Sole traders can obtain tax relief on various expense costs. This overview looks at allowable and disallowable expenditure, focussing on some of the things that need to be considered when deciding if expenditure is allowable or disallowable for tax purposes.

What are allowable expenses?

Allowable expenses are the expenses that have been included in the profit and loss account and are also allowable for tax purposes. This means that the sole trader will get a tax deduction for these expenses. 

Contact the the GOV.UK Self Assessment helpline if you’re not sure whether a business cost is an allowable expense.

The two rules you need to know

There are specific rules relating to some items such as entertaining, fines and legal expenses but the two general rules to be aware of are as follows:

1. Expense must be ‘wholly and exclusive’ for business use. This means that the expense must have been incurred by a business purpose for a business purpose and there is no private benefit.

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‘Wholly and exclusive’

Where an expense is incurred and there is a mix of business and personal use, if you are able to apportion on a reasonable basis then the business portion is allowable, e.g motor expenses, as these can be apportioned on a mileage basis.

Where there is mixed use (both business and private) and it is not possible to apportion on a reasonable basis, then the whole cost is disallowed e.g a gym membership which includes the gym facilities and occasional networking events. 

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2. Expenditure must be revenue, not capital in nature. Capital expenditure is deemed to be items purchased in the business which provide an ‘enduring benefit’ to the business.

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Revenue expenditure

In other words, you expect to use for the long term; two years or more. Revenue expenditure is the day-to-day expenditure.

Examples of allowable expenses include:

  • office costs
  • travel costs
  • clothing expenses
  • staff costs
  • things you buy to sell on
  • financial costs 
  • costs of your business premises
  • advertising or marketing. 

 

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What are simplified expenses?

Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. The aim is to ease the administration burden on small business.

You don’t have to use simplified expenses. You can decide if it suits your business.

You can use simplified expenses if:

  • You use your car for business (you would need to keep a record of the number of business miles)
  • You use part of your home for business use (e.g. a workshop or an office)
  • You use your business premises for home (e.g. you live above a pub).

Can I use simplified expenses?

You can use simplified expenses if you are a sole trader or a partner in a partnership (as long as all of the partners are individuals). Simplified expenses can’t be used by limited companies or business partnerships involving a limited company.

If you use simplified expenses, you will note this on your tax return.

How do I claim allowable expenses?

You will claim all of your allowable expenses on your self assessment tax return.

You are able to break down the types of expenses as part of your return or you may be able to use the ‘three line account’ method which is simpler if your turnover is below the VAT registration threshold (currently at £85,000).

The ‘three line account’ method is a simple way of giving details of your income and expenses to HM Revenue & Customs (HMRC). 

Checklist: What records do I need to keep?

It is vital that books and records are kept safely as there are rules surrounding how long business records must be stored for. Information that you will need to keep to prepare your accounts can be found below. Login to save this checklist to your profile for future use - as you work through the list, any checkboxes that are ticked or unticked will be automatically saved to your profile. (To register to join and enjoy the benefits of membership click on the link at the top right of the page. It will only take a few minutes to create your profile).

Next Steps

Registering for VAT

This page will help you with VAT registration, when you need to register, what it means for your business and give you a brief overview of your legal obligations.

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Once you have started to trade it is your responsibility to inform HMRC and to file a tax return under self-assessment

This article will give you an overview of the self-assessment process and your legal obligations as a self-employed individual.

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