List of Business Expenses Claimable by Sole Traders: What You Can Deduct

As a sole trader in the UK, filing an annual tax return to HMRC by the 31st of January is a mandatory requirement. Although the process becomes straightforward once you understand the necessary steps, it can be time-consuming. One of the most challenging aspects is identifying which expenses you can reasonably claim. Accurately claiming legitimate expenses could potentially save you hundreds or even thousands of pounds in taxes.

In this article, we will clarify what expenses you can claim and provide a detailed list of sole trader business expenses you can use for your tax return.

Key Topics Covered

With valuable insights from Kyle Eaton at Money.co.uk Business Insurance, we will discuss:

• Understanding self-employed expenses
• Claiming expenses while working from home
• Other tax claimable expenses
• Effective tracking of your expenses
• How HMRC determines self-employment status
• Frequently Asked Questions (FAQs)

If you have specific questions or uncertainties regarding your business claims, we strongly recommend consulting with a qualified accountant or bookkeeper.

Read More: Who Needs To Do Tax Returns?

How Do Self-Employed Expenses Work?

As a self-employed individual, you are responsible for managing your own tax affairs. Each year, you submit a tax return to HMRC, outlining your profits and losses. HMRC then calculates your tax obligations based on this information.

However, self-employment incurs various expenses—ranging from energy bills and travel costs to clothing and marketing efforts—that reduce your overall profits. For instance, if you sell a handmade table for £500, and your raw materials and tools cost £200, your actual profit amounts to £300.

It would be unjust to pay tax on profits you haven’t genuinely made. Hence, you can deduct your business expenses from your profits, effectively lowering your tax liability.

HMRC allows you to enter an estimated amount for expenses on your tax return. While you don’t need to submit receipts at this stage, it’s crucial to maintain this evidence in case HMRC requests it later.

Read More: Maximising Your Deductions: A Guide to Self-Employed Expenses

What Expenses Can You Claim When Working from Home?

Many sole traders operate from home, but does this mean you can fully claim costs like rent, Council Tax, or utility bills? Not exactly.

Here’s a list of expenses for which you may be able to claim a proportion:

• Heating
• Electricity
• Insurance
• Council Tax
• Mortgage interest or rent
• Internet and telephone services

It’s important to note that you cannot deduct the entire cost of these bills, as they are not solely linked to your business activities. You will need to estimate a reasonable portion relating to your work. One effective method is to measure the square footage of your workspace compared to your entire home. Some costs, like phone bills, are easier to calculate since you can differentiate between business and personal calls. For more complicated cases, consider seeking advice from an accountant.

For additional guidance on simplifying your expenses, refer to the government website.

A Comprehensive List of Allowable Sole Trader Business Expenses

You can apply for a variety of HMRC-allowable expenses, which essentially encompass any costs necessary to run your business. These may include:

• Travel Costs: Train fares, parking fees, etc.
• Clothing Expenses: Uniforms, Personal Protective Equipment (PPE)
• Staff Costs: Salaries, training courses
• Office Expenses: Stationery, furniture, and utility bills if applicable
• Raw Materials: Materials needed for production and sales
• Charges: Insurance premiums, bank fees, and loan interest
• Advertising and Marketing: Including website development costs

Additionally, you can claim back costs for larger items, such as vehicles and machinery, using either cash basis accounting or capital allowances.

Small businesses and self-employed individuals can utilize cash basis accounting, which entails reporting income and expenses based on classic accounting methods. Conversely, larger businesses often rely on capital allowances, although this is not exclusive to them.

How Can You Efficiently Track Your Expenses?

Today’s technology makes tracking expenses easier through software and apps. Alternatively, you can maintain physical folders of receipts and invoices. Regardless of the method you choose, categorizing your expenses—such as bills, travel, and clothing—can help you stay organized and simplify any potential requests from HMRC for documentation to support your tax return.

To avoid overwhelming yourself, set aside regular time to track these expenses. Waiting until the end of the year can lead to mistakes and disorganization.

If you prefer tracking software, consider tools like Xero or QuickBooks. Both platforms are user-friendly, sync seamlessly with your bank account, and help categorize expenses efficiently—all available on iOS, Android, and web browsers.

How Does HMRC Determine Your Self-Employed Status?

You are considered self-employed by HMRC if you operate your business independently and are accountable for its success or failure.

To analyze your self-employment status, consider these questions:

• Do you perform your work independently?
• Do you issue invoices for your services?

If your answers are affirmative, you likely qualify as self-employed.

Notify HMRC as soon as you decide to become self-employed, even if you are balancing this with employment. This helps them adjust your tax code and ensures they expect your tax return.

Be mindful of important deadlines. If you haven’t registered or submitted a self-assessment tax return previously, notify HMRC by the specified date—October 5 in 2024. Once registered, you will receive a Unique Taxpayer Reference (UTR) that identifies you when submitting your tax return or discussing your self-employed taxes with HMRC.

Read More: Self Assessment Deadline Puts Christmas on Hold for UK SMBs

Frequently Asked Questions (FAQs)

Do I need to keep receipts for self-employed expenses?

While you don’t need to submit receipts with your tax return, retaining them for all work-related expenses is advisable, as HMRC may ask to see them later.

What are common errors in self-assessment tax returns?

Mistakes are not uncommon, but many can be avoided. Frequent errors include miscalculating income and expenses, failing to claim allowable expenses, submitting returns late, and missing payment deadlines.

What if I make a mistake in my self-assessment?

Before submitting your tax return, you can edit it if you identify an error. If you notice a mistake after submission, contact HMRC immediately to explain the situation; neglecting to do so may lead to penalties or even a tax investigation.

Can I claim business expenses if utilizing the tax-free trading allowance?

You may earn up to £1,000 each tax year from trading without tax obligations. If your earnings remain below this threshold, you cannot claim business expenses.

What documentation verifies my expenses as self-employed?

Acceptable documentation includes receipts for goods and stock, bank statements, sales invoices, and till rolls.

Are capital expenses claimable for the self-employed?

Yes, you can claim capital expenses to recoup the cost of equipment, machinery, and business vehicles essential to your operations.

Can I claim expenses for multiple businesses?

Indeed, you may claim expenses for multiple businesses. However, it’s vital to maintain clear separation of income and expenses for each entity, as each will require its own tax return.

What expenses are not eligible for claims?

Personal-use expenses do not qualify as business expenses. Consequently, you can only claim a proportion of costs related to mixed-use items such as rent or utilities. Non-claimable expenses include:

• Meals and entertainment for personal occasions
• Personal clothing and travel expenses
• Late payment fees
• Parking fines
• Childcare costs
• Groceries
• Loan or debt repayments (note: you can often claim the interest portion of any business-related loan)