What business expenses can I claim as a Sole Trader?

If you're a sole trader, you have the option to reclaim any expenses that you've incurred, similar to a Limited Company. It's important to have knowledge of all allowable business expenses as it can reduce the amount of tax you pay HM Revenue and Customs (HMRC) when you submit your Self Assessment tax return.

It's important to keep in mind that, in general, expenses should be 'wholly, exclusively, and necessary' for business purposes. However, dealing with HMRC rules can sometimes feel like navigating a maze, with concepts like 'fairness' and 'reasonableness' playing a role.

In this article, we'll walk you through the primary types of HMRC-approved business expenses that you, as a sole trader, can claim for tax purposes.

To ensure you stay on the right side of HMRC, it's crucial that you only claim expenses that are on their approved list.

HMRC's rules regarding tax-deductible expenses can sometimes resemble a labyrinth, often hinging on concepts like 'fairness' and 'reasonableness'.

Managing your expenses effectively requires meticulous record-keeping, we will discuss this further below.

What sort of record-keeping is expected of you?

Receipts must be kept for all purchases, and for five years after you have filed your tax return for a given year, as HMRC could decide to investigate at any point within this time.

Most of my clients are set up on accounting software such as FreeAgent. Within most accounting software packages you have the option to attach receipts/ purchase invoices to specific bank transactions. This is a surefire way to make sure that your record-keeping is in perfect order.

On some occasions where you do not have a receipt or purchase invoice, HMRC will accept a bank statement as proof if you misplace a receipt.

What expenses are allowable for a sole trader?

When it comes to claiming business expenses as a sole trader, there are two key rules to follow:

1. You can only claim for the expenses you incur wholly and exclusively during the everyday running of your business, although sometimes the line is blurred, such as when you work from home.

2. You cannot claim for expenses that have a dual purpose for business and personal use. The exception to this is mobile phones, computer equipment, and vehicles.

If you are ever unsure about whether something would qualify as a business expense please reach out with your specific circumstances and I’d be more than happy to offer advice.

Check out the list below for some of the more common allowable expenses, click on each item to find out more information!

• Accountancy fees

  This one is self-explanatory!

• Accommodation costs

  When travelling for business purposes, provided it is reasonable and not excessive, no 5-star hotels, sorry!

• Advertising and marketing

  This may be a one-off cost or an ongoing charge as long as the service is exclusively for your business.

• Business insurance

  Such as professional indemnity insurance, public liability insurance or specific equipment insurance.

• Bank, credit card or finance costs

  Such as leasing agreements, hire purchases, or interest costs on loans.

  The costs must be directly related to the operations of your sole trader business.

• Business mileage claims

  If you use a personal car, van, or motorbike to get to/ from a client’s workplace you can submit a mileage claim to your limited company, allowing you to withdraw money from the company without incurring any personal taxes, and you will also reduce your corporation tax bill at the same time!

  https://support.freeagent.com/hc/en-gb/articles/115001223124-How-to-record-a-new-mileage-claim

  You can claim 45 pence and 24 pence per mile for a car or motorbike for the first 10,000 miles in a year. After this, a reduced rate applies to cars only.

  The rate decreases from 45 pence to 25 pence per mile.

  Note that ‘cars’ include vans.

  Remember you must not buy fuel or other maintenance costs with your business bank account for a personal vehicle.

  The 45 pence per mile that you claim on your car covers both the fuel cost and general wear of driving your personal vehicle for that mile, hence you do not buy fuel through your sole trader bank account as well, or you are putting the cost through the business twice.

  There is an alternative method whereby you put all vehicle costs through the business such as fuel, maintenance costs, insurance, etc, but you are only at an appropriate % of the costs to remove and personal usage of the vehicle.

  Reach out if you want to find out more!

• Charitable donations

  As a sole trader you and your business are treated as the same legal entity.

  If you make a charitable donation it will be an adjustment to your self-assessment tax return but won’t feature as part of your sole trader profits.

  Making charitable donations has the effect of increasing your tax bands, which basically means you’d pay less 40% or 45% income tax, so is only beneficial if you are a higher rate taxpayer.

• Clothing

  Only if it is wholly, exclusively and necessary for the performance of your work, for example, a uniform, protective clothing, and costumes (for actors or entertainers) it is allowable.

• Eye tests and glasses

  Eye tests are an allowable expense against corporation tax for employees or directors.

  However, this is only the case when someone uses a display screen equipment (DSE) for at least one hour per day.

  DSE are devices or equipment that have an alphanumeric or graphic display screen and include display screens, laptops, touch screens and other similar devices.

  Glasses are an allowable expense, but only if they are specifically prescribed for work purposes. If you then used them for personal use as well then unfortunately it would be hard to justify the expense to HMRC.

• Food, meals or eating out

  If you are travelling for business purposes, then food and drink is an allowable expense.

  Examples include travelling to a client’s workplace, attending conferences, and spending overnight away from home.

  These expenses are also known as subsistence expenses. These expenses are necessary expenses while travelling for exclusively business purposes.

  However, you cannot claim food and drink costs where they are part of your normal commute to a fixed workplace.

  The costs must be reasonable, and cannot be lavish in nature.

  Note that any food and drink costs spent whilst entertaining a client are not allowable.

• Fixed assets

  As long as they’re entirely for business use, items such as laptops, PCs, business phones and furniture for an office can be recorded as a fixed asset in your accounts.

  It is worth noting that the purchase of fixed assets does not reduce sole trader profits, but you receive capital allowances at 100% of the asset value (in most cases) to reduce the amount of tax paid.

• Legal and professional fees

  As long as they are directly related to your business, legal fees and other professional fees are allowable.

• Medical insurance

  Medical insurance expenses are allowable, however, you must notify your accountant as it will need to be treated as a Benefit In Kind (BIK) through payroll.

  You will personally pay income tax on the value of the benefit, and the company will pay national insurance on it.

• Mobile phone, landline and broadband

  Make sure that the contracts are in the business name, otherwise, HMRC may argue that it is used for personal use.

  The duality of use may mean the expense is disallowed.

• Office costs

  The cost of anything necessary and essential for your duties as a director is allowable.

  This covers computer equipment, printers, software, postage, stationery, cloud storage or other subscriptions.

  You may also claim reasonable relief towards the cost of equipping/ furnishing an office, e.g. chairs, bookcases and so on.

  This may appear to hold a dual purpose, but it’s allowed because it is a consequence of a business need. As long as the personal use is insignificant.

• Professional subscriptions

  Professional subscriptions such as memberships to trade bodies or anything directly relevant to your employment are allowable.

  A membership to the local sports club is now allowable unless you are a professional athlete.

• Subcontractors

  Subcontractors or agencies are allowable expenses.

  Do you occasionally hire freelancers or others to help out with your workload?

• Training courses

  Training courses for business purposes or continued professional development.

  However, note that HMRC often disallows expenses for courses such as MBAs as they offer new skills and knowledge rather than building on existing skills in your industry.

  You must be able to justify the business relevance in improving existing skills.

• Travel costs

  The travel should not be ‘ordinary commuting’. HMRC defines a commute as the journey you make between your home and permanent workplace.

  Travel costs for work travel. Examples include parking costs, trains, buses, airfares, taxis, or vehicle rental.

  This is one of the few occasions it is acceptable to purchase fuel through the sole trader's bank account. You do not submit a mileage claim for a vehicle rental, instead, you would pay for all directly related costs through the sole trader bank account.

• Working from home

  If it’s necessary for you to work at home you’re entitled to claim your allowable home expenses as a business cost.

  You have two choices: you can choose to claim simplified expenses for the self-employed or a proportion of actual costs incurred.

  In almost all cases it will work out more tax efficient to claim a proportion of actual costs.

  I will request the following pieces of information - the rental cost of the home, mortgage interest statement, service charge, ground rent, utility bills, council tax bill, broadband + landline costs, property insurance, cleaning, and any other ongoing house costs (note that mortgage interest + capital repayments are excluded).

  In addition please confirm the number of rooms in the house (excluding bathrooms, kitchens, hallways).

  And finally, you will need to confirm the amount of time spent working from home in a year. For example 7 hours a day, over 260 working days in the year.

Bear in mind that this list is not exhaustive. If you aren’t sure about a particular purchase, then reach out and I can provide some guidance.

Now that we have covered most of the allowable expenses. There are certain expenses that you are not allowed to deduct from your sole trader profit.

• Pension payments

  As a sole trader, payments to your pension aren’t allowed as an expense, but instead, you can get personal tax relief from contributions you personally make into your own pension scheme.

• Medical insurance

  Health and medical insurance costs can rarely be claimed as an expense.

• Gym membership

  This includes personal trainers too.

  The consensus is that no it is not allowable.

  There is however an exception to all of this, and that is if you happen to be a professional athlete, or you are a personal trainer, or in a position of work where being at a certain level of fitness is a requirement of the work.

• Driving lessons

  It would be very difficult to prove to HMRC that standard driving lessons for a car were wholly and exclusively for business purposes.

  In almost all cases there will be an element of personal use.

  However, if you were taking a specific driving course that was in relation to your business then this would be allowable. Examples include lorry driving, becoming a driving instructor, and towing a trailer behind a car if required for work.

• Fines or penalties

  Any form of fines or penalty charges are not allowable.

  For example late filing of tax returns, or vehicular offences (speeding tickets, parking tickets).

If you’ve found this useful, or have any questions off of the back of this article please email me at hello@floewa.com.