With the Self-Assessment deadline passing on 31 January, it’s clear that many sole traders and business owners aren’t using allowable expenses and deductions to their full potential.
When using Self-Assessment to report your taxable profit to HM Revenue & Customs (HMRC), it’s important to remember that not all your profits are taxable.
There are inevitably costs associated with running your business, which can be deducted from your total turnover to work out your taxable profit.
For example, if you have a turnover of £50,000 and claim £5,000 of allowable business expenses, then you’ll only pay tax on the remaining £45,000.
Some deductions are well known as common business expenses, such as office equipment, staff costs, rental, utility and insurance bills and stationery.
However, some are less widely known and may mean that you aren’t using allowable expenses to their full potential.
As the next financial year fast approaches, the following are five allowable expenses that all business owners should understand and use if applicable.
Training costs
Certain training costs are accepted as allowable expenses, but they should be approached with caution.
Training courses or other provisions which help you improve or refresh the skills you use in your business, such as top-up courses to learn about new developments in the industry, can be claimed under Self-Assessment rules.
What cannot be claimed for are course costs which help you start a new business or expand into a new area of business through your existing operations.
Clothing
Clothing is another deduction that can present confusion, so you may have been reluctant to use it in the past.
You are allowed to claim expenses for certain items of clothing that you use for your business, including uniforms, necessary protective clothing and costumes (if relevant to your work).
Bear in mind that you can’t deduct the cost of regular clothing, even if you wear it for work. This is not classed as a strictly business expense.
Subscriptions
If you provide yourself or an employee with a subscription to trade journals or membership to an industry organisation that is related to your business, you can claim this as a business expense.
You can’t claim for certain other regular payments, however, including payments to political parties or non-business benefits to staff, such as gym membership fees.
Marketing
An integral part of your operations and growth, certain marketing expenses can be deducted from your pre-tax profit.
For example, if you choose to have a new website built and hosted externally, or place an advertisement in your local newspaper, this can be deducted as an allowable expense.
Certain marketing avenues, which tend to be of a higher cost and aren’t seen as a ‘necessary’ business expense cannot be deducted. This generally includes event hospitality and entertainment for clients or customers.
Interest and overdraft payments
If you incur bank costs such as credit card charges, interest or overdraft charges through the running of your business, you can claim these as expenses.
This includes leasing payments, interest and bank loans and alternative finance arrangements.
It’s important to note that, if you use cash basis accounting, you can only claim up to £500 in interest and bank charges as allowable business expenses.
Claiming allowable expenses
In the course of your accounting period, you should keep records of all your expenses, such as receipts, invoices and purchase orders.
When you file your next Self-Assessment return, you should add up all your allowable expenses for that year and list them on your submission.
You will then be taxed on only the taxable portion of your profits.
While you don’t have to send proof of expenses with your Self-Assessment return, you may be asked to show proof to HMRC, so keep them to hand.
For help making the most of allowable business expenses, get in touch with our team.
