A Guide to Understanding Allowable Business Expenses
No matter what type of business owner you are either freelancer, contractor or sole trader, it is likely that you are unaware of what business expenses you can claim. Therefore, it is GrowFactor’s mission to educate UK businesses on allowable business expenses to ensure ultimate tax efficiency!
[If you own a limited company you’ll want to read What Expenses Can I Claim Through a Limited Company?]
This post is aimed at helping Freelancers understand what they can and cannot claim as a business expense.
What is a freelancer?
Freelancer is a term used to refer to the type of work undertaken.
It must be noted that HMRC do not identify ‘Freelance’ or ‘Freelancer’ as a legal form of entity. Instead, a freelancer is grouped under self-employed and is identified by HMRC as a sole trader, limited company or business partnership (depending on the most appropriate). For the purpose of this blog post, we will refer to a freelancer that is identified as a sole trader.
As a Sole Trader Freelancer, you can only be taxed on the profits of your company.
Income – (expenses + personal allowances) = PROFITS
Therefore, if in the year 2017 you turnover £100,000 but have expenses of £20,000, you will only pay tax on £80,000. In this scenario, whilst you are only paying tax on £80,000 and not the full £100,000, bear in mind you have spent £20,000 cash!
However, if your business generates £25,000-£30,000 turnover we advise that you should move from a Sole Trader to a limited company. This is typically the value which makes the tax savings worth it, alongside the increased accounting costs, to justify the move to a limited company. To learn more read Directors Salary and Dividend 2017/18 and Sole Trader vs Limited Company.
Genuine Expenses Only
It may seem self-explanatory but you can only claim business expenses, if they are in fact, business expenses or company expenses. Therefore, an expense claim is only valid if it was incurred though the business or through business activities and has not been classified as disallowable by HMRC. This also means that you cannot claim expenses which have a dual purpose i.e. for both personal and business use.
Business related + classed as allowable by HMRC = Genuine Expense
If in doubt, it is always best to check with an accountant as you may have to pay a misconduct fine if HMRC finds you have claimed a personal expense as a business expense.
As a Sole Trader, you will be expected to register and file a Self-Assessment tax return which will determine the level of tax you will pay.
You should always keep a record of your receipts as proof, in case you need to prove the legitimacy of your claim further down the line. HMRC states that records must be kept for a minimum of 6 years from the end of the last company financial year they relate to.
Read How to Manage Receipts as a Small Business Owner for further information on receipt management best practice.
What Can I Claim?
To tackle this, rather large, question we’ve created an A-Z guide of common business costs and expenses for Sole Trader Freelancers and Self-employed Individuals. We’ve listed the most common business costs and expenses you’ll most likely need, as well as explain HMRC’s guidance for claiming tax relief on these costs.
Thank you for reading! Please leave any feedback and comments below.