The one question I get asked the most often by sole traders is what expenses can be charged against business profits for tax purposes. This blog lists some of the most important tax deductible expenses. (please note that the below applies to sole traders, not to limited companies).
The basic rule is that you can claim expenses that are wholly and exclusively for the purpose of carrying out your trade. The most obvious ones are cost of stock, and payroll costs.
Other tax deductible expenses you may be able to claim include:
- Costs of working from home: If you work out of your home then as a sole trader you can charge a proportion of certain household expenses such as mortgage interest, utility bills, and insurance. A good way to calculate the proportion to charge is to do a rough estimate of square footage used, or base it on the number of rooms used, and the amount of time they are used for business. Note if you are using part of your house exclusively for business then this can give you problems with capital gains tax when you sell your house in the future – non exclusive use is much safer. Alternatively you can claim £4 for each week where you use part of your house for work, which is an easier calculation!
- Telephone: You can claim a proportion of your line rental and call charges. The best approach is to periodically track your business calls and your personal calls so you can see what proportion of the use is business. Keep a record of it (a call log) to support your tax return.
- Broadband: You can also claim a proportion of your broadband costs – again support this through keeping a log to show how many hours broadband is used for business vs. personal. You could keep a log for a couple of weeks every few months assuming that those weeks are representative.
- Mileage: Mileage is calculated at 45p a mile for cars for the first 10,000 miles, and 25p a mile above 10,000 miles. You can also claim mileage for motorbikes at 24p a mile, and for cycles at 20p a mile – now there is a good reason to get fit and cycle! Mileage can only be claimed for business mileage, and travel to your normal place of work cannot be charged (so if you work in the same office every day, that is viewed as normal commuting, and is not allowable for tax purposes). Click here for more info on car expenses.
- Business insurance: If you need any insurance for your business, e.g. public liability insurance, professional indemnity insurance, etc. then the cost is tax deductible.
- Magazine subscriptions: If you have a subscription to a magazine, trade paper, etc. which is relevant for your business (e.g. Vogue if you are in fashion) then you can offset this against your business profits.
- Website costs: Ongoing website hosting costs for your business site are tax deductible. Website development costs are viewed as capital expenditure so are treated differently, ask for advice from your accountant.
- Advertising and marketing: You can charge your PR, advertising, and marketing costs against your business profits. Be careful though, you may think that business entertainment falls under this heading, but it doesn’t, and is not tax deductible.
- Professional fees: If you pay a lawyer to draft your terms and conditions, or you pay an accountant for your end of year accounts, all of these fees are allowable for tax purposes.
- Ongoing training costs: If you need to keep your skills and knowledge up to date then you can claim costs for training against your profits. If you are being taught something new which will enable you to add to your products or services then that is viewed as capital, and you should seek advice from your accountant.
Make sure you keep good records of your expenses, and all your receipts – either original hard copies or electronic scanned versions – to support your tax return.
Are there any other expenses you think you should be able to claim which I have not discussed above? Post a comment and I will reply as soon as possible.
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