What expenses can sole traders claim to reduce their tax bills?

In this launch episode, one of GoSimpleTax’s very own tax experts, Mike Parkes, runs through allowable expenses that sole traders can claim via Self Assessment to minimise their tax bills.  The Tax Tea Break with GoSimpleTax…

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Last Updated: 23rd March 2023

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In this launch episode, one of GoSimpleTax’s very own tax experts, Mike Parkes, runs through allowable expenses that sole traders can claim via Self Assessment to minimise their tax bills. 

The Tax Tea Break with GoSimpleTax podcast series is presented by leading small-business and tax content expert Mark Williams. It’s a brand new six-part series packed with tax tips and need-to-know information about tax that’s aimed at sole traders, private landlords, expat Brits and others who pay UK tax via Self Assessment.

All you have to do is bring some biscuits. 

The Tax Tea Break podcast is brought to you by GoSimpleTax – award-winning software that provides an easier way to complete and file your Self Assessment tax return. It comes with free support from GoSimpleTax’s very own Self Assessment experts, helping to ensure that your tax returns are mistake-free. Find out more by visiting www.gosimpletax.com and be sure to check out the GoSimpleTax blog, which is also packed with free tax and Self Assessment tips and information.

Transcript

Mark Williams: Hello, and welcome to the very first episode of a brand new podcast called Tax Tea Break with GoSimpleTax. It's a six part podcast series where I'll be speaking to tax and Self Assessment experts who offer free time and money saving tax tips for sole traders, private landlords, expats, and others who pay UK tax by our Self Assessment

Mark Williams: My name is Mark Williams and I'm your host. Hopefully you've made yourself a nice cuppa now each 20 minute episode we'll have its own subject. And in this, our first. We'll be talking about expenses. You can claim when you're self-employed and run your own sole trader business. There are about 3.2 million self-employed sole traders in the UK, and they make up about 56% of the total UK business population.

Mark Williams: They're the unsung heroes of the UK economy. And if you're listening, you're probably one of them. If so, you're wanna know whether you are claiming all of the tax expenses you're allowed to claim, especially with costs increasing so much across the board and sole trade of profits under pressure. But before we learn more about allowable expenses from today's guest expert, let's find out how GoSimpleTax could benefit you, if you pay tax by Self Assessment.

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Mark Williams: It's time now to introduce our expert Mike Parkes, who is the technical director of GoSimpleTax for most of Mike's 30 year career. He's worked in practice and for HMRC. So is a deep knowledge of small business tax, including sole trader allowable expenses. Welcome Mike.

Mike Parkes: Hi, thank you very much for having me.

Mark Williams: You're welcome. You're welcome. Okay. Now, as the name suggests allowable expenses or expenses that HMRC allows you to deduct from your profits before they work out your tax bill, claiming them has always been important, but with prices rising across the board at the moment, if you're a sole trader claiming all of your allowable expenses is arguably more important than ever, would you say?

Mike Parkes: Absolutely, yes.

Mark Williams: Why do you think then that so many sole traders fail to claim all of their allowable expenses? Is it just lack of knowledge? They don't know everything that they can claim. Is it poor expense management? Is it a bit of both?

Mike Parkes: I think it's a bit of both, to be honest with you. The key for me, I've been saying this for many, many years, but saving tax for sole trader is record keeping. If you don't know, you spend the money, you can't claim the expense on, on the tax return. Now the right expenses to claim come a bit of a minefield. So I would always have advice to, to make a note of everything you spend.

Mark Williams: Yeah.

Mike Parkes: Uh, cause you can always sort times towards the end of the year and you can actually physically claim it or not. But if you don't have a record of any expenditure, then you never go to claim it. Record keeping for me is key.

Mark Williams: I suppose it's a good habit to get into is regularly recording, maybe weekly or maybe even daily. So you write down your expenses, so you're less likely to lose track of them. And then you keep holding your sales receipts as well. So when you are working out your expenses at the end of the month, whenever it is, then you've got the proof there. If they're not on a, especially for cash purchases where you, you're not gonna have those records on a, on a, a credit.

Mike Parkes: Yeah, exactly. I mean, technology allows for record keeping has done done much easier and much more frequently. Now, many, many years ago, you used to write it in analysis book or ax D book, and you do that weekly, or, but now you can do it, be it on a spreadsheet or app. It's just a matter of minutes every time. Really?

Mark Williams: Yeah. So before we move on to specific allowable expenses, Just to explain, to be allowable, an expense must be wholly and exclusively for business.

Mark Williams: You, you can't claim for personal expenses?

Mike Parkes: You can't claim for anything that's personal, no, not at all. No. There are some crossovers, cause some expenses can have a personal, um, uh, business nature. Such as a mobile phone for example, but essentially it's got to be whole exclusive way for the business.

Mark Williams: Okay. We're gonna move on from mobile phones. So the cost of buying products, materials for sale, the things that you use to create the things that you sell, they're all allowable expenses. Aren't they but, what about payments to subcontractors and staff wages because sole traders can employ others.

Mike Parkes: Yeah, absolutely.

Mike Parkes: All those costs are allow, uh, expenses on the, on the tax return and, and should also, should always be included. It's not just the wages, if you have an employee it's a national insurance contributions, pension contributions you have to make, if you have an employee benefits, the cost of those would be, be claimable as.

Mark Williams: Yeah. Okay. And what about if I have commercial premises rent or say mortgage interest? If I'm buying those commercial premises rates, utility bills, insurance. All these overheads. Are they allowable?

Mike Parkes: Yeah, absolutely. Yes. Anything running with a commercial premise. So if you're, if you're renting a shop or a workspace, a unit for storing your gloves that you're reselling or costs related to that and associated with that will be allowable expenditure for the tax return.

Mark Williams: Right? Okay. And obviously in the UK, there's about 3 million people who run a business, start a business, or run a business from their home. If I'm one of them, if I'm running a business room from a spare room or, or my kitchen table at. What allowable expenses can I claim? And, and how do I work out? How much I can claim?

Mike Parkes: Well, there's two ways you can work this out. So there is something called simplified expenses, and that is basically based on the number of hours per month that you work at home. So HMRC, for example, if you work between 25 and 50 hours a month at home, you can claim a flat rate of 10 pound per month. So £120 for the year. If you're working more than 101 hours a month at home, then you can claim £26. The claim goes. Based on a number of hours. Alternatively, you can claim the actual costs associated to that workspace within the house. So that could be a proportion of the heat, the light, mortgage interest, the rates, etc just for that particular workspace.

Mike Parkes: Now it can be difficult to work out the workspace, but if it's a room in a house, it can be dedicated room, then it will be what proportionally that. So you've got six rooms in the house and one's used for business purposes, exclusively for business purposes. Then you could claim one six in theory, for the running costs.

Mike Parkes: If you don't have a dedicated room, you could do it on space and work. How much floor space out the total floor space. So you can get a little bit cumbersome, can get difficult to prove as well. But again, depends on how frequently you're working at home, how much space you've got at home for working, etc but certainly the flat rate.

Mike Parkes: You should certainly look at that anyway. Cause it's, it's an easy calculation.

Mark Williams: Yeah. So the flat rate is easier, but if you are operated the business at home for longer hours, more days probably claiming the actual costs is the way to go.

Mike Parkes: Yeah. If you, if you're an eBay seller, for example, and you've got a room full of stock, your spare bedrooms, full of stock and you working from the dining room table, it might be better to work out the actual costs than the, the flat rate costs.

Mike Parkes: You see, do you need to need to take a pragmatic view about

Mike Parkes: it really.

Mark Williams: Okay. And we've already mentioned, or you've already mentioned it, but the same rule then applies as regards proportion costs to things like mobile phones. It's a classic example. Someone starting a business would, would use their own personal phone perhaps for business calls.

Mike Parkes: Yeah.

Mark Williams: So you, you can only charge for the business, use proportion of the phone, can't you?

Mike Parkes: Correct. That's very difficult. These days to determine what that might be. If you're on the, if you make numbers of numerous phone calls. Obviously you can look through the call log and determine how many of those calls are for business.

Mike Parkes: How many for private that's quite easy to prove.

Mark Williams: Yeah.

Mike Parkes: If it's more database, then it is where it has to be more of a real, a best estimate. , it's gotta be an estimate you're comfortable with and you can comfortable that. Trying to prove that to HMRC should be asked the question without being reasonable.

Mark Williams: Yeah. Okay. As people listening might expect business related phone and broadband landline, phone and broadband costs. They're reliable. Stationary leaflets, postage stamps, computer software, printer, ink all those office costs. They they're allowable expenses.

Mike Parkes: Absolutely. Yeah

Mark Williams: yeah. But what, what about sort of more bigger, bigger purchases that you might might make if it was to buy a computer or a laptop?

Mark Williams: Or say if I was a tradesperson and buying a vehicle for use in the business, how do I claim for those costs?

Mike Parkes: It depends on how you are recording or declaring your income to HMRC so if you are declaring your income expenses on what they call a cash basis, i.e. You declare what money you earn in the year as, um, what money you spend in the year as opposed to the accruals basis or, or the invoice basis, which is essentially you declare you declare your income based on the value of the invoices raised, whether they, regardless of whether they've been paid or, and invoices received, regardless of whether you paid for your invoices or not. So you got a choice in which way, which way you do it. If, if you got on the cash basis and lots of people do cash bases, cause it's easy to understand.

Mike Parkes: Cause you physically have the money in, you physically paid the money out, which makes it easy to account. When it course the record keeping you can claim the costs of these. Now they, they will just go down business expenses for computers, etc but again, if there is mixed use, you only claim the business elements of that.

Mike Parkes: So if you do buy a laptop for home, but the kids use it for the homework. Again, you need to make an adjustment to reflect the, by the children are using it for the homework, etc. Is exactly the full amount. In terms of vehicles that's we claim the, uh, annual capital allowances and that can be, if it's a motor vehicle, there are many different facets to it.

Mike Parkes: But if essentially coming into it is a private use. Also the CO2 has an impact on the amount you can claim. So, yeah, it's recording all this information down you buy a vehicle what's the CO2 when did I buy it can I keep a mileage log so you can prove the mileage that you've done. Then you can claim the business element correctly, moving forward.

Mike Parkes: So, yeah, they can all be claimed.

Mark Williams: Okay. And then what about bank costs then? Mike loans, credit card fees and charges all are all of those allowable?

Mike Parkes: Yeah, certainly dedicated business bank account? Yes. Um, would all be chargeable? Yes. Any, any charges on business loans? Uh, credit card charges on business credit cards,

Mike Parkes: etc you got dedicated business account yet. The bank any charge again, the claim bit more difficult on use person account. You paying a monthly fee for the account. Aside from the costs, I would always recommend a separate business account. Anyway, it doesn't have to be a technical business account, but a second account for running your business through anyway is always a good idea,

Mark Williams: keeps it nice and organized.

Mark Williams: And then when it comes time to claim your expenses, the figures are there. You don't have to Wade through other figures

Mike Parkes: makes it much easier for, for doing that. And likewise, if there was a tax investigation or a HMRC were make an inquiry into tax which they can do randomly and for no other reason than.

Mike Parkes: Um, if you can supply them with a bank account, that's just got all the business related items in there. It's a bit tied for them as well.

Mark Williams: So advertising and other marketing costs, that's allowable. And you can claim for sort of trade magazine, subscriptions and membership fees of your, your trade body or a professional organisation.

Mark Williams: What about the fees that you pay to, uh, solicitor or an accountant? Are those allowable?

Mike Parkes: Accountants fees are, are allowable. Yes. Yes. And the main legal fees are also allowable as well.

Mark Williams: Well, that'd be good news to a lot of, uh, sole traders. If who, who did give, give over their bookkeeping to an accountant tax?

Mike Parkes: Absolutely. Yes. Yes. You'd include those costs in tax returns. Get tax relief on those. Yes. Yeah.

Mark Williams: Okay. So a major cost for many sole traders is travel and, and obviously fuel prices have gone through the roof in, in recent months as we all know. So what travel related costs can be claimed as an allowable expense?

Mike Parkes: If you're using public transport, traveling to and from appointments, etc. That's absolutely fine. Slightly have somewhere, any accommodation costs you travel to London. That's fine. Any food costs, subsistence costs related to all overnight days as well. Those can be claimed. Um, what you can't claim for is normal commute.

Mike Parkes: So if you're

Mike Parkes: a shop owner and you travel to your shop every day, that will be where commuting. So that those journeys are excluded from being able to claim. If you don't use public transport, you use your own vehicle. Then obviously discussed earlier. You can claim cost of fuel and capital allowances and allowance on purchasing the vehicle.

Mike Parkes: Alternatively you can claim a manage allowance that covers those costs.

Mark Williams: And just to make the point then, so you you've mentioned if travel, say, if you use your car to go to your normal place of work every day, that's just your commute, which is a it's, it's a dis allowable expense.

Mike Parkes: Yes.

Mark Williams: But if you're a tradesperson and you're traveling to a different location regularly, then that, that is an allowable expense that can be claimed.

Mike Parkes: Yeah. Yeah. Yeah. It's got proving where your normal place of work. So, you know, a place of work in that instance, you're a plumber, for example, and you go into different jobs each day, you start your job, you start work, working day at home and you're traveling to and from, but if you're a shopkeeper, you don't start your working.

Mike Parkes: So you get your shop.

Mark Williams: Yeah. Okay. And, and there's two ways, again, of, of claiming this as you've already mentioned. So you can keep, keep hold of your invoices and receipts and claim for the actual vehicle related expenses, or you can claim a mileage flat rate, which simplifies things. What, what can you tell us more about that mileage flat rate, Mike?

Mike Parkes: It's very straightforward. You claim 45p for the first 10,000 business miles in a year and 25 P per mile thereafter. And that covers the, the costs and purchase price of the vehicle instead of keeping individual records of expenditure. But you do have to keep an mileage log.

Mark Williams: Yeah,

Mike Parkes: you've done these business miles.

Mark Williams: Oh. So you need to keep, keep details. Where you went, how many miles you did? What was the purpose of the journey or that stuff?

Mike Parkes: Yes.

Mark Williams: And, and is that the same for a car and a van then Mike, is it same scheme applies to both?

Mike Parkes: Uh, no. If it's a van, if it's a, if it's a van, then you would claim the actual costs of a van.

Mike Parkes: That would be more be probably more like more beneficial. Cause you can claim more allowances, and capital allowances it's it's worth checking. You can do the calculations, which works out the best method. So you can change so you can choose as a, as a so trader you can choose which method is best for you. So in the first year you could say, okay, in your this year, I think mileage allowance is gonna be best for me.

Mike Parkes: And that's fine. You can, but you have to stick with that method then until you change your vehicle. When you change your vehicle, then you can reassess it. And if you want to then go back to actual costs, you can .

Mark Williams: And that's a general point when we talk about claim and allowable expenses, they claim via Self Assessment uh, your Self Assessment tax return.

Mark Williams: Aren't they? So you provide summary details of your expenses within your annual tax return.

Mike Parkes: Correct, yes. Yes. Yeah. So, so only text you would, you would declare your growth, your growth earnings at your total amount you've earnt from your business and then you would categorise the expenses and you would pay tax on the difference.

Mark Williams: I see. And at that point you don't have to provide proof of those expenses. Although later HMRC could ask you for proof of your fuel costs, for example.

Mike Parkes: Yeah, exactly. So the, the giveaways in the name is Self Assessment you Self Assess your own tax liability. You make submissions to HMRC. They then may do a random.

Mike Parkes: check your circumstance on the, in you personally and ask you to vouch or verify you spent X amounts on fuel, for example, or X amounts on purchases.

Mark Williams: Yeah. So,

Mark Williams: so you're making a very good point there that it, it's not a good idea to sort of claim for it, uh, non bonafide, the expenses, illegitimate expenses at all.

Mike Parkes: No, absolutely not. Because if you, if you get caught, get caught, I would say if, you know, HMRC will not just only ask for the tax due, they will penalise you as well. You penalty is up to hundred percent of any extra tax that they find, uh, on your tax returns. So it can be very, very cost.

Mark Williams: Yeah, indeed. Okay. So we've, we've covered a lot of ground Mike and, and it's clear that sole traders can claim for a wide range of business expenses, but which expenses aren't allowable, we've just spoken about travel expenses.

Mark Williams: And you've, you've, you've said that obviously journeys between your home and your normal place of work aren't, um, allowable expenses. What other sort of expenses are you not, not allowed to claim for? What about parking and speeding fines, for example.

Mike Parkes: Parking. Yes. because you have to park the vehicle. Fines? No.

Mike Parkes: Speeding fines, parking fines. Okay. Any, any fines are generally disallowed.

Mark Williams: People might think then that they can take clients out to a sporting event or take them out for a posh meal or, or even buy themselves a nice new business suit for, for, for work. But none, none of those expenses are allowable are they?

Mark Williams: No, no, not

Mike Parkes: at all entertaining.

Mike Parkes: Definitely not allowed. Regardless of how big your businesses that's a big no, no. In terms of buying a suit, no, again, HMRC view is you have to have clothes. Now having said that if you buy clothes, that's got your logo work, wear logo on. So, um, a print shop would be a good example. You have a t-shirt polo shirt with a print shop, name on it.

Mike Parkes: The cost of that is fine. Cause that's, that's that's work wear. That's not, that's not clothing you would wear elsewhere. okay. So it's definite that's fine. Safety clothing, builder steel toe cap shoes. That's fine. General jeans. T-shirt sweatshirts normal clothing's definitely not allow.

Mark Williams: Okay. And, and, and what about childcare costs and gym membership?

Mark Williams: I mean, people often think people, people who aren't, sole traders admitted admittedly, but people think that you can claim for those things on the business. That's not true either. Is it?

Mike Parkes: No, it's not true either. No, no deductions at all for, um, for, for, um, childcare costs at all, regardless again, who you are, are what business.

Mike Parkes: Um, gym memberships, 99% of the time are not allowable. We get a very, very rare occasion where an actor might be having to buff up for a particular role they can prove with they're only doing it for that particular. That's very niche and very few and far between, you know, so for most of us it's keeping fit and being healthy.

Mike Parkes: Um, there's no tax deductions for that. I'm afraid.

Mark Williams: Yeah. Okay. And you've already said as well, your daily sort of meal deal, you can't put that on the business. So there really is no such thing as a free lunch when you run your own sole trader business. sadly.

Mike Parkes: No no.

Mark Williams: No. All right, Mike, all that remains is for me to thank you, uh, for being such a great guest and for sharing your knowledge.

Mark Williams: You've been brilliant. Thank you.

Mike Parkes: You're welcome. Thank you, for having me onboard.

Mark Williams: So what are the three key takeaways from this episode? Well, firstly, you can claim allowable expenses for many of the costs you pay to run your sole trader business. Secondly, claiming them reduces your taxable profits, which lowers your tax bill. So it can save you a lot of money. Finally, not all costs are allowable.

Mark Williams: Despite what you may have heard, you can't buy yourself a new suit, pay your gym fees or get lunch every day on the business. Hopefully this episode has given you a greater understanding, but you can also head over to the GoSimpleTax website, which is gosimpletax.com for more free guidance on allowable expenses and many other tax related topics.

Mark Williams: Our next episode will be packed with free advice for expats who wanna save time and money when managing UK tax. If you're an expat who pays UK tax, you really don't wanna miss it. We hope you've enjoyed this episode and that you've learned lots of useful things. Please tell others about the podcast and followers and like, and share our social media posts because we really do wanna help as many sole traders, private landlords, and expats as possible.

Mark Williams: Thanks for listening until next time.

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