If you are self employed, there are certain expenses that you can deduct from your income to calculate the tax owed on your business profits.
You can claim costs incurred in the following broad areas of your business as expenses if you’re self employed:
- Office, property and equipment,
- Car, van and travel expenses,
- Clothing expenses,
- Staff expenses,
- Reselling goods,
- Legal and financial costs,
- Marketing, entertainment and subscriptions,
- Training courses
These categories of expenses are made up of costs that you will incur when running your business and that HMRC agree can be deducted from your total income to determine your business profits. The amount of tax you owe to HMRC is based on your business profits after allowable expenses have been deducted.
Read on as we cover how to determine if you’re self employed and further detail on the types of things that can be claimed as an expense when submitting your annual self-assessment tax return.
What Are Expenses?
When you’re self employed, expenses are the costs that you incur when trying to generate income for your business. For example, to build a website to promote your business online, you may need to pay a web designer to manage the technical aspects of the build or you may have to pay rent on a warehouse to store the stock that you intend to sell.
In these examples, the fee that you pay to the designer and the cost of the rent would be an expense. Similarly, if you were to host a business meeting for new clients, you could class the cost of the meeting room hire or transport costs to get there as an expense because they are all costs incurred as part of running your business.
You should be aware though, that not all expenses incurred as part of running your business are allowed to be deducted from your income. It is therefore important to check HMRC’s guidance on what is and isn’t classed as an allowable expense before claiming.
Are You Self Employed?
Expenses are handled differently depending on whether you’re employed or self employed. If you are self employed, you are responsible for tracking and keeping records of any business expenses that you incur so it’s important to understand if you fall into the category of being self employed.
For most people, it’s fairly clear if they are employed or self employed but there can be some grey areas, and it is very common to be both employed and self employed at the same time which can cause confusion.
You are considered to be self employed if you run your own business and are responsible for its success or failure. Several simple tests can be used to see if you meet the criteria for self employed status which are outlined below.
You are likely to be self employed if;
- You can decide how to work, where to work and when you will work.
Having full autonomy over when and where you complete work on behalf of clients is one of the biggest distinctions between self employment and being employed. In the case of being employed, an employer sets the expectation of when, where and how you complete your work.
When you are self employed, as long as you meet the deadlines or tasks agreed in the contract between you and your client, you are free to work on your terms and are an independent provider of services and not a permanent part of the client’s business. This means you can work wherever you wish at a time that is convenient to you.
- If you invoice others for your time or services offered. If you have to send an invoice to your clients when you have completed a task or project, or if you invoice customers that wish to use your services on a retained basis, then you are self employed.
- You can have several clients or customers at the same time.
When you are self employed, you are in control of who you work with and how many clients you have. This means that you can work for multiple clients or customers at the same time as long as the work you have agreed to complete for them can be done without interfering with the delivery of another client’s project or workload. Being self employed allows you to work when your workload dictates, which is great if you like flexibility but can quickly spill over into evenings and weekends too.
- You provide your own equipment. If you have to provide the main equipment or tools that you need to complete your work, then you’re likely to be self employed. This could be a laptop or computer for home-based service workers such as writers and designers, or something more substantial such as a pick-up truck or scaffolding for manual workers.
- You are responsible for the success or failure of your business.
When you are self employed, it is your responsibility to ensure that your customers are happy with the work that you complete on their behalf. If you submit unsatisfactory work or services that are not up to standard, then you cannot charge the customer again for the time spent re-doing the original work if this is requested by the client. This must be at your own cost.
- Somebody else can do the work that you have agreed to. When you are self employed and agree to complete work for a customer or client, you can send somebody else to complete it instead of you, or you can supervise others in delivering the work on your behalf – as long as they have the required skillset to deliver the work agreed. For example if you are a builder, you can send another builder in your place or if you are a writer, you could ask another writer to produce the work required.
If you are still in any doubt as to whether you are self employed or not, then you can view this factsheet from HMRC to help you to check your employment status.
What Counts As An Expense?
When it comes to expenses, it’s important to know what can and can’t be claimed as a legitimate business running cost. Not every outgoing incurred can be claimed as an expense as HMRC are very clear about what they class as an allowable expense.
You can claim the following allowable expenses;
- Costs associated with setting up or running your office or business such as; stationery, phone bills or printer ink, computer software, rents & utility bills, business rates, property insurance, broadband. View the full list of allowable office costs here.
- Costs associated with travel that you do for work such as; fuel, parking, train tickets, vehicle insurance, breakdown cover, hotel stays, meals on overnight trips. View the full list of allowable travel costs here. You cannot claim for non- business-related travelling or travel costs, parking fines or driving penalties, or travel between home and work.
- Costs associated with clothing expenses such as; uniforms, protective clothing such as specialist working boots or overalls, costumes for actors. View the full list of allowable clothing expenses here. You cannot claim for the cost of regular clothing, even if you wear them to work.
- Costs associated with staffing such as; wages, subcontractor costs, bonuses, pension contributions, employees national insurance payments, and training courses. View the full list of allowable staffing expenses here.
- Costs associated with reselling such as; the cost of stock that you buy in to sell on to others, raw materials needed to do your jobs such as timber for a carpenter, or direct costs from producing goods. View the full list of allowable reselling expenses here.
- Costs associated with legal and financial transactions such as insurance, bank charges, hiring legal representation, surveyors or accountants for your business. You cannot claim for fines that you have been charged for breaking the law though. View the full list of allowable legal and financial expenses here.
- Costs associated with advertising, marketing and subscriptions such as; website development costs, providing free samples, placing digital or print advertisements, conducting mail drops or subscriptions for trade magazines or memberships to professional organisations. You cannot claim for entertaining clients, suppliers or customers, gym memberships or payments to political parties. View the full list of allowable marketing and subscription expenses here.
If you are newly self employed and don’t know if your business will be viable, HMRC offers you the chance to earn £1000 without paying tax. This is referred to as a tax-free trading allowance and means that you don’t have to submit a tax return if earning under this amount but you can’t claim expenses if using your £1000 tax-free trading allowance.
If you’re not sure whether a business cost is an allowable expense you can always contact the Self Assessment helpline.
If the idea of working out the proportion of energy specifically used for business purposes when working from home baffles your brain, then you may find it useful to use HMRC’s simplified expenses calculator.
Using the calculator means that you don’t have to record every single bill within certain expense categories to claim them as an expense. Instead, you would use a simplified, set rate for expenses such as mileage, working from home, business running costs for some vehicles, and living in your business premises.
You can use the simplified expenses checker to compare what you can claim using simplified expenses with what you can claim by working out the actual costs. This will help you work out if simplified expenses will save you money when calculating the tax owed to HMRC.
If you’re unsure whether to use actual costs or simplified expenses, you should compare one with the other. If you don’t have a full year’s worth of data you can base your calculations on a typical month and multiply it by 12 to get an estimate of your annual expenses if using actual costs over simplified expenses.
Expenses And Self Employment
Whether you are solely self employed, or self employed at the same time as being employed, then you will be responsible for paying your tax and national insurance contributions via an annual self assessment tax return for any work that you carry out on a self employed basis.
To know how much tax that you owe to HMRC, you will need to know your total income and your total expenditure. The total expenditure is the combined total of all of your allowable expenses and simplified expenses for the year.
By deducting your expenses from your income, you can then determine your profits and it’s your profits that will then be used to calculate how much tax that you will need to pay to HMRC.
For example, if your turnover is £40,000, and you claim £10,000 in allowable expenses. You only pay tax on the remaining £30,000 and this is known as your taxable profit.
- If you are employed, the tax that you owe will be collected through the pay as you earn (PAYE) system which is managed by your employer.
- If you are self employed then you will pay tax on your self employment profits via the self-assessment system.
- If you are both employed and self employed, you will be required to enter figures showing how much you have earned from being employed on your self-assessment tax return, as well as your self employment figures. This information is easily found on your P60 which your employer must supply at the end of each tax year.
How Do You Claim Expenses?
In order to submit your annual self-assessment, you must keep track of the expenses that you incur as a self employed person. You are required to keep these records for at least 5 years after the 31st January of any given tax year in case HMRC needs to check your records to ensure you’re paying the right amount of tax.
Whilst you do not need to submit every individual cost that you incur to HMRC, you do need to keep accurate records of each cost, including receipts, so that you can submit the combined sum of your expenses to HMRC and show proof if you are ever required to do so.
As HMRC do not dictate the way that you keep track of your expenses, the size of your business and scale of operations will determine how you manage this. Most people will use a dedicated accounts software package that keeps track of all payments out of your business as well as facilitates invoices. If your business is very small or you have very few expenses, then you may be able to keep on top of your accounting records via an excel spreadsheet.
Can I Claim Expenses From A Previous Tax Year?
You can claim expenses from a previous tax year but this must be done within 4 years of the end of the tax year that you spent the money. Upon submission via your self-assessment, HMRC will either adjust your tax code or give you a refund.
The post What You Can Claim As Expenses If You’re Self Employed appeared first on Real Business.
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