As a sole trader, your company may incur a lot of operating costs on which there are a lot of expenses that may theoretically contribute to a significant amount of tax savings. This blog will consider the various categories of allowances that may be eligible and how they should be effectively applied for tax purposes.
The number one rule for claiming expenses
As a sole trader you can get up to £1,000 each tax year in tax-free allowances for property or trading income. If you have both types of income, you will get a £1,000 allowance for each type, and if you earn below this threshold you are exempt from income tax and national insurance contribution on that income.
Allowable expenses and tax relief
Allowable expenses are considered expenses that can be deducted to form taxable profit. You must correctly account for your expenses to HMRC and, it is important to note, HMRC states that all of your records should be kept for six years for investigation or review.
Examples of allowable expenses can include:
· Office costs (e.g., stationary, postage)
· Travel costs (e.g., fuel)
· Staff costs (e.g., wages)
· Legal/financial costs (e.g., bank charges, insurance)
· Cost of running a business premise (e.g., heating, lighting, rates, utility)
· Training courses (e.g., a refresher course)
· Cost of sales (e.g., raw material)
· Membership fees of professional organisation
Travel costs explained
The relevance of travel costs if you are using a car is based on mileage. For example, 0.45p is claimed per mile if a car or van is used; after the first 10,000 miles, only 0.25p can be claimed as an allowable expense. If a bicycle is used, 0.20p can be claimed as an allowable expense per mile.
Additional expenses that can be claimed relevant to travel include:
· Parking or congestion charges
· Train, bus or taxi fares
· Hotel rooms
· Hire charges – however, this depends on cars emissions
Expenses to claim as capital allowance
Capital allowance can be claimed by a sole trader if you invest in assets, such as equipment, by deducting the value of the item from you annual investment allowance. At present, the annual investment allowance has been increased to one million until January 2022 to enable all businesses to invest.
Examples of assets to claim as capital allowance:
· Business equipment (e.g., cars, vas, lorries)
Items which qualify for the annual investment allowance:
· Items used solely for the purpose of your business (examples above)
· Alterations to the building but not including repairs
· Integral features (explained below)
· Some fixtures (e.g., fire alarm, fitted kitchens)
If the accounting period is more than or less than 12 months:
The annual investment allowance needs to be adjusted on the proportionate of month basis depending on the financial year of the business.
If you as a sole trader own more than one business, then you can claim a ‘writing down allowance’ for each of your business if they meet the following two conditions:
1. If both businesses are controlled by the same individual
2. If both businesses use same premise or have similar trading activities
Integral Features Explained:
Integral features are those expenses incurred by a sole trader which can be qualified for tax relief. Integral features can claim writing down allowances which is the amount of percentage that can be deducted on the value of item each year.
Examples of these include:
· Lifts or escalators
· Water heating systems
· Air conditioning
· Electrical systems
Writing down allowance: the rules explained
To claim a writing down allowance, the sole trader needs to group the items into the three different pools depending on which rate they qualify for:
1. Main Pool with a rate of 18%
2. Special rate pool with a rate of 6%
3. Single asset pools with a rate of 18% or 6%
A writing down allowance is only a claim against assets when the asset investment exceeds the annual investment allowance, or when there is no annual investment allowance limit left. It is also important to be aware that, for cars, the writing down allowance rate depends on co2 emissions.
Sole traders cannot claim personal expenses, but only expenses applicable to the company, and hence it is necessary to differentiate between allowable and non-permissible expenses.
For example, the sole traders bill relevant to personal calls is not deductible, but business calls are deductible.
Sole trader allowable expenses: working from home
As relevant to the pandemic, some sole traders are working from home due to restrictions, and some self-employed choose to work from home. This gives rise to allowable expenses if the sole trader finds a reasonable way to proportion costs by the hours spent working at home.
· Council Tax
· Mortgage interest
· Telephone for business use
If a sole trader decides to let out residential property, they can claim for tax relief if the following two conditions apply:
1. If the sole trader operates a holiday letting business
2. If the item is a common part of a residential building
Overall, there are numerous expenses that a sole trader can claim and this blog gives an insight into the different allowances with the aim to reduce tax liability to the minimum. For further assistance feel free to get in touch.
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