In the UK, if you are self-employed, working as a freelancer/contractor, whether through a limited company or as sole trader, you are allowed to deduct a variety of reliefs and allowances to reduce your tax bill. Slightly different rules apply depending on whether you are a limited company or a sole trader, so check on the HMRC website for more information about working for yourself as a freelancer or contractor.
In the main, the rules governing the sort of expenses you can claim are consistent whichever business model you operate, but it may be useful to read the recently posted DBS blog about new rules that apply to certain expenses for contractors, small businesses, and people working through umbrella companies.
Running any business there will be related expenses, but you must be aware that the tax authorities are strict about claiming them. HMRC’s rules state that “expenditure must be incurred wholly and exclusively for the purpose of the trade, profession or vocation.” If the expense is not absolutely “wholly and exclusively”, let’s say if you work from a home-office and have an internet connection you use both for business and pleasure, then you must apportion the expense between the two uses. Likewise, if you are a hairdresser, you cannot put a drill through your expenses unless you can show it is solely for the purposes of running the hairdressing business; similarly, a painter and decorator could legitimately claim an expense for a drill but not for a hairdryer.
Remember that you could be asked to provide evidence that the expenses you file you actually incurred, and so accurate record keeping is an essential element of running a business. If HMRC carry out a tax investigation of your business (remember that you must register with HMRC if working for yourself) they will expect to find accounts (including receipts, bank statements, invoices, etc.), so never, ever be tempted to fiddle your accounts in order to pay less tax.
Accounting for expenses
Much of your business expenditure can be deducted from your profits, but note that this is under the “wholly and exclusively” rules and you cannot deduct private expenditure. That said, as noted, you are allowed to apportion certain expenses if they are used for both private and business purposes. See more about this on the HMRC website. Certain special reliefs are put against “capital expenditure”, which are one-off purchases to improve how your business runs, such as a new computer, phone, or camera. See more on the HMRC website.
Types of expenditure
Expenditure falls into three different types, each with different tax relief rules. Normally you are able to claim deductions, reliefs, and allowances for the current tax year and for the previous four years, but you must check this, as some must be claimed according to shorter time limits. See the HMRC website, which updates as legislation changes, and so it is a good idea to check the notes before filling in your self-assessment tax return (if self-employed) or, as a limited company freelancer, filing your company accounts and annual return.
Capital expenditure /allowances
If you buy or create, or improve an existing a business asset that helps your business turn a profit, then this is capital expenditure. For example, buying a van for your business is capital expenditure but if you hire a van this is an expense.
Other examples of capital expenditure include purchasing business premises, machinery, computers, fixtures, and furniture. Tax relief is not available for all types of capital expenditure, and special rules apply for claiming it.
You can claim tax relief for your business expenditure as long as it is not capital expenditure, or a non-allowable expense, such as for entertainment.
To be allowable, the expenditure must come within the “wholly and exclusively” rule for running a business. You may get some private benefit from the expenditure and still get tax relief for the amount spent for your business so long as the private benefit was incidental or you can identify and separate the expenditure between business and private purposes.
For example, you can separate private from business for your car (to claim petrol allowance), for telephone and broadband (but be careful, it could be better to get two separate lines).
A note about private expenditure
Private expenditure is all the money you spend on your day-to-day living expenses, including the “wage” you take from the business profits. There is no tax relief for private expenditure.
Allowable and non-allowable business expenses
You deduct the full amount of your allowable business expenditure from your business income to work out your taxable profits.
The HMRC website lists the allowable expenses. There are very few plausible excuses to explain to HMRC why you have made “errors” when reporting expenses, and the HMRC’s penalties and fines regime can really hurt if you are caught claiming for expenses that are not allowed or which you did not actually incur. A business expense is allowable only if it is wholly and exclusively for business purposes. The most common expenses are:
- Administration costs (including stationery, website, domain fees, advertising, postage, telephone and internet)
- Cost of stock
- Finance costs (your accountant)
- Motor and travel expenses
- Payroll costs
- Costs of incorporation (if you decide to set up a limited company)
- Premises costs (including apportioning home-as-office)
- Professional fees, repairs
- Pensions, insurances
- Subscriptions or books according to the “wholly and exclusively” rule
There are others, so check the allowable expenses on the DNS website, or on the HMRC website, the link is just above.
Key expenses, allowances and reliefs
The expenses, allowances, and reliefs available vary according to the sort of business you run, and in certain respects to the business model under which you operate (whether sole trader, partnership, limited company, or umbrella company). Let’s imagine that you run two businesses, one as a hairdresser and you also run an editorial business, then you should keep both business accounts separate.
Under the “wholly and exclusively” rule you can receive capital allowances for the following:
- Fixtures and fittings (i.e. shelves, furniture, electrical, and fittings)
- Plant and machinery (i.e. cars, vans, computers, equipment)
- Tools and some buildings (i.e. industrial and agricultural buildings; tools if you’re a tradesperson)
If self-employed, you claim capital allowances on your self-assessment income tax return. Normally the claim must be made within twelve months after the 31 January filing deadline for the self assessment tax return. First-year allowances, some of which are also known as “enhanced capital allowances”, are currently available to businesses for expenditure on certain items. These include energy-saving and water-efficient equipment, cars with low CO2 emissions, and goods vehicles with zero carbon emissions, for which you may be able to claim up to a 100% of the cost against your business profits in the year of purchase.
You can deduct the cost of using your own car for business purposes. There are two ways of working out how much you can deduct: the rules changed slightly in 2016 and the rates allowed can change, so it is best to check the HMRC rates first.
There is a fixed rate for each mile travelled on business, using fixed mileage rates (in 2016, 45 pence a mile up to the first 10,000 miles and 25 pence per mile after that; passengers at 5 pence per mile).
The actual expenses are worked out using detailed records of business and private mileage to apportion your recorded expenditure.
Expenses related to premises
You can deduct the costs of maintaining your business premises, including rent, rates, heat, light, repairs, and insurance. You can also deduct the business part of these costs if you run your business from home.
You can deduct the administrative costs of running your business (i.e. advertising, stationery, postage, telephone, and internet). Trade or professional journals or subscriptions, books, and so on may be claimed, but remember the “wholly and exclusively” rule.
Hiring an accountant
Hiring an accountant may be tax efficient and cost-effective; an accountant could win you back more money than it costs you to hire one. Whether sole traders, freelancers, contractors, whether running a limited company or not, and in all types of professions, trades and services. With your accountancy package (which remember is fully tax deductable against your profits) you receive the DNS guarantee of service as well as a guarantee that you will never fall foul of a tax-related penalty, for late filing or payment, under our watch, if the error is down to us. You benefit from free access to the most amazing integrated bookkeeping and accounting package that guides you on your expenses, whether you should register for VAT, and so on. You are assigned a dedicated account manager from the moment you sign up.