The Comprehensive Sole Trader Expenses List

Are you looking for a comprehensive sole trader expenses list? We have the only one you’ll ever need! Allowable expenses, in the context of a sole trader, are those costs that can be deducted from your income to reduce the taxes you have to pay. These are expenses that are directly related to the running of your business. For instance, if you use your home as your business premises, you can claim a portion of your utility bills as an allowable expense. This includes costs such as electricity, gas, and even council tax.

Whether you’re a seasoned sole trader or just starting, this guide will equip you with the knowledge to maximise your tax relief and keep your business costs in check.

What are Allowable Expenses?

Allowable expenses are costs that you can deduct from your taxable income. This reduces your overall tax bill because you’re essentially taxed on your profit (income minus allowable expenses) instead of your gross income (total income before expenses). If you have a turnover of £100,000 and claim £25,000, you only pay tax on the remaining £75,000. This can result in substantial savings, but it’s crucial to note that not all expenses can be claimed as allowable. Parking or speeding fines, everyday workwear like business suits, and the cost of settling tax disputes are not considered allowable expenses.

The method of accounting you use can also influence what you can claim as an allowable expense. If you use cash basis accounting, you can claim the cost of small office equipment and computer software as allowable expenses. If you use traditional accounting, these would be claimed as capital allowances instead.

Sole Trader Expenses List

Understanding the types of allowable expenses for sole traders is crucial in managing your business costs effectively. Let’s dive into the different categories of expenses that you can claim as an allowable expense.

Office Equipment and Tools

• Business equipment such as computers, printers, and software used for less than two years.
• Small office equipment.
• Equipment and tools, if you use cash basis accounting.
• Computer software and ink cartridges.
• Items normally used for less than 2 years.
• Equipment kept for business use, if you use cash basis accounting.
• Repairs and maintenance of business premises and equipment.
• Alterations to install or replace equipment, if you use cash basis accounting.
• Integral parts of a building, for example, water heating systems.
• Vehicles bought for business use, if not using simplified expenses.

Stationery and Communications

• Phone and Internet Bills: These are claimable as allowable expenses, but only for business use. This includes landline, mobile, and broadband costs.
• Postage: Any postage costs incurred in the course of your business operations can be claimed as an allowable expense.
• Stationery: This includes not just paper, pens, and envelopes, but also printer ink and cartridges.
• Printing: The cost of printing, including the ink and cartridges used, can be claimed as an allowable expense.
• Software: If your business uses a particular software for less than two years or if it’s on a subscription basis, you can claim it as an allowable expense.
• Electronic Communications: With more businesses now trading online, the allowance also applies to electronic communications. This means you can claim tax back on your business phone, mobile, and internet bills.

Professional and Financial Services

Professional consultation fees, such as those for accountants, financial advisers, solicitors, and surveyors. These are considered allowable expenses if they are used purely for business purposes.

Membership costs for trade bodies or professional organisations. These are claimable as long as they are directly relevant to your business and approved by HMRC.

Subscription costs for professional publications. These are also considered an allowable business cost.

Bank charges incurred in the course of conducting business.

Registration fees required to enable trading. These are allowable provided they are relevant to your employment and approved by HMRC.

Travel and Vehicle Costs

All these costs can only be claimed if they are wholly and exclusively for business purposes. Regular commute to a base of operations is not claimable. However, occasional trips to the same place are still claimable. Always consult with your accountant to ensure you are claiming the correct expenses.

Marketing and Advertising

• Investment in advertising and marketing, including costs for hosting and maintaining your company website.
• Costs associated with direct marketing, such as sending out printed mailshots.
• Expenses incurred for advertising in local or national newspapers, business directories, and websites.
• Costs related to creating a business website domain or getting a business email address.
• Fees for professional trade body or organisation memberships relevant to your business.
• Subscriptions to trade or professional journals related to your business.

Working from Home and Allowable Expenses

If you’re a sole trader operating your business from home, you’re entitled to claim certain expenses. These can include a proportion of costs associated with heating, electricity, Council Tax, and even mortgage interest or rent.

The goal is to accurately determine the business use of your home. This way, you can maximise your allowable expenses and reduce your tax liability.

Determining Business Use of Home

If you use one room in your four-room house as an office, you can claim a quarter of your utility bills as business expenses. The same principle applies to other costs such as council tax, mortgage interest, and even internet and telephone use.

However, it’s not just about the physical space. The time you spend working from home also plays a role in calculating your allowable expenses. If you work from home only one day a week, for example, you can claim a seventh of your office room’s costs.

The goal is to find a realistic and reasonable method of dividing your costs. This way, you can maximise your allowable expenses without crossing any lines.

Understanding Cash Basis and Allowable Expenses

Understanding the nuances of different methods can be a game-changer for sole traders. One such method is the cash basis accounting, which has a significant bearing on how you manage your allowable expenses.

What is Cash Basis?

Cash basis is a straightforward method of accounting that records income and expenses when they are actually received or paid, rather than when they are incurred. This method is often favoured by small businesses and sole traders for its simplicity.

In the context of income tax, using a cash basis means you only need to declare the money that you’ve received in a tax year. You don’t need to worry about customers who haven’t paid you by the end of the tax year.

This method of accounting can significantly simplify your financial management. It provides a clear snapshot of where your business stands financially at any given time, based on the actual cash flow.

However, it’s worth noting that a cash basis might not be suitable for all businesses. For instance, businesses with high levels of stock or those that want to claim interest or bank charges over £500 as an expense may find traditional accounting more beneficial.

How Cash Basis Affects Allowable Expenses

When you use cash basis, you only record income or expenses when money changes hands. This means you claim expenses when you pay them, not when you incur them.

One of the main advantages of using cash basis is that it can simplify your tax returns. You don’t have to deal with accounts receivable or payable. You merely report the money you’ve received and the expenses you’ve paid during the tax year.

For instance, if you buy a car or equipment for your business, you can claim this as a capital allowance, not as an allowable expense. This is because these items are considered long-term assets that you’ll use for more than two years.

Similarly, if you buy software that you’ll use for more than two years, you must claim it as a capital allowance. This is different from items you’d normally use for less than two years, like stationery or insurance costs, which can be claimed as allowable expenses.

Claiming Allowable Expenses

Claiming allowable expenses as a sole trader is a straightforward process. The first step is to identify what expenses are allowable for your business. Once you’ve identified these, you can claim them against your income to reduce your tax bill.

You can do so through your Self Assessment tax return. You’ll need to fill in the ‘Business expenses’ section of the form, detailing your allowable expenses. Remember, you can only claim for costs that were solely for business use.

For example, if your mobile phone bills for the year total £200, and you’ve spent £70 on business calls, you can claim for £70 of business expenses. It’s essential to keep a record of these costs, as well as any receipts or invoices, to back up your claims.

In some cases, you may be able to claim tax relief on certain expenses. This means you could get back some of the money you’ve spent on these costs. However, it’s important to note that not all expenses are eligible for tax relief, so it’s worth checking with a tax advisor or HMRC.

Wrapping Up on Allowable Expenses for Sole Traders

Effectively managing your allowable expenses as a sole trader can significantly reduce your tax bill. It’s crucial to keep accurate records of your business costs and to claim all allowable expenses on your self-assessment tax return. Remember, expenses that are ‘wholly and exclusively’ for your business use are generally claimable. Not all costs can be claimed as allowable expenses. Misconceptions, such as the idea of claiming client entertainment or personal gym memberships, can lead to complications.

Stay informed and organised. Whether you’re working from home or running a small business, understanding your allowable expenses can make a big difference to your bottom line. Remember, if you need help, an accountant is only a phone call away. Get a quote from Mazuma Money right now.