Self Employed Expenses Guide ‘The Basics’ – PART 1
If you are a Bricklayer, Dog Walker, Hairdresser, Taxi Driver you will incur costs as a result of running your business.
MAKE SURE YOU KEEP ACCURATE RECORDS:
selfemployedplus.com can help KEEP ACCURATE RECORDS for you. A good record system helps you keep track of your expenses and makes that end of year self assessment so much quicker and easier to do. If you don’t keep good records you could receive an instant fine for late filing or even have to pay a penalty on top.
Things you must keep a record of:
Receipts from purchases
CIS Vouchers (construction industry)
Your ‘profits’ are your income less expenses, and you only get taxed on your profits, so the higher your expenses, the lower your tax bill. If your earnings are £8,000 a month and you have £2,000 of expenses, you would only pay tax on the £6,000 (if you aren’t VAT registered, the total amount spent on the expenses, including VAT, is deductible).
Buying or improving capital items, such as a van, machinery, business premises, a computer, fixtures and furniture which last for several years etc… are not business ‘expenses’ for tax purposes but you may still be able to claim relief for them as long as they are related to your business. Capital items need to be shown separately on your Self Assessment tax return, but will also reduce your taxable profits.
Any expenses must be applicable to the running of your business. You can’t take away any private expenses. The general rule is that a self employed person cannot deduct expenses unless they are ‘wholly and exclusively’ laid out for the purposes of the trade, profession or vocation.
It’s worth bearing this in mind, because you may be asked to provide evidence by HMRC that firstly, you actually incurred an expense and secondly, the expense was wholly and exclusively for your business. There is no point making them up just so you can pay less tax – penalties are severe.
Self-employed drivers need to be aware of the rules that HMRC has set out about claiming motoring expenses: “If a vehicle is used for both business and private purposes then the capital allowances and the total running expenses will be split in proportion to the business and private mileage. You will need to keep records of your total mileage and the number of miles travelled on business to calculate the correct split.
This is the simplest method. You simply keep a mileage log of all allowable business journeys Note the date of journey, start point, end point, purpose of journey and total number of miles. To calculate how much you can claim as a business expenses it is currently 45 pence per mile for the first 10,000 miles and 25 pence per mile thereafter. Motor Cycles are 24p per mile and Bicycles are 20p per mile. There is an additional rate where drivers who carry passengers on a work related journey get 5p per mile per passenger.
Please note that you can only use the mileage rate method if at the point the car is first used for the business your business is below the VAT threshold rate. This is currently £83,000.
If you are above this rate you calculate the actual costs less private element deduction.
This is more complicated but can be more tax efficient, depending on your level of use. Using this method you keep a tally of all motor expenses which will include road tax, insurance, fuel, repairs and maintenance and breakdown cover. Also if you have bought your vehicle on a lease you can include the interest costs. Warranty costs can also be included but must be spread over the life of the warranty which may for example be three years.
The purchase cost of the vehicle is a capital item so is dealt with through a treatment called ‘Capital Allowances’. If you have bought a Van it will be eligible for the Annual Investment Allowance (AIA) so potentially the entire cost could be offset in the first year.
Car’s however are not eligible for the AIA. The rate at which you claim the allowances varies depending on when it was purchased and the emissions rate.
When you sell the vehicle the value it is sold for must be taken into account as well so you could end up with a balancing amount which is taxable.
The key element when using this method of calculation is working out the percentage of your vehicle that should be disallowed because of private use. In theory you should keep a detailed mileage log of all work journeys and note the mileage at the beginning and end of the financial year. This will allow you to work out the exact personal element. However this is not always feasible.
It is acceptable to keep a mileage log for a ‘snap shot’ period of, say, three months and work out the private element from this. This area of judgement is one of the most looked at by HMRC so make sure you do not over claim and can justify your claim.
Remember these methods of claiming vehicle costs are only relevant for the self-employed, if you operate through a limited company the rules are very different.
The Inland Revenue is typically strict in terms of the records required to prove business use and general upkeep, so you’ll need to make sure that you keep all records relating to:
- Mileage (business & private)
- Road tax
- Insurance costs