Updated: Aug 20, 2020
For sole traders to claim an expenses as tax deductible it must be ‘wholly and exclusively’ for the purposes of the business, trade or vocation. This means it must only be for the business and not of a mixed purpose.
Where an expense is both for business and personal use, if you can identify the split you can still claim the business proportion.
Where there is an incidental personal use element the expense would still be allowable.
Here is an example:
I sell notebooks and the sales are £15,000 per year.
In selling these notebooks I have to spend £5,000 on business related costs such as the notebooks themselves, advertising online and posting the notebooks to customers.
I will need to pay tax on the profit of £10,000.
Keeping accurate records of business costs will help to reduce the tax I need to pay.
Here is a list of common allowable expenses:
Office running costs (eg postage and stationery)
Mobile phone costs - apportion the bill between business and personal and claim the business portion (contract does not need to be in the name of the business)
Uniforms and protective clothing (but not business attire or shoes)
Staff costs (eg salaries and sub-contractor costs)
Finance charges (eg bank fees and insurance costs)
Professional fees (eg accountants and lawyers fees)
Business premises costs (eg electricity and business rates). If you work from home and are self-employed claiming the ‘simplified expense’ is an alternative to splitting bills (see below)
Advertising and marketing (eg website costs and Google ads)
Travel and subsistence (eg trains and taxis, meals whilst travelling on business)
Staff entertainment and Training
Business mileage (see simplified expenses below)
Costs of running a vehicle (but see simplified expenses below)
Equipment used in the business (eg laptops and computers) - unless you use an accrual basis of accounting in which case see the allowances section below.
An important exclusion:
You cannot claim entertaining customers as an allowable tax deduction (or for VAT reclaim). There are no exceptions to this rule. So taking your customer for a meal or to a music event is not allowable as a deductible for tax purposes (but does impact the profit in your accounts).
It is therefore important to have a separate category to capture this type of expense so that it can be excluded from the taxable profits calculation.
Note staff entertaining costs are allowable (if not excessive!).
There are 3 areas where simplified expenses are allowed for sole-traders:
1. Business mileage
- Keep records of the miles travelled, when and why
- Claim 45p per mile up to 10,000 miles, and 25p per mile thereafter
2. Use of Home for business purposes
- There is a scale of claim depending on hours spent working at home
- This is for household running costs
- If you claim for a proportion of Council Tax/Mortgage interest etc there may be Capital Gains Tax consequences!
Number of hours worked Flat rate per month
25 or more £10
51 or more £18
101 or more £26
3. Private use of Business Premises
- Applies to bed and breakfast and care homes etc
- Depends on the number of people on the premises
- Flat rate deduction from all costs to arrive at business only costs
Some costs are claimable via an allowance. The most common of these allowances are:
The Annual Investment Allowance – allows you to claim 100% of the cost of equipment in the year of purchase (this only applies if you use an accrual method for accounting - rather than the cash basis - claim as an allowable expense if you use the cash basis of accounting)
Research and Development Tax Credits – allows certain R&D expenditure (development of a process or system) to be claimed back. See separate blog
Trade allowance – rather than claim specific expenses there is an option to claim a flat £1,000 allowance against income. This will be useful if specific costs are less than £1,000 in total or if there is a desire to reduce administration burden on the business (other specific costs cannot be claimed in addition).