As a sole trader, your business will naturally incur running costs. The good news is that many of these running costs can be claimed as business expenses, meaning you’ll pay less tax and get to keep more of your hard-earned money.
It’s easy to forget or lose track of what can and can’t be claimed as an expense, given the array of eligible items. Ultimately though, this means you could be paying more tax than you need to be.
In this article, we’ll be running down all the expenses you can claim as a sole trader.
What is tax relief?
Allowable business expenses reduce the amount of profit on which sole traders pay Income Tax. So, more allowable expenses means less taxable profit and less tax to pay.
To account for your expenses properly, you need to keep accurate records of everything. Bear in mind that you’re legally bound to keep these records for six years.
As ever, HMRC rules can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed. When in doubt, always contact an accountant such as Agricounts for advice.
How to claim business expenses as a sole trader
Sole traders can claim back any expenses they’ve incurred that relate directly to their business in much the same way as limited companies. The rule of thumb when claiming for any expenses is that you can only claim for expenses which are ‘wholly and exclusively’ incurred in the performance of your duties.
HMRC will normally allow your claim if you meet these conditions. When there are both personal and business elements (i.e. dual purpose) to your claim it’s unlikely to be accepted, because the expense would be needed regardless of the business.
For example, if your monthly mobile phone bill is £50 but you only use your phone 50% of the time for business use, you can only claim for £25 as an expense.
However, if the dual purpose is only incidental because of a business necessity, the claim may still be valid, such as protective work clothes or uniforms that could also be used for personal use.
Sole traders claim their expenses when they file their Self Assessment; this is typically done at the beginning of each year (the deadline is 31st January for online filing), although they can file any time from the end of the previous tax year on 5th April.
How to keep a record of my sole trader business expenses
Keeping track of your expenses such as business mileage is essential, as without the breakdown of journeys and mileage covered, HMRC could refuse to validate your claim.
We suggest detailing all business mileage on a spreadsheet and keeping it up-to-date throughout the year. If you’re claiming tax relief for fuel when using a company owned car, you must keep hold of all of your receipts.
For other business expenses then the cost of anything that’s necessary for the running your business will receive tax relief – the trick is to make sure you meticulously record everything so you don’t lose out. Unlike mileage, you’re not limited to a certain amount of supplies, within reason.
If you’re not using online accounting software the best way to keep track of what you’ve spent on supplies and other expenses such as travel and subsistence is, again, in a spreadsheet.
The main difference is you don’t have to record each item separately – for example, if you have bought 10 packs of 100 pens at £3 each, you can record it as 1000 pens – £30.
It is, however, important to keep the receipts for every separate purchase. Receipts must be kept for six years after you have filed your returns, as HMRC could decide to investigate at any point within this time.
If you’re just away for the day, you can claim lunch costs if you exceed five working hours, this extends to dinner if you’re working up to ten hours. As always, ensure that you keep receipts for everything. It’s also advisable to log all expenses in your accounting software, or on a spreadsheet so that you always have the date and exact costs at hand in case HMRC decide to take a closer look. Also be aware that HMRC take a dim view of excessive use of taxis, particularly if they appear unnecessary – i.e. it was a very short journey
Storing receipts can be done in a variety of ways and it’s always best practice to keep the paper copies somewhere safe, as well as backing them up digitally – with a picture on your phone for example (receipts tend to fade, but digital backups will remain pristine forever). You can manually scan them or use a mobile app to record the details.
There are many other more unique expenses that can be claimed, give us a call or send us an email and we would be happy to send you a PDF copy of our manual which goes much deeper.