As a sole trader, your business is likely to incur various running costs, some of which can be deducted from your profits to reduce your taxable income, meaning you pay less tax.
In this guide for self-employed workers, we explain which expenses are allowable, how to make a claim for expenses and what records you are required to keep.
Sole trader tax relief
Tax relief for sole traders refers to the allowable business expenses that can be offset against your taxable profits when filing a self assessment return with HMRC. In practice, this means your allowable expenses reduce the amount of income tax you are liable to pay.
However, the rules relating to sole trader expenses are not always clear cut, where HMRC relies on concepts such as the fairness or reasonableness of what is being claimed. It is therefore important that you understand how the rules relating to tax relief work for the self-employed and, when in doubt, seek the advice of a tax specialist.
Which expenses can sole traders claim?
As a sole trader, you can claim various expenses that you have incurred that relate directly to your self-employed business. These are known as allowable expenses and can include:
- general admin costs, such as office stationery, postage, printing and compare software
- telephone, mobile phone and broadband expenses
- car and van costs, such as fuel, insurance, repairs, servicing and breakdown cover
- other business-related travel costs, such as parking, train, bus or taxi fares
- accommodation expenses and meals on overnight business trips
- clothing expenses, such as a work uniform or protective clothing
- financial costs, such as bank charges, credit card costs or interest on business loans
- business insurance, such as professional indemnity cover or public liability insurance
- business rent, business rates and water rates
- costs of running your business premises, such as heating and lighting
- office furnishings, or essential equipment and tools of your trade
- repairs and maintenance of business premises, equipment or tools
- goods for resale, raw materials or the direct costs from producing goods
- advertising and marketing, such as business cards, free samples or website costs
- training costs, such as business refresher courses for your existing trade
- professional subscriptions, such as membership of an approved trade body
- accountancy and legal fees, provided these directly relate to your business.
The rule of thumb when claiming sole trader expenses is that you can only claim for expenses which are ‘wholly and exclusively’ for your business. If there are both personal and business elements to a claim, where the expense would be incurred regardless of the business, this is unlikely to be allowed. For example, if you are using a mobile line for both business and personal calls, you can only claim for any identifiable business calls. You cannot claim for the line rental because there is a dual purpose, where the cost would be incurred in any event.
In the case of vehicle use, many sole traders will not have a car or van that is designated exclusively for business purposes, where that vehicle is also likely to be used for private use, such as running the children to school or doing the weekly grocery shop. In these circumstances, the cost that relates solely to your business can still be claimed, although you will not be allowed to recover the cost of travel between home and work.
There are also certain limitations on what you can claim on any of the allowable expenses listed above, for example, you can claim for a uniform but not for everyday clothing such as a suit, even if you wear this for work.
You can also claim for a training course if this relates to your current profession or trading activity, but not if the course is specifically designed to retrain you so that you can branch out into a different sector or offer a new service.
If you are unsure whether an expense is allowable, you should contact the HMRC self assessment helpline or seek expert advice from a tax specialist.
Simplified expenses for sole traders
As a sole trader, there are two ways you can calculate certain business expenses: either by calculating the actual costs directly attributable to running your business or using ‘simplified expenses’. This is a way of calculating certain business expenses using flat rates. You can use flat rates for vehicle expenses, working from home or where you live on business premises.
Prior to completing your self assessment return, you should use the online simplified expenses checker to compare what you can claim using the flat rates against your actual costs. As a sole trader, you do not have to use simplified expenses, but in this way you can assess if this method will suit your business.
The use of flat rates vary depending on the type of expense being claimed:
You can use simplified expenses for cars, vans and motorcycles. Cars designed for commercial use, for example, black cabs or dual control driving instructors’ cars are excluded from this method. Where applicable, you will calculate your vehicle expenses using a flat rate for mileage instead of the actual costs of running your vehicle for business purposes, for example, fuel, insurance, repairs and servicing etc.
For cars and vans, the flat rate per mile with simplified expenses will be 45p for the first 10,000 miles, reducing to 25p after 10,000 miles, and for motorcycles 24p. For example, if you have driven 15,000 business miles over the year, for a car or van this would equate to 10,000 miles x 45p (£4,500) and 5,000 miles x 25p (£1,250). The total vehicle expenses you could claim using the flat rate would be £5,750. In addition to your flat rate vehicle expenses, you can also claim other travel expenses, such as parking or train and taxi fares.
Unless your vehicle is a tool of your trade, such as a van for a delivery driver, it is often more beneficial to use the flat rate business mileage rather than claim full running costs with a percentage taken off for any personal use. If you do decide to claim the full costs, however, you may also be able to claim towards the purchase costs of your vehicle, known as a capital allowance, although this can be complicated, so expert advice should always be sought.
Working from home
You can use simplified expenses provided you work from home for 25 hours or more a month. This will allow you to calculate your allowable expenses using a flat rate based on the hours you work from home each month, rather than having to work out the proportion of personal and business use for your utility and other bills.
The flat rate per month for 25 to 50 hours of business use at home is £10. This increases to £18 for 51 to 100 hours, and £26 for 101 or more hours. For example, if you worked 45 hours from home for 10 months (£100), but worked 55 hours during 2 months (£36), the total you could claim using the flat rate is £136. As the flat rate does not include telephone or internet expenses, you can also claim the business proportion of these bills based on the actual costs, provided of course these are identifiable.
If you decide to use the more complex method of calculating the proportion of running costs used when working from home, you will be required to adopt a reasonable method of apportioning these costs, such as the amount of time you spend working from home or the number of rooms you use for your business. Very often, expert advice should be sought.
Living on business premises
If you live on business premises, such as in a guesthouse or B&B, you can use simplified expenses rather than working out the split between what you spend for your private and business use. You will need to calculate the total expenses for the premises, using the flat rates to subtract an amount for your personal use based on the number of people living there. The rest can be claimed as business expenses.
The flat rate per month is £350 for one person, £500 for two people and £650 for three or more people. For example, if you and your partner run a live-in B&B and your overall business premises expenses are £18,000, you would apply a flat rate for personal use of £500 per month (£6,000), leaving you a total of £12,000 to claim for business use. If you have a child at university who comes back for three months of the year during the summer, you can only claim the higher flat rate of £650 for those three months.
As with working from home, if you decide to use the more complex method of calculating the proportion of living on your business premises, expert advice should be sought.
How to claims sole trader expenses
Sole traders must claim their expenses when they file their self assessment tax return for the previous tax year. The tax year runs from 6th April to 5th April. Your tax return must be filed by 31st October of the same year if filing by post, or by 31st January of the following year if filing online. However, you can file at any time from the end of the tax year.
When completing your return, you can reduce the amount of trading income on which you will be liable to pay income tax by including any allowable sole trader expenses. For example, if your turnover as a sole trader for the last tax year was £50,000 and you claim £10,000 in allowable expenses, you will only be liable to pay tax on the remaining £40,000.
From 6 April 2017, sole traders are also entitled to a £1,000 tax exemption on trading income from self-employment, known as a trading allowance. However, you cannot also claim expenses if you use this allowance. If your allowable expenses are likely to exceed £1,000, it is better for you to deduct your actual (or simplified) expenses instead.
Expenses & record keeping
To account for your sole trader expenses, you must keep an accurate record of everything you have spent related to your business during the course of the tax year, together with any receipts. In this way you can add up all your running costs to report on your self assessment return. Keeping track of your expenses is essential as, for example, without a breakdown of your journey and fuel costs, HMRC could refuse to validate your vehicle expenses claim.
Even if you plan to use simplified expenses, you will need to keep records of business miles, or hours you work at home or how many people live at your business premises over the year. You can then multiply the flat rates for the miles you drove, the hours you worked from home or the number of people who lived on your premises at the end of each tax year.
When you file your self assessment return you will not be required to submit any documentation in support, but you will still need to be able to accurately calculate the extent of any allowable expenses. Any proof of expenses must also be made available if HMRC asks to see this. You are legally bound to keep your records and receipts for a period of six years.
Sole trader expenses FAQs
What expenses can I claim as a sole trader?
You can clam various expenses as a sole trader, from travel to equipment costs, provided they relate wholly and exclusively to the running of your business. These expenses must also be reasonably incurred and not be excessive in cost.
What is the difference between personal and business expenses?
Any expense directly linked to the running of your business is a business expense, whereas something bought for private use is classed as a personal expense, even if you use money from your business to pay for that purchase.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.