, paper you print on and postage you use to send documents to customers are all classed as office-related expenses.
Here are some other business expenses:
- Travel – Sometimes you need to meet a client in order to secure work, making journeys that aren’t within your normal commute. If you took a train, plane or car from Manchester to London, for example, you’ll be within your rights to claim for the fuel, tickets or airfare – even tunnel tolls.
Equipment – From telephones to the computers you use, equipment purchased wholly for business purposes is an allowable expense.
- Accommodation – Even hotel stays are eligible for business expenses provided you needed to stop over in order to fulfil your work commitments. While you’re away, you can claim the cost of subsistence as a business expense – including food and drink consumed while you’re away.
- Office costs – These can range from postage and stationery to telephone calls made from your mobile or landline. Remember, though, that the calls you make from home must be itemised. Additionally, landline rental costs can’t be recovered unless you have a specific line for business purposes.
Of course, your expenditure (and what you can subsequently claim for) depends on the nature of your work. If you’re a creative or digital expert, the chances are that being able to claim on some of the above costs is going to revolutionise the way you complete your Self Assessment.
What is classed as a capital allowance?
To put it simply, a capital allowance is an expenditure that businesses can claim against taxable profits under the Capital Allowances Act. Provided the item you’re purchasing has a long-term benefit for your business, in all likelihood it can be claimed as capital expenditure.
This route to tax relief is less specific than businesses expenses, making it harder to understand exactly what you’re entitled to claim for. You’re only allowed to claim for assets deemed to fall under the categories of ‘plant and machinery’, ‘equipment’ or ‘business vehicles’ such as cars, vans or lorries.
There are three types of capital allowance:
- Annual investment allowance (AIA) – This allows you to deduct the full value of an item used for business purposes. You would then claim a deduction the same year that the item is purchased.
- Writing down allowance – This enables you to deduct a percentage of the total value of an item.
- First-year allowance or enhanced capital allowance (ECA) – This allows deductions above the standard AIA amount for certain assets.
Typically, freelancers and sole traders claim capital allowances for vehicles or computers. However, if you work as a creative and make artwork as your trade, you may require an industry printer to deliver your designs. Said printer is an example of something that you can claim tax relief on, as it’s undeniably a business asset providing a long-term benefit.
If all that sounds too complicated, you could opt to run your business on a cash basis – that is, declare income when you receive it and record expenses when you spend. As long as your turnover is less than £150,000, then this may be a viable option. The cash basis simplifies how you claim your expenses by allowing you to treat capital expenditure in the same way you would any other business expense.
Focus on your passion with GoSimpleTax
Freelancers that are clued-up on allowable expenses are able to develop their service. No longer will they have to worry about covering their train fares or the cost of a replacement PC. Now they can build their operation up more easily with the breathing room provided by tax relief.
GoSimpleTax are on hand to assist you in claiming all of the deductions and credits you’re entitled to. Our Self Assessment service makes logging your expenses and submitting your returns easier. You’ll be able to reduce your tax bill and keep all your records online – not to mention entirely compliant with Making Tax Digital. Get the relief you’re eligible for and start your trial today.
Last updated on 8th August 2019.