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Anita Brook is founder of Accounts Assist a growing firm of Chartered Accountants. She’s been advising small business, sole traders and consultants for 12 years.
It may seem like a headache to keep track of, but if you are self-employed there are various deductions, reliefs and allowances that you can get to reduce your tax bill.
Don’t try and dupe the tax man though. HMRC has pledged to contribute to the budget deficit by investigating all fraudulent claims and fining guilty parties.
By deducting expenditure your profits are worked out and this is the figure you will be taxed on. Expenditure can include almost anything to do with the running of your business, but must not feature any private spending. You can also claim special reliefs for certain ‘capital expenditure’ – one-off costs to buy or improve assets for your business.
Expenditure usually falls into three different types:
Capital: Buying, creating or improving business assets, such as vans, business premises and equipment.
You can get capital allowances on the cost of:
- Plant and machinery – including cars, vans, computers, equipment, tools
- Fixtures and fittings – including shelves, furniture, electrical and plumbing fittings
- Some buildings – including industrial and agricultural buildings
Business: Anything considered to be ‘wholly and exclusively’ used for the running and generation of profits for your business. You can still get some private benefit from the expenditure as long as this benefit was incidental and you can clearly separate the private from the business costs.
The most common expenses, that are normally allowed, include:
- Cost of stock
- Payroll costs
- Premises costs
- Repairs
- Motor and travel expenses
- Finance costs
- Administration costs
- Professional fees
Private: This is what you spend on day-to-day living expenses and normal household costs, including the amount you take from your business as a wage, or your ‘drawings.’ You can’t get tax relief for this.
Business and private expenses: If there is cross-over between private and business that can’t be separated, this is non-allowable expenditure. An example would be the cost of travelling to see your bank manager, but while you were in town you also did your private shopping.
If you can separate the two then the business part is allowable. For example, if you use a car for business and private purposes then you can claim a proportion of its use. There are two ways of working this out:
- A fixed rate for each mile travelled on business, using HMRC’s fixed mileage rates
- The actual expenses, worked out using detailed records of business and private mileage
Another example of this is if you work from home, part of the costs of running your house can be deducted as a business expense.
How far back can I claim?
In most circumstances you can usually get deductions, reliefs and allowances as far back as four years.
Loss in profits: If your business makes a loss you can get tax relief by setting that loss against the following:
- Other income for the same, or previous, year
- Gains for the same, or previous, year – if your other income is used up
- Other income from the previous three years
- Profits from the business in later years
- Profits for the business in the previous three years – if your business has ceased
If your business made a loss in the 2008-09 or 2009-10 tax years, the loss can be set against profits for the previous three years, whether or not your business has ceased.
All of this might seem like a headache you can do without, so calling in the services of an accountant is well worth it. They can get you recording things correctly from the off and may ultimately save you money on your tax bill.
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Tags: Anita Brook, Business Advice, expenses, self-employment, small business finance, small businesses, SMEs, tax advice
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