- Accounts submitted to HMRC & Companies House
Allowable costs for self employed business owners
Self-employed business owners need to consider the tax that will be paid on their profits. We have discussed tax structures and the difference between self-assessment and limited company corporation tax.
We need to consider what costs can be offset against self-employed business owner profits. The less self-employment business profits are made, the less tax is paid to HMRC, whether self-assessment income tax or limited company corporation tax.
Self-employed business owners must keep the receipts claimed as an allowable cost. HMRC suggest that you keep receipts for seven years. We recommend that self-employed business owners keep their receipts physically in an annual folder and electronically using an online storage system.
Allowable costs may be categorised into two sections.
– Revenue expense
– Capital cost
Self-employed business owners need to know that revenue expenditure is an allowable cost that helps reduce profits. These allowable costs (revenue expenses) will reduce self-employment business taxes paid to HMRC.
Here is a small list of revenue expenses that are allowable costs to reduce self-employment tax
– office costs, for example, stationery or phone bills
– travel costs, for example, fuel, parking, train or bus fares
– clothing expenses, for example, uniforms
– staff costs, for example, salaries or subcontractor costs
– things you buy to sell on, for example, stock or raw materials
– financial costs, for example, insurance or bank charges
– costs of your business premises, for example, heating, lighting, business rates
– advertising or marketing, for example, website cost
Many self-employed business owners will now work from home. There are additional allowable costs to reduce self-employed business tax
– Council Tax
– mortgage interest or rent
– internet and telephone use
Self-employed business owners need to find a reasonable method of dividing their costs, for example, by the number of rooms they use for business or the amount of time they spend working from home.
Example: Self-employed business owners using a home
You have four rooms in your home, one of which you use only as an office.
Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).
If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).
Self-employed business owners will incur capital costs and revenue expense / allowable costs.
The term capital costs may be deceiving. For self-employed business owners, capital costs are still allowable, but they cannot reduce annual profits in the year incurred.
Self-employed business owners’ capital costs are fixed assets and sit on a balance sheet. These costs may be claimed over time using capital allowances.
Self-employed business owners can claim 100% of capital items in the tax year. This is often referred to as Annual Investment Allowance (AIA). Self-employed business owners need to speak with their accountant to understand how the Annual Investment Allowance can help them reduce their tax liability.
Self-employment business vehicles and cars: Self Assessment tax
This section is relevant for self-employed businesses taxed under self-assessment income tax, not using a limited company.
It is possible for self-employed business owners to claim a % of their vehicle costs. These allowable costs will help reduce taxable business profits.
Self-employed business owners will need to keep a record of the car expenses shown below and allocate a reasonable allocation between personal use and their business (allowable costs to reduce taxable profits)
– Maintenance costs
– Repair costs
– Road tax
The cost of a car used by self-employed business owners will be considered capital. As stated above, the capital costs may be claimed as an Annual Investment Allowance. We suggest that self-employed business owners speak with their accountants to deal with this rather tricky tax element.
Those self-employed business owners that like to keep things simple may claim car costs on a mileage basis. This means that self-employed business owners do not need to keep a record of receipts for their allowable costs. Self-employed business owners can use a mileage rate instead.
– 45p allowable costs, mileage rate per mile for the first 10,000 miles
– 25p allowable costs, mileage rate after the 10,000 miles as mentioned above
Self-employed business owners must keep a mileage log for these costs to be allowable. We suggest that you keep the following information on your business allowable mileage costs:
– Date travelled
– Where from
– Where to (and a tock box to say return journey)
– The number of miles done
– Reason for the journey
As you can see, there are several costs that you need to account for. Each allowable cost must be evidenced with a receipt/invoice. Each receipt of the allowable costs ought to be kept physically in a box file and electronically in case something happens to the physical receipt.
Limited company cars and corporation tax
– Personal ownership of the car and charge mileage (as above)
– Own the vehicle within a limited company
Business owners that run their self-employment activities within a limited company must be mindful that they (as individuals) could be subject to a benefit in kind charge. A benefit in kind charge is a monetary value that HMRC will deem based on the type of car owned. The benefit in kind charge for the self-employed business owners will be subject to income tax and will form part of their self-assessment tax.
This is another element of tax that can be pretty tricky, and self-employed business owners need to consider these allowable costs with their accountant to select the best option.