Service: Taxation 

Self-employed expenses explained

By Simone Lyons

10 Jan 2022

As a self-employed individual, you can reduce your trading profits by claiming a number of expenses against your income, therefore reducing your Income tax and National Insurance liability.

Categories of Expense

The main categories of expense as shown on self-assessment tax returns are;

  • Direct cost, including cost of good bought for resale, or good used
  • Wages and salaries
  • Car, van and travel expenses *
  • Travel and subsistence *
  • Rent, rates, power and insurance
  • Repairs and renewals of property and equipment *
  • Phone, fax, stationary and other office costs
  • Advertising and entertainment *
  • Bank/ Loan interest
  • Bank, credit card charges
  • Bad debts *
  • Accountancy and legal fees *
  • Depreciation *
  • Other expenses *

Not all the above expenses would be an allowable deduction for tax, those with * are the key areas that often contain expenses that are not allowable, these are the main areas your accountant would want to see a detailed breakdown of.

In general, any expense that is wholly and exclusively for the purposes of trade will be allowed as a deduction. The trade purpose must be the only purpose.

Looking at some expenses in more detail

Wages and salaries

  • If you have employees paid through payroll, all applicable costs will be allowable for tax including running costs of the payroll and employers National Insurance.
  • Any external consultants who invoice you would be an allowable deduction if for business purposes.
  • Any amounts taken by yourself would not be considered wages and no deduction would be given. All profits are deemed to be your earnings and the self-employed are taxed through self-assessment on the remaining tax-adjusted profits of their business.

Car, van and travel expenses

  • If your car or van is included as an asset of the business you would be able to claim the business proportion (there would usually be a personal element too) of
    • Fuel
    • Hire charges
    • Servicing
    • Breakdown cover
    • Repairs
    • Insurance
  • If your car was owned outside of your business, then you could claim your business mileage at 45p a mile for the first 10,000 miles (25p a mile over 10,000 miles) which would cover all the above expenses.
  • Travel expenses could be included e.g. train fares, congestion charge, parking if for business purposes

Travel and subsistence

  • Travel- you must establish where is the ‘business base’ (this should be the place that is in the real sense the centre of the business)
    • If home is your base then travel costs to where the business is conducted would be an allowable expense.
    • If the taxpayer rents separate business premises then this address will be the base and no travel to or from home would be allowable, instead, travel from the rented premises to the client's premises would be an allowable expense.
    • Any parking fines or driving penalties would not be allowable even if incurred during working hours.
  • Subsistence- Subsistence costs would not be allowed if working from or in close proximity of the ‘business base’.

Rent, rates, power and insurance

  • If you rent business premises then all applicable costs are able expenses of the business. E.g. rent, rates, service charge, utility costs, insurance
  • If your home is your ‘business base’ you are able to claim an allowance in one of two ways, either
    • Calculating the percentage of household utility costs that are used for the business. Only costs that would increase because of the business use can be included so a percentage of mortgage interest payments would not be allowed because they would be fixed irrespective of you working from home or not.
    • There is a simplified method based on the number of hours worked from home:
      • 25-50 hours £10 per month
      • 51-100 hours £18 a month
      • 101 and more £26 a month

Equipment

  • There are two main ways to treat equipment purchased for use in the business
    • Fixed Assets- usually if the purchase is expected to last more than 2 years
    • Expense- If would need to be replaced more regularly
  • Fixed Assets- an example would be machinery, computer hardware, cars…
    • These are treated as assets of the business and for accounts purposes would be ‘depreciated’. 
    • For tax purposes fixed assets are usually entitled to ‘capital allowances’, these are specific tax adjustments. Please seek advice from a competent professional because there are set rules for the calculations.
  • Repairs to assets
    •  Repairs to assets owned by the business would generally be allowable so long as the repairs do not enhance the asset but merely put it back to the state it was in prior to the repair being required.
  • Consumables
    • Any consumables purchased in relation to the assets, eg printer ink, batteries, annual computer software licenses would all be allowable expenses.

Advertising and Entertainment

  • Advertising
    • Generally, marketing and advertising costs for the business would be allowable unless it includes an element of entertaining, see below
  • Entertainment
    •  Staff entertainment is allowable subject to a limit of £150 (vat inclusive) per staff member per year.
    • Client entertainment would never be an allowable expense for tax but can still be included within the accounts.

Accountancy and Legal Fees;

  • Any costs incurred for trading or statutory purposes would be allowable as a deduction
  • Costs for personal use (unrelated to the business) would not be allowed 

Other Expenses

  • A few other expenses not covered above:
    • Clothing costs- these would only be allowed if there is no dual purpose, so not everyday clothing. An example of allowable clothing would be high vis or protection clothing and hard hats (if you are a builder), but gym clothing (even if you are a personal trainer) would not be allowed.
    • Subscriptions- if wholly for business purposes, so trade memberships, training courses, professional membership- if related to the business would be allowable. If however you decided to take a cookery class but are an electrician, this would not be allowable because although it is a training course it is not related to your trade.

Record Keeping

Although you do not need to send your records to HMRC when you submit your tax return, you do need to make sure you have backing evidence for all amounts included in your self employed accounts.

Types of evidence include:

  • all receipts for goods and stock
  • bank statements, chequebook stubs
  • sales invoices, till rolls and bank slips 
  • what you’re owed but have not received yet
  • what you’ve committed to spend but have not paid out yet, for example, you’ve received an invoice but have not paid it yet
  • the value of stock and work in progress at the end of your accounting period
  • your year-end bank balances
  • how much you’ve invested in the business in the year
  • how much money you’ve taken out for your own use

You must keep your business records for at least 5 years after the 31 January submission deadline of the relevant tax year. HMRC may open an enquiry and want to check your records to make sure you’re paying the right amount of tax.

We do offer our clients a fee protection insurance that would generally cover the costs of an enquiry.

For more information

This is a very general overview; every self-employed business has its own unique circumstances and it is very important to seek professional advice when preparing your accounts and tax computation. 

If you would like more information about any of the areas referred to above, please speak to Simone Lyons or another member of our tax team.

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