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.
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.
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.Find out more
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.Find out more
Most of the expenses that a business incurs meet the ‘wholly and exclusive’ test and are therefore allowable. Items such as staff wages, materials, business travel, postage etc do not cause a problem. Let’s now look at the areas that may contain disallowable expenditure and the reasons why.
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 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.
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).
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.Read more
This article will give you an overview of the self-assessment process and your legal obligations as a self-employed individual.Read more
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