Allowable expenses are an important consideration when completing your self assessment obligations, but it’s an area in which errors are common. Deducting expenses from your profit figure reduces your tax bill, but with so many expenses incurred in the normal course of business, it can be difficult to know which ones are allowable.
HMRC may request documentary proof to back up your expense claims in some circumstances. It’s crucial, therefore, to retain all receipts and other expenses paperwork for a minimum of five years following the end of the tax year to which they relate.
Handpicked Accountants can refer you to a local tax accountant who specialises in self assessment. They’ll be able to remove some of the administrative burden when it comes to HMRC reporting, and provide valuable advice on systems to record expenses in your accounts.
Keeping receipts and proof of expense claims
Without receipts to back up your expense claims, they may be disallowed by HMRC. Apart from increasing your tax liability, this could trigger an investigation into your tax affairs and business record-keeping. It’s a good idea to use an expenses spreadsheet to track your expenditure each month, or to take advantage of the many online accounting packages available.
Receipts can be scanned and stored electronically if you’re short of office space, but you must make sure that all information on the receipt is captured, and legible for HMRC. So what expenses are allowable against the profits of a business?
What business expenses can you claim?
Allowable business expenses are those incurred ‘wholly and exclusively’ for business purposes, and commonly include the following. (Expenses for items with a dual business/personal purpose are disallowable).
- Office: rent, rates, insurance, water
- Consumables: stationery, postage, the costs of printing
- Technology: some computer software, landline, broadband, mobile phone
- Professional fees: accountant costs, legal advice
- Training: courses must be relevant to your business
- Marketing: advertising, internet marketing, website costs
- Vehicles (business use only): fuel, parking, congestion charges, servicing, mileage, insurance and breakdown cover, licence fee – you may be eligible to use HMRC’s flat rate scheme for claiming vehicle expenses, also known as the simplified expenses scheme.
Working from home
Sole traders or partnerships
If you are a sole trader or are in a partnership that has no companies as registered partners, then you can claim a proportion of your household costs as expenses. ‘Reasonable’ work from home expenses can include a proportion of your heating and lighting costs, telephone and broadband, water rates, rent, or interest on your mortgage repayments.
The proportion claimed depends partly on the number of rooms in your home, and the length of time you use a room for business. You should avoid using a room exclusively for business purposes if possible, as you may incur a tax liability if you sell your property in the future.
As with the flat rate scheme for claiming a car allowance, you may be eligible to use simplified expenses to calculate your work from home costs. Depending on the number of hours that you work from home each month (as long as this figure is over 25 hours) you can claim a flat rate of expenses to cover your increased household costs. However this rate doesn’t cover telephone or internet costs – you will still need to calculate the proportion of these to claim individually.
If you are an employee of a company, are paid via PAYE and you work from home either some or all of the time it is very difficult for you to claim expenses for home working, as you would have to prove that these costs are higher than you would have paid anyway. Your employer can choose to pay you a maximum or £4 per week (£18 per month) which would be tax free and for which you wouldn’t have to provide receipts etc. However these would be required for any costs above this.
Employee of your own company
If you work through your own company and are paid through PAYE, you may be able to claim some ‘expenses’ for working from home by charging your company rent and then claim a fair share of your household bills on your tax return. This is because landlords are categorised along with self-employed when it comes to PAYE.
If you wish to follow this route then you must ensure that you are charging a fair market, ‘arm’s length’, rate. Again you should claim expenses on the proportion of your house that is used for home working, and the percentage of time that it is used for this. Also if you are a limited company then an official licence agreement will need to be drawn up.
Other considerations for self-assessment expenses
- VAT and expense claims - If you’re registered for VAT and the tax is recoverable, you should not include VAT, but use the net amount of an expense. If you’re not VAT-registered, you should claim the full expense amount, including the VAT element.
- Business entertaining - Entertaining business clients or suppliers is not an allowable expense, nor is the costs of hospitality at business events that you hold.
- Business travel and subsistence - The costs of business travel and staying overnight on a business trip - such as a meal and the cost of the room - are allowable, but non-business travel and travelling between your home and business are disallowable expenses. The only exception being if you are an employee based at what HMRC considers to be a temporary workplace i.e. to perform a task of limited duration or for a temporary purpose. The exact rules around this are complex, in many cases a temporary workplace ceases to be so after 24 months, but there are exceptions to this rule. In some cases self-employed people may also be able to claim travel from home to work if they can prove that their home is their ‘base of operations’.
- Claiming expenses from previous years - Although you cannot backdate expenses or claim expenses from previous years – all expenses must relate to your income in the same tax year – you may be able to claim some of the pre-trade expenses incurred when you started-up in business. Also if you believe that you have made a mistake on a submitted tax return you can amend this up to 12 months after the prescribed filing date, or can claim Overpayment Relief for any errors on either your of HMRC’s part that you believe have led to you paying too much tax for up to 4 years after the end of the relevant tax year.
- Capital allowances - Capital allowances are different from the allowable expenses you claim for revenue expenditure. You may be able to offset a proportion, or the full cost, of a business asset against tax.
- Property allowable expenses - Allowable landlord expenses to reduce rental income must be ‘wholly and exclusively for the purposes of renting out the property.’ They can include business rates, council tax, insurance, advertising, and some repair costs.
Claiming expenses when you’re employed
You can claim some business expenses if you’re an employee paid through PAYE. Costs such as travel and subsistence are common allowable expenses claimed. Expenses must be justifiable, however, and supported by proof in the form of a receipt or other documentary evidence.
If your expenses are paid via your employee payroll, then any tax due on your expenses will have been automatically deducted through PAYE. However in some cases your employer will need to complete a P11D form, for example if your expenses have been paid at above the tax-free rate i.e. 45p per mile.
Fixed deductions for expenses related to specialist tools or clothing that your employer has not reimbursed may be available in some trades. So rather than claiming the exact expense, you can use a simplified flat rate scheme that makes self-assessment easier.
As you can see, self-assessment expenses are extremely complex. For this reason, and to remain compliant with HMRC, it’s advisable to seek professional assistance when completing your self-assessment tax return.
Handpicked Accountants are in the perfect position to help in this respect. We have longstanding working relationships with accountants nationwide, and can provide a reliable referral for a self-assessment specialist in your area. Call one of our experienced team to discuss your needs and find out more.