Sole Trader Expenses

There are countless benefits to working as a sole trader, one of which is the ability to claim expenses that can go a long way towards lowering your tax bill.

But a question often asked is how do expenses for sole traders work in practice? How do they reduce your tax liability? And more to the point, which expenses are classed as legitimate by HMRC?

In this simple guide, we answer everything you need to know about sole trader expenses.

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What are expenses?

Before we dive in, it’s important that you’re clear on what an allowable expense is – misunderstand this and it could prove costly.

All businesses incur running costs, whether it’s accounting fees, marketing spend, travel or equipment needed to perform your service. As a sole trader – and the sole owner of your business – you’ll pay for these out of your own pocket.

HMRC takes this into account, allowing you to deduct some of these expenses from your turnover before calculating the amount of tax you’ll pay as part of your self-assessment tax return.

What are allowable expenses?

You’ll notice that we’ve used the term ‘allowable expenses’. This is because not all expenses you incur will be allowable. Some won’t qualify as business expenses and some, whilst legitimate expenses, won’t qualify for tax relief.

Generally speaking, you can only claim back costs that are ‘wholly and exclusively’ incurred for your business. However, there are exceptions.

For some expenses, such as mobile phone bills (which aren’t always wholly and exclusively bought for business purposes), HMRC asks you to identify the proportion of the amount.

You might, for example, use your home broadband 80% of the time for your business and 20% personally. In which case, you can claim back 80% of the cost of this. But as you can imagine, this can get complicated.

How do sole trader expenses work?

Let’s say you spend £500 on a website to win new business or provide your service to existing clients. If you claim this expense, the amount can be subtracted from your taxable income, reducing the Income Tax you owe HMRC on your annual self-assessment tax return.

In other words, by claiming all allowable expenses, you reduce the amount of profit you declare to HMRC. This lowers your personal tax liability.

What expenses can a sole trader claim?

Sole traders can claim various expenses, we’ll run through the most commonly claimed sole trader expenses now.

Travel and subsistence expenses

If you’re travelling for business – but not commuting to a regular place of work – you can claim back train tickets, airfares, ferries and tolls as a business expense.

And if you need to stay overnight on your business trip, accommodation and meal costs are seen by HMRC as allowable expenses.

Accountancy fees

Accounting spend for your business qualifies as an expense, meaning that the cost of bookkeeping, payroll, VAT returns and much more can be claimed back.

Business mileage

Many sole traders drive to client meetings or work onsite with clients occasionally. In this scenario – and assuming you use your personal vehicle to get around – you can claim:

• 45p per mile driven in a car or van up to 10,000 miles in one tax year
• 25p on every mile above 10,000

If you ride a motorcycle, it differs a little:

• 24p regardless of how many miles you cover

These are known as ‘simplified’ or ‘flat rate’ expenses, which we’ll focus on in more detail later.

Business rates and rent

From office, workspace or business premises rent, to costs including electricity, water, business rates and even property insurance, sole traders can claim a range of expenses. However, you can’t claim back the cost of buying premises or a building.

Working from home expenses

If, like many sole traders, you spend some or all of your time working from home, HMRC allows you to claim back a proportion of heating, electricity, Council Tax, broadband costs, mortgage interest (but not repayments) or rent.

There are two ways to do this:

• Flat rate method: HMRC allows you to claim a flat rate allowance of up to £26 a month to put towards working from home costs. This saves you the hassle of calculating the proportion of time spent working from home against certain bills.
• Proportion of household: for this, you’ll need to work out how much of your home you use for work, before calculating a percentage of certain bills, which you can claim. Our working from home expenses guide explains this in more detail.

Charitable donations

Charitable donations aren’t allowable expenses for sole traders, which means you won’t receive tax relief on them. However, by donating via Gift Aid, the charity receives 25p tax relief on every £1 donated.

Childcare costs

While HMRC doesn’t view childcare as a business expense, relief can be claimed under the government’s tax-free childcare scheme. This offers up to £500 every three months (capped at £2000 a year) to help with costs.

Work uniform and clothing

Unfortunately, everyday clothing – including suits and dresses – isn’t a legitimate business expense. However, the cost of workwear bought specifically to carry out your job – whether branded uniform, work boots or protective clothing – can be claimed.

Eyesight tests and glasses

On the one hand, the costs of eye tests – assuming you rely on your sight to perform your job – are allowed. But glasses, contact lenses and corrective surgery aren’t an allowable expense because they’re likely to be used for other purposes, not exclusively for the business.

Home office equipment

Along with the cost of computers, printers and technology needed to do your job, you may be eligible for tax relief on other home office equipment, such as desks, chairs, cabinets and so on. The key thing to consider is if there will be any personal use of the item, which can impact whether HMRC deems it allowable or not.

Marketing costs

You can claim back money spent on marketing, advertising and promoting your business. This could include costs involved with building and running your website, paid digital advertising and marketing campaigns to generate business.

Phone and broadband rental

If your phone (mobile or landline) and broadband are used for personal and business use, as a sole trader you can apportion the cost and claim the cost back. But might want to consider taking out a separate phone or broadband contract exclusively for work – a cost that could be claimed back fully.

You’ll find a detailed breakdown of all allowable expenses for sole traders on the government website.

What are simplified expenses?

Simplified expenses are designed to make life easier for sole traders and are calculated using a flat rate instead of the true cost. You don’t have to use simplified expenses though, which can only be applied to:

• Business mileage
• Working from home costs
• Expenses incurred from living in your business premises (e.g. landlords)

Who can use simplified expenses?

Sole traders and business partnerships that have no companies as partners can use simplified expenses. Limited companies or partnerships involving a limited company can’t make use of them.

How to use simplified expenses

1. Keep a record of all expenses you intend to claim – from business miles to hours worked from home and, if relevant, the number of people living at your business premises.
2. At the end of the tax year (5th April), use the flat rates for mileage (see above), working from home (up to £26 per month) or living at your business premises to calculate your expenses.
3. The total amount can be claimed in your self-assessment tax return, to reduce your tax liability.

Keeping a record of sole trader business expenses

Don’t forget to keep a record of your business expenses, which you may need to show HMRC if the tax office enquires into your tax returns.

Which expenses can't a sole trader claim?

While there are plenty of allowable expenses for sole traders, you won’t receive tax relief on expenses HMRC do not consider as being incurred wholly and exclusively for the purposes of trade. This includes:

• Gym memberships
• Payments to political parties
• Repayments of personal loans, finance or overdrafts
• Everyday clothing
• Carers or domestic help (nannies)
• Entertaining clients, suppliers and customers
• Event hospitality

To conclude, you can claim many expenses as a sole trader – ones that can legitimately reduce your tax bill. What matters most is that you’re sure they can be claimed for and if so, you keep hold of your receipts.

Speak to an expert

For more information and to discuss your tax and accounting needs with one of our friendly experts, please get in touch.