Dealing with your finances correctly is an important part of being self-employed, albeit not the most exciting. Claiming business expenses helps reduce your tax bill but, knowing what, and how much you can claim isn’t always straightforward. Nicola Roby at CHW Small Business Bolton Accountants explains how HMRC allow self-employed to use ‘simplified expenses’ to claim certain allowable business expenses without needing to make complicated calculations.
If you are self-employed you are required to complete a self assessment tax return every year and if you make a mistake you can be fined. Whilst many self-employed businesses invest in an accountant to handle their affairs, it’s still worthwhile having a basic understanding of your business finances.
Allowable expenses are classified by HMRC with clearly defined rules. These strict specifications mean that you can only deduct expenses that are vital to the running of your business. Running costs cover day-to-day things like travel, insurance, office costs, stock, advertising and marketing expenses, to name a few.
The amount of tax you are required to pay is calculated after these allowable expense have been deducted.
Simplified expenses are a way of working out the cost of your allowable expenses using a flat rate instead of working out your actual business costs. Choosing this option will save you time and avoid the hassle and complications of working out every single business cost.
Simplified expenses can be used by sole traders, and partnerships but not limited companies and business partnerships that involve limited companies.
They are flat rates that can be used for vehicles, working from home and living at your business premises.
You can use simplified expenses to calculate vehicle expenses by using a flat rate for mileage. This includes car, motorcycle and van and you do not have to use a flat rate for every vehicle in your business.
Working from home
If you work from home more than 25 hours per month you can offset a flat rate as follows:
The flat rate doesn’t include internet or telephone costs – these are claimed separately by calculating the actual business proportion of these bills.
Living at your business premises
A small number of self-employed use their business premises as their home, e.g. a guesthouse, bed and breakfast or small care home.
You can use simplified expenses instead of working out the split between what you spend for your private and business use of the premises.
With simplified expenses you calculate the total expenses for the premises. Then use the flat rates to subtract an amount for your personal use of the premises, based on the number of people living on the premises and claim the rest as your business expenses.
If one person is living in the business premises you can claim £350 per month, if two people are living there you can claim £500 and more than three people £650 per month.
Other allowable business expenses
Other business expenses considered by HMRC to be allowable, but don’t fall into the simplified expenses scheme, so have no flat rate. These include employee costs, mobile phone costs, insurance, subscriptions, professional fees, stationery, printing costs and postage, stock as just some examples.
Nicola comments ‘There is no doubt that there is software available which makes it easier for those who are self-employed to manage their finances. However, it doesn’t make it infallible and one of the most important areas to get right is managing your expenses.
‘Taking advantage of simplified expenses can save you time and money if you don’t want to make calculations accurately.’
Many small businesses choose to employ an accountant to do the calculations for them, to avoid potentially costly errors. For more advice contact the team at CHW Small Business Bolton Accountants on 01204 534031 or via our contact us page.
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