HMRC Allowable Expenses for Business and Employees
HMRC Allowable Expenses – Guidelines
According to the HMRC Allowable Expenses guidelines, almost all expenses incurred entirely, and exclusively during the course of operating a limited company can be reclaimed. There are changeable rules for expenses that have a dual purpose, such as expenses for personal and expenses for business use. Some of these HMRC allowable expenses are acceptable based on a simple computation while the other are not permitted, irrespective of their business percentage. In case of a limited company, any business costs can be deducted from PBT (profit before tax). Any item used for personal use must be reported as a company benefit.
Costs that can be claimed as allowable expenses include:
- Office expenses, like internet and phone bills, or stationery
- Travel expenses, like fuel, train or flight or bus tickets
- Office uniform
- Staff expenses, like wages or sub-contractor costs
- Purchase of raw material or stock
- Insurance and bank costs
- Business site costs such as electricity
- Advertising and marketing costs
On the other hand, for a self-employed, the various operating costs can be worked out against the taxable profit as long as the expenses are allowable under HMRC. Let’s assume that the business turnover is £40,000 and the claimable allowable expenses are £10,000. Hence, the taxable profit is £30,000. Allowable expenses do not take into account the money taken from the business for private expenses.
Allowable Expenses for Self Employed
Sole Trader Allowable Expenses
Working as a Sole trader has its own privileges. Few of the most common allowable expenses that can be claimed when working as a self employed or freelancer are:
Work from home costs
Work from home or the freelancing model is very common with the millennial generation. Hence, it becomes imperative to understand the cost related to using the home as an office. Let’s comprehend this through the two different models:
Simplified HMRC rate
The simplified HMRC rate of £4 per week can be applied, but this rate is way too low unless the quantity of work done from home is negligible.
Work from home apportionment costs
A portion of the home running cost can be allocated as allowable expenses to the business. A freelancer or contractor needs to work out, what the actual cost is for running business from home. If it’s an owned property, cost can include mortgage interest and not capital repayments. If the property is a rented one, only the rental charges need to be captured. Also, it’s acknowledged if costs are paid jointly but not if the costs are being paid completely by someone else. Other costs that need to be captured include insurance, council tax, gas, cleaning, service charges, and electricity.
Now, a sole trader needs to calculate what proportion of the cost would be fair to apportion to the business. A simple method of computing this is:
- Figure out the number of rooms in the house excluding hallways, bathrooms, and kitchens
- Calculate what percentage of time is one room used for business
With allowable expenses you could estimate the entire expenses for the premises.
After that use the flat rates to deduct an amount for your own use of the sites, depending on the number of people staying on the areas and claim the rest as your business expenses.
|Number of people||Flat rate per month|
You and your partner run a bed and breakfast service for the complete year. Your total business areas costs are £15,000.
Now you should calculate the below way:
Flat rate: 12 months x £500 per month = £6,000
You might claim the below amount:
£15,000 - £6,000 = £9,000
When somebody stays at your business premises for part of the year, you could subtract only the applicable flat rate for the months they stay there.
You and your partner run a bed and breakfast service and live there for the whole year. For studying purpose your child stays away from you for 9 months of the year but comes back to home in summer for only 3 months in a year.
Here the calculation should be like below:
Flat rate: 9 months x £500 per month = £4,500
Flat rate: 3 months x £650 per month = £1,950
Total = £6,450
You could claim the below:
£15,000 - £6,450 = £8,550An important tip: The entire office room should not be used for business. A small portion of the room must be kept for personal use as this protects the sole trader from possible capital gains.
A sole trader can claim some of the mobile expenses as part of the business expense. But the complicated part for a freelancer is to understand what proportion to claim as the phone is usually used for both personal and business purpose. As a best practice, a sole trader should do a thorough review of a couple of bills during the year and highlight the business phone calls and personal calls. This percentage can be used to arrive at an amount that can be claimed as a business expense. A sole trader must remember that the percentage be verified by HMRC in case of an enquiry, so it is important to keep a note of the business phone expenses.
If a sole trader engages an accountant like DNS Accountants, then the accounting fees for self employed accounts can be claimed as tax deductible expense. Conversely, if there is any fee related to preparation of tax return, these are not allowable expenses. Practically this means that, till the time there is self-employed income on the tax return, the accounting fee can be claimed.
The travel expenses rules for self-employed are different from those of a limited company. It is important to understand the “base of operations” from where a self-employed individual carries out their business. There can be multiple “base of operations” and can include areas instead of a single location. In case, home is treated as a base of operation then business travel will be allowable. But, for a different location the travel between home and “base of operations” is not an allowable expense.
Self-employed individuals working as sole traders can use a van or car for work. There are two different methods of claiming these travel costs and it is important to follow the same method for the life of that vehicle.
Computing through the mileage rate method is simple. Here, a log is maintained (including journey date, beginning and ending point, purpose of travel, and number of miles traveled) of all the allowable business journeys. Currently, the computation works as: For the first 10,000 miles – 45 pence per mile, and 25 pence per mile thereafter. DNS Accountants can help sole traders with a free mileage log. The mileage rate is best suitable if the VAT taxable income of the business is below the VAT threshold rate of £83,000.
Actual costs less private element deduction
This method is a little complicated, but more tax effective. Under this method, interest costs for vehicles bought on lease can be included. The purchase price of the vehicle is treated under “Capital Allowance”. Van bought will be eligible for an annual investment allowance (AIA), whereas, car won’t be eligible for an AIA. The main element when using this method is, computing the percentage of the vehicle that should be prohibited because of private use.
These computation methods are only pertinent for self-employed. The rules are different if operating through a limited company.
Other HMRC Allowable Business Expenses
HMRC Allowable Expenses for Limited Company
If an individual is paid a salary through Pay-as-you-earn
- Charitable donations: A higher-rate taxpayer, making charitable donations, can claim back the higher paid tax rate
- Professional fees: Individual who are members of a professional body and pay twelve-monthly fees, can offset it against tax
- Uniforms: The cost of uniforms can be deducted against tax
HMRC Allowable Expenses for Self Employed
- Electricity, gas, council tax, and water: Individuals using their home as work place can claim all against the bill
- Mortgage: On a pro-rata basis, the interest portion of the mortgage settlement can be claimed
- Broadband/phone and computers: All business calls can be claimed. Based on the business use, a proportion of the line rental and broadband can be claimed. The whole cost of the computer can be claimed if its only used for business purpose
- Entertaining: Even if the whole time is spent discussing work, client lunch is a “non-allowable expense”
Expense Managers – DNS ACCOUNTANTS
DNS Accountants help clients with expense management, accounting and taxation solutions. Our learned team of CA’s and ACA’s work with clients, to understand their business and provide them with best solutions.