Contractors that say business expense claims are “not worth the trouble” are simply missing out. What is often regarded as a complicated and time-consuming task is actually rather simple – and an essential part of running a successful trade business.
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Aside from being able to work your own hours and run things your way, a self-employed contractor or business owner can also claim back business expenses for any business-related purchase. By claiming for these expenses you could significantly lower your tax bill, leaving more money in your pocket.
When starting your trade business, there’s a lot of admin jargon to get your head around. This can sometimes mean that things like business expense claims fall by the wayside. But it’s important to keep an ongoing, up-to-date record of those all-important figures – incomings and outgoings – so that you’re maximising the tax benefits for your business.
This article covers which business expenses you can claim and why good expense management is important.
Short on time? Skip ahead!
- 1. What is a business expense, and should you claim it?
- 2. HRMX guidelines on business expenses
- 3. Types of business expenses
- 4. Business expense claims - common expenses
- 5. Claiming your business expenses
- 6. Tips for better expense management
- 7. Business expense claims made easy
1. What is a business expense, and should you claim it?
A business expense is when you pay for something necessary for the everyday running of your business:
- Tools & materials
- Petrol & phone bill
- In some cases, a portion of your utilities bill (if you work from home)
You can probably think of other examples too. Your first instinct as a new trade business owner might be to keep your business expenses as low as possible, so your business profits are high. But business expense claims are deducted pre-tax and VAT which means you’ll come away with a smaller tax bill and more cash in your business.
2. HMRC guidelines on business expenses
Under UK Government regulations, a business (or allowable) expense is generally any necessary cost incurred as part of the daily running of your business. However, the category of each allowable expense will determine just how much of that expense you can deduct from your taxable profit.
3. Types of business expenses
There are three categories of business expenses when it comes to claiming tax back:
Tax-deductible expenses: Most business expenses fall into this category. They’re goods and services that you’ve paid for directly out of your business account, and 100% of the cost can be attributed exclusively to the day-to-day running of your trade business.
Partially tax-deductible expenses: This category covers expenses where only a portion of the cost needs to be deducted for personal use. Examples include a personal vehicle used for business purposes or a mobile phone you use for both work and non-work calls.
Non-tax-deductible expenses: Personal items and expenses are non-tax-deductible. These expenses are not business-related and therefore can’t be deducted from your year-end profits. Doing so can result in scrutiny and penalties from HMRC.
Setting up a separate bank account for your business is an easy way to keep personal and business costs separate. It’ll make things easier come tax time.
4. Business expense claims – common expenses
Business start-up costs
If you’re just starting out, any expense that you’ve already paid for using personal funds can be claimed when your business officially starts trading. For corporation tax purposes, the expense must be no older than seven years, and for VAT purposes, no older than six months before you started trading.
Business utilities and services
Trade business owners that do admin from their home office can claim a portion of their home expenses like power, water and internet. Similarly, you can claim a percentage of your personal phone bill as a business expense if you use it for work.
Then there are services you require to run your business. These are fully tax-deductible and may include professional services like an accountant, marketing professional, or insurance consultant.
This type of expense refers to items like computer hardware, office furniture, work vehicles or tools and equipment. Things that will help you run your business over a long time. How much you can claim and in what tax year will depend on the capital allowance rate.
If you buy a capital asset through hire purchase, then the cost of the interest payments can also be claimed as a revenue expense.
Despite what many think, schmoozing a prospective client is not a tax-deductible expense. Client gifts are considered a business expense, but they must be under ₤50 and do not include food, alcohol or anything that promotes your business.
Employee entertainment like staff Christmas parties can be claimed as a tax-deductible expense up to £150 per person. This still applies to solo-operators, so feel free to claim it for your party of one!
Tools and equipment
The repair or maintenance of your tools and equipment may not be considered capital expenditure, but the cost is still a tax-deductible business expense. Personal protective equipment like high-vis jackets and steel cap boots can be claimed, as well as computer software like Tradify or Sage.
Training and professional memberships
You can claim subscriptions to approved professional bodies or fees for training as allowable expenses, provided they are directly related to your work. If you need to keep qualifications updated to provide a service, be sure to claim the costs back.
Travel could be a tradesperson’s greatest business expense – in some instances, it’s an expense you can claim. If you have a work vehicle (that is strictly for business purposes only), you can claim 100% of your fuel, mileage and car maintenance expenses.
A few things to note about travel expenses:
- Working on-site for longer than 24 months could compromise your IR35 status. Should your contract be longer than 24 months, this is then deemed a ‘permanent’ workplace and you can no longer claim your travel expenses.
How you travel will determine the amount of tax relief that you’re entitled to:
- Public transport (including air and rail). Pay directly using your business account or reimburse your personal account for the transaction using business funds. Keep the receipt and claim for your fare.
- Toll roads and parking charges. Provided these costs are incurred while performing business activities, these are also eligible for tax relief if accompanied by a supporting receipt.
- Use of a personal vehicle. You’re eligible to claim the cost per mile for eligible business travel in your personal vehicle. The number of miles travelled during the financial year will determine the monetary value of your claim.
Mileage claims soon add up, so claiming for all work-related journeys can make a real difference to your tax liabilities – just make sure you’re noting your mileage down after every journey.
- Overnight travel expenses. If you have to stay the night somewhere to complete a job, you may be able to claim tax relief.
5. Claiming your business expenses
It’s at this stage that many contractors fall into the trap of dealing with receipts and invoices later. But with good expense management, you’ll always have a view of how well your business is performing financially.
When claiming business expenses, the most important thing is that you have proof. Keep a good record of each expense (date, cost, item) as well as any VAT expenses. You also need to keep receipts or order documentation for your business transactions.
6. Tips for better expense management
- Use your business bank account. Keep your personal and business expenses separate. Create a business bank account and use that to pay all your business expenses.
- Store your receipts digitally. Small expenses can get lost in piles of papers. Rather than holding onto hard copies, ask for a digital receipt or take a photo and assign it to the relevant job in Tradify.
- Track as you go with technology. Get rid of the paper – use accounting software with expense management capabilities, then streamline that workflow process by integrating with Tradify. That way you can track your jobs and your expenses while you’re on the go.
7. Business expense claims made easy
Like many admin tasks, keeping on top of your expenses can be fiddly and time-consuming. But putting off dealing with those receipts and invoices could mean you’re missing out on valid claims for business expenses.
Streamline expense management with a combination of your favourite accounting software and Tradify. As a bonus, they’re also tax-deductible.
You can refer to the HMRC guidelines for a list of the types of expenses that can be claimed. You can also visit the HMRC website for detailed examples of allowable and non-allowable business expenses. We recommend discussing any specifics with your accounting provider.
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