For small business owners and self-employed individuals, accurately claiming expenses in a self-assessment tax return is crucial. It not only ensures you’re not overpaying on your taxes but also helps maintain compliance with HMRC regulations. This guide will walk you through the process of identifying and claiming legitimate business expenses in your self-assessment.
Identifying Allowable Expenses
Understanding which expenses are allowable is key. These typically include costs directly related to running your business, such as:
- Office supplies and equipment.
- Business travel and accommodation.
- Marketing and advertising expenses.
- Utility costs for a home office.
Documenting and Recording Expenses
Maintaining organized records is essential. Keep all receipts, invoices, and bank statements. For shared expenses, like a home office, calculate the portion of the cost that pertains to business use.
Filling Out Your Self-Assessment Tax Return
Gather Your Documents:
Before starting your tax return, compile all documents related to your business expenses. This includes receipts, invoices, bank statements, and mileage logs. These documents serve as evidence for the expenses you’re claiming and are crucial if HMRC requires proof.
Organizing your expenses into specific categories helps streamline the process. Categories can include office costs, travel expenses, and equipment purchases. Proper categorization ensures that expenses are entered in the correct sections of your tax return.
Enter the Information:
With your categorized expenses, start filling out the ‘expenses’ section of your self-assessment tax return. Each category of expense should be totaled and entered in its respective field. Be meticulous to enter the right amounts in the right categories.
Review for Accuracy:
Once you’ve entered all your expenses, review each entry. Ensure that the figures match your records and that you haven’t missed any allowable expenses. This review is vital to ensure that your tax return is both accurate and complete, reducing the likelihood of errors and potential issues with HMRC.
Common Pitfalls to Avoid
1. Claiming Personal Expenses as Business Expenses:
Example: If you buy a laptop that you use for both personal and business purposes, you cannot claim the entire cost as a business expense. Only the portion used for business can be claimed.
Pitfall to Avoid: Ensure that you only claim the business-use portion of expenses that are mixed (personal and business use). Accurately calculate and justify the percentage claimed for business use.
2. Failing to Keep Adequate Records of Your Expenses:
Example: Suppose you incurred travel expenses for a business trip but lost the receipts. Without proper documentation, these expenses cannot be claimed.
Pitfall to Avoid: Always keep detailed records and receipts of all business expenses. In the absence of a receipt, maintain a log of the expense with details like the date, purpose of the expense, and amount. This practice is crucial not only for accurate filing but also in case of an HMRC audit.
Understanding how to properly claim expenses can significantly reduce your tax liability and help keep your business finances healthy. While the process requires careful documentation and attention to detail, it can be straightforward with the right approach.
FAQs (Frequently Asked Questions)
1. What qualifies as an allowable expense for a self-employed individual?
Allowable expenses are those costs incurred wholly and exclusively for your business. This includes office supplies, travel costs, specific types of insurance, and business-related phone bills.
2. Can I claim my home office expenses?
Yes, if you work from home, you can claim a proportion of your heating, electricity, Council Tax, mortgage interest or rent, internet, and telephone use. The amount claimed should be based on the proportion of the home used for business.
3. Are travel expenses to and from my regular workplace claimable?
Generally, regular travel between your home and permanent workplace is not claimable as a business expense. However, trips to clients or for specific business purposes can be claimed.
4. What records do I need to keep for claiming expenses?
Keep all receipts, invoices, and bank statements related to your business expenses. For mileage claims, maintain a detailed log of business trips with dates, destinations, and miles traveled.
5. How do I handle expenses that are partly personal and partly business?
You can only claim the business part of the expense. For example, if your mobile phone bill is used 60% for business and 40% for personal use, you can claim 60% of the bill as a business expense.
6. Can I claim clothing expenses?
You can only claim clothing expenses if they are specific to your work, like uniforms or protective clothing. Everyday clothing, even if worn for work, is not claimable.
7. Are entertainment expenses claimable?
Client entertainment expenses are generally not allowable for tax purposes. This includes taking clients to meals or events.
8. Can I claim training expenses?
Yes, if the training is directly relevant to your current business, you can claim these costs.
9. What about new equipment or assets for my business?
The cost of new equipment used in your business can be claimed. Larger items may need to be claimed as capital allowances.
10. Is it possible to claim pre-trading expenses?
Yes, you can claim certain expenses incurred before starting your business, like market research or consultant fees, provided they are legitimate business expenses.
11. How do I claim vehicle expenses?
You can either claim a flat rate for business mileage (using HMRC’s approved mileage rates) or claim a proportion of your total vehicle running costs, based on the amount of business use.
12. What if I make a mistake in claiming an expense?
If you realize you’ve made an error, it’s important to correct it. You can amend your tax return if it’s within the amendment window. If the window has closed, inform HMRC of the mistake.
Have been working as an independent accountant and consultant for SME’s in London for over 15 years. Post Qualification experience (FCCA) in the field of accountancy for over 15 years. At the moment MD at SMY ASSOCIATES LTD.