Claiming Expenses

As a sole trader you are able to include a deduction for expenses which have been incurred wholly and exclusively in respect of your trade. These expenses will reduce your profits chargeable to tax.

Common expenses claimed by sole traders will include stationary, postage, computer software, stock, professional subscriptions, premises costs (use of home deductions – please see our article on this point), travel, subsistence, indemnity insurance, professional fees, subscriptions, payments for domain names and possibly employee costs.

When purchasing items for the business it is very important that you keep all receipts or invoices.  HMRC do not routinely require that backing documentation is provided to them, but it is important that you keep the relevant proof of purchase in case this is required at some time in the future.

Travel Expenses

Costs of travelling from home to the normal place of work are not allowed as a deductible expense for self-employed individuals as they are not incurred for the purposes of the trade. Other business travel expenses are allowable.

If you use your own vehicle for business journeys, you can include a deduction in your accounts calculated in one of two ways.

1. Claim a mileage rate of 45 pence per mile for the first 10,000 miles and 25 pence thereafter for every business mile driven.  You would be required to keep mileage records showing business journeys made, the date of the journey, the mileage driven and the reason for the journey.
   
   These records would be used to calculate the relevant deduction when your accounts are prepared.
2. You can keep detailed mileage logs of both the business and private use of your vehicle.  You can total up the annual costs of fuel, servicing, car tax, insurance and MOT.
   
   You can then calculate the business proportion of these costs based on the business and private use of your vehicle.
   
   It is very important if you choose this method to keep full details of all journeys in your vehicle and to keep all fuel receipts and car servicing invoices.

Once you have decided which method to use, you should stick with that method.

Subsistence

Subsistence is the accounting term for food and drink.  Subsistence costs are not generally allowable as HMRC's view is that "everyone must eat to survive".  Therefore, you can’t include your day to day meals as a business expense. However, expenses incurred on food and drink incurred whilst travelling on business will be allowable where the business travel is not the normal pattern of travel for his trade. 

For example, a plumber carries out his trade by visiting clients at various sites, the travel costs are allowable but any subsistence expense is not because the travel is part of the normal work pattern.  If however, if he attended a one-off training course or conference then you can include a meal as an allowable expense.

Where your business trip involves an overnight stay, the travel accomodation and reasonable expenses for the evening meal and breakfast can be claimed.

Purchases which have a dual private / business use

If you buy something for use in the business (not equipment – e.g. computers, vans or cars as these are dealt with via Capital Allowances) which is used both privately and for business purposes, no deduction is available in your accounts.  You can only claim for expenses which relate to items wholly & exclusively for use in your trade.

For example, a trader has a mobile phone contract which he uses both for business and personal.  The line rental cannot be claimed due to duality of purpose however all chargeable business calls and texts (outside of inclusive minutes and texts) can be expensed.  If however you have a second dedicated mobile phone contract for business, the line rental, calls and texts are all allowable expenses.

Clothing is another common area of difficulty with our clients.  If the clothing you require to perform your trade carries a logo of the business and can be viewed as a uniform, this will be acceptable and clothing costs can be included in your accounts.

If the clothing is required by Health and Safety regulations, costs relating to such clothing will be an allowable deduction.

If you buy a certain type of clothing (sportswear, smart clothing, black tie) which does not carry a company logo and could be worn outside of work (regardless of whether you actually would do this), this is considered to have a duality of purpose and no deduction will be available.

This same principal can also apply to travel expenses if you make a journey and combine a private motive and business motive at the same time.  Travel costs would only be allowable if the main purpose of the journey was for business, and any private purpose incidental.

Valuing Stock

If you purchase stock for use in your business, it is necessary to value your stock each tax year / accounting period (if different).

It is necessary to include only the movement in your stock levels in each tax year.

In order to do this you should keep records of:

1. Value of stock at the start of the tax year / accounting period (if different to a tax year). In your first year of trading this will be nil. In subsequent years this will be the value of stock remaining at the end of the previous tax year / accounting period.
2. Total stock purchased in the tax year / accounting period
3. Value of stock remaining at 5 April / end of accounting period.

The value of stock then included in your accounts as an expense will be calculated as:

 Value of opening stock PLUS stock purchases LESS value of closing stock.

If you do not sell tangible items, for example you sell your personal services; you are not required to make any such stock calculations.