Self Employed Expenses Guide ‘The Basics’ – PART 2
This is part 2 of the Self Employed Expenses Guide ‘The Basics’. Part 1 can be found here.
You can claim some of your mobile phone costs as a business expense, the tricky bit is what proportion to claim as usually someone who is self employed will use their phone for both personal and business use.
What you should in theory do is go through one or two sample months of bills each year and highlight your business use vs personal and use that as a basis of what % of your total bill to claim as a business expense.
In reality we tend to be a bit more pragmatic and suggest that if you use your mobile phone heavily for business and just a bit personally then to claim perhaps 80% of the total costs for business would be fair and justifiable. However if you use it quite evenly for business and personally, then we would suggest claiming perhaps 50%.
What you need to remember is that you might have to justify this percentage to HMRC in the event of an enquiry, so keep a note of your workings and lean on the side of caution when it comes to what % to claim.
These days a lot of self employed work from home so it is important to ensure a sufficient “Use of Home as Office” cost is put against your tax return. There are two methods.
There is a simple rate of £4 per week which HMRC let you put through without any backup. For most people this is way too low unless the amount of work done from home is minimal.
You can allocate a portion of your home running costs as allowable expenses to the business. Firstly work out what your actual running costs of your home are. If you own a property this can include mortgage interest but not capital repayments. If you rent then it is simply the rental charge. If you pay costs jointly that’s fine but you can’t include costs that are being paid entirely by someone else. Other costs which you need to capture are Gas, Electricity, Insurance, Service Charges, Cleaning and Council tax.
You then need to work out what proportion of these costs would be fair to allocate to your business. The simple way of doing this is to firstly work out how many rooms you have in your house excluding bathrooms, kitchens and hallways. You then need to work out what % of the time you use one of the rooms for business use. Let’s assume you use one of your rooms as an office and 50% of the time that it is in use it is used for your self employed work. Let’s then assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens. If your total running costs of your house per year are £15,000 it would therefore be justifiable to charge £1,500 per year (50% x 1/5 x £15,000) to the business as rent.
If you are renting only part of a property (e.g. a house share) then you should only include the rooms that you have access to in the calculation.
Another tip is that you shouldn’t use your office room entirely for business use – keep at least a small element of the room for personal use as this protects you from any potential capital gains tax issues.
Entertaining clients, customers or third parties
The cost of entertaining clients, customers or third parties in relation to the business is disallowed as a deduction for tax purposes. It still should be included as a business expense on your “Profit and Loss” account but it should be separately analysed so that it can be added back for tax purposes.
When a room is hired for an event and entertaining also takes place it can be possible to claim tax relief on the cost of the room.
The cost of entertaining yourself or members of your family, is not deductible as it is entertaining and under the general principle of “wholly and exclusively”.
The only exception is where family members are your employees. In that case the cost may be allowable providing that it is not excessive.
Where an employer entertains his staff the cost is not treated as entertaining. It is staff welfare so it is allowable for tax purposes. Please note that Subcontractors / Freelancers are not Staff.
It is not possible to claim the cost of a training or course fee for tax purposes if the object is to learn a new skill or qualification. Why? Any new skill or knowledge obtained creates an intangible asset; it is something of enduring benefit which is totally personal to the individual.
Example of a disallowed expense : Dave is a self-employed sales consultant; he attends a college course and obtains an MBA in business studies. The cost is not allowed, as this is a new qualification. His incidental costs of obtaining his MBA, such as travel, stationery and subsistence are not allowed either.
On-going training and development – Once a knowledge, skill or qualification is acquired, the cost of up-dating or continuing development costs are allowed for tax.