If you plan to work as a sole trader and run your business long-term, you need to be knowledgeable about tax requirements. A firm understanding of sole trader tax supports the success and security of your business.
Sole traders can claim back any expenses they’ve incurred that relate directly to their business in much the same way as limited companies. The rule of thumb when claiming for any expenses is that you can only claim for expenses that are wholly and exclusively’ incurred in the performance of your duties. Claiming as much tax relief as possible will no doubt be one of your biggest priorities as a self-employed sole trader.
In this guide, we will help ensure you pay the right amount of tax as a sole trader, and not a penny more than you need to. When you work for yourself, the last thing you want is to pay more tax than is necessary.
No matter how long you have been self-employed, all sole traders are entitled to claim allowances and expenditure relating to their business. In this guide we will discuss the main business expenses sole traders can claim for with HM Revenue and Customs (HMRC).
What is tax relief and how does it work?
Tax relief allows you to deduct some payments you make during the tax year from your gross income. So, there’s less for you to be taxed on. You can claim tax relief in addition to any personal tax allowances that you are entitled to, which essentially means you’ll take home more of your income and pay less tax.
As a sole trader, by claiming tax relief on business expenses i.e. costs directly linked to the running of your business, you can recover your hard-earned income and pay a little less income tax.
- It’s even possible to reclaim the VAT paid on goods and services for your business in your quarterly VAT returns, providing you are VAT-registered.
- Tax relief can be used to offset against your taxable profits when filing a self-assessment tax return with HMRC.
What sole trader business expenses can be claimed?
Uniform or work clothing
There is a HMRC laundry allowance which you can find on the GOV.uk website which means you can claim tax back for uniform used directly for your business.
This includes purchase, cleaning, and repair costs for all clothing. What you must pay and report depends on if it’s:
- Protective clothing that you need to do your job, e.g. PPE
- A uniform they only wear at work
If your clothing could be included in an “everyday wardrobe” and is not strictly for business use, it is not permissible for a work clothes tax rebate. But this doesn’t just cover branded uniforms for your business. You can include the cost of protective clothing for tradesmen, while entertainers can even claim tax relief for stage costumes.
Travel and motor running expenses
Claiming travel expenses is another legitimate allowance in the eyes of HMRC. Although there are some aspects of your mileage and travel that you must consider as a sole trader.
In most cases, sole traders will have a vehicle that isn’t mandatorily used specifically for business needs. Although you might use your vehicle to travel to meet customers, it’s highly likely that it will also be used for other purposes, such as non-business travelling and grocery shopping.
Only the business elements of fuel, parking, repairs, servicing, breakdown cover and insurance are allowable business expenses. Crucially, it does not cover you for travel between home and work, any speeding or parking fines incurred and any non-business driving costs. You can also claim business expenses for any other business-related travel costs, such as train, air or taxi fares for business purposes, hotel rooms e.g. following an industry seminar or conference and meals during overnight business trips.
There is a simplified method for claiming business expenses for running a vehicle in your business, which is to claim business mileage. You can claim 45p per mile for the first 10,000 business miles. Anything over this figure will be claimed at a rate of 25p per mile.
Buying or leasing vans and cars
You might be wondering whether you can claim the cost of buying a car or van for exclusive work use. Self-employed car expenses are an important talking point for any sole trader. If you buy a car or van through your business, it will be listed as a fixed asset to your firm, a form of plant and machinery.
This allows you to claim capital allowances on the value of your purchase, reducing your taxable profit. If you choose to lease a car instead of buying one for your self-employment, you can opt for one of three lease options:
- Hire Purchase
- Finance Lease
- Operating Lease
If you work from home as a self-employed sole trader you should be able to claim a portion of your household bills, even if the level of business use is minor. Your claim should be based on your total household bills, the area you’ve used and the duration you’ve used it for business purposes. Remember the room(s) you use should be used exclusively as a business/working space, but you can allow people to use it at the end of the working day to catch up on some work or let the kids do their homework in it. This will ensure you don’t pay any Capital Gains Tax if you sell your home.
What constitutes a tax-deductible household expense?
To work out the proportion of household expenses you can claim for each of the below costs, you will need to determine how many rooms at home you use for work purposes and how long you spend using it for work.
There are many self-assessment expenses you can claim if you work from home, including:
- Mortgage interest (not the capital repayment aspect of your mortgage)
- Council Tax
- Cleaning costs
- Property repairs
Work out the maths for your sole trader business expenses claim
For example, if your home has five rooms, and you use one of them Monday to Friday for business and it is used for the family at the weekend, you would start by calculating a fifth of your mortgage interest, rent, Council Tax, utility bill and so forth, then you would divide by seven days a week and times by five working days. This adjusts your claim to only reflect the business use of this room.
Tools and other equipment
It’s possible to claim back tax on replacing and maintaining your essential equipment. If you are a self-employed builder or mechanic, or any other sole trader that relies on tools or machinery to do their job then you could be entitled to claim money back.
You can only claim tax relief for equipment expenses if:
- It is needed to do your job
- You use the equipment for work and there’s no significant private use – this includes using the equipment according to your organisation’s policy
Depending on the basis you are using, you are also entitled to claim relief when you first purchase the item, and this will be done either by capital allowances or as an allowance expense.
Are training courses tax-deductible for sole traders?
Providing skills-based learning to yourself as a sole trader can have such a beneficial advantage to your business. You will be happy to know that training courses are deemed an allowable business expense by HMRC. The training courses must be relevant to your current profession and geared towards furthering your career. For example, if you are an electrician that needs to enrol in a refresher course to understand the latest regulations, this expenditure will be tax-deductible.
If you are considering enrolling in a training course that will enable your business to enter an entirely new marketplace, this is not allowable.
As ever, if you are unsure whether a training course will be tax-deductible for your self-employment, please don’t hesitate to ask Maple, we’ll be more than happy to provide help and advice.
HMRC’s Simplified sole trader business expenses calculator
If you decide to trade as a sole trader as opposed to a limited company, HMRC allows you to use their Simplified Expenses calculator for some of your business costs.
This calculator enables sole traders and business partnerships to determine their business expenses using flat rates. Rather than having to spend time working out the specific costs to your business. Flat rates can be used to cover:
- Business costs for vehicles
- Costs of working from home
- Cost of living in your business premises
This is simplified and will not give you an exact number. But it can help you calculate your business expenses and will save you more money.
- The Simplified Expenses calculator is not available to limited liability partnerships or limited companies.
Maple can help sole traders claim for business expenses
Self-assessments can take a lot of time and cause unnecessary stress, but our team of tax experts can help with everything from preparation to filing, so you won’t have to worry about the ever-changing tax rules or making costly mistakes.
At Maple Accountancy, we can help you access and benefit from tax relief schemes, to reduce the amount of tax you pay. For the best guidance on claiming business expenditure, you can check out our website for Tax breakdowns or contact our Maple Accountants today at firstname.lastname@example.org or speak to an advisor on 01217692197.