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Freelancers have to complete a self-assessment tax return by January 31st each year. This includes listing all of your income for the tax year – and your eligible expenses. But what can you include as legitimate spending – and what will HMRC oppose?
Let's take a look at what you can and can't include as acceptable expenditure in your self-assessment. This guide is aimed at sole proprietorships. Taxes for limited companies, SPS, and charities are different.
Explained completely and exclusively
Before you start tossing everything on your business account to burden your self-assessment, wait! You may have to prove to the helmsman that your expenses were "entirely and exclusively" incurred in the context of the work.
For example, you cannot book a two-week vacation to attend a one-day conference and claim the full cost. However, you can claim the travel required to get to the conference and hotel one night before (or even after, depending on the distance from home and travel requirements). The rest of your accommodation and travel expenses – d. H. Your vacation – must come from your own pocket.
Personal effects for business purposes
Sometimes, especially when you're just starting out, you use personal stuff in the industry. For example, you can use your cell phone or laptop when you're first running your freelance business.
You can't get the full bill, but you can get the fair share of the cost used in the industry. For example, you can find out how many minutes of your monthly mobile phone plan you have used for business purposes and use that as a prorated amount for the claim.
Simplified and Actual Editions
If you run a low overhead business, your costs can be under £ 1000 per year. In this case you can claim the use of "simplified expenses" for some things. This includes the business use of vehicles, the cost of working from home and living on your business premises. Everything else must be calculated as an actual cost.
Simplified spending will save you a big headache! You use the flat-rate expenses set by HMRC to make approximate cost claims rather than adding up, for example, every single mile you have traveled in the year. For more information on simplified editions, see the Gov.uk website.
For example, the flat rate for working from home is £ 10 per month for 25 to 50 hours per month, £ 18 for 51 to 100 hours and £ 26 for more than 101 hours per month. This can get you more than just calculating the actual expenses (see below).
Traditional vs. Cash Based Accounting
Decide if you want to follow the traditional or cash-based billing options. In traditional bookkeeping, you count the bills sent that month – not necessarily the money received. This can be helpful when setting up if you have a lot of inventory or long payment terms, as you can offset unpaid bills.
However, cash settlement is often easier for sole proprietorships. It only takes into account the money that you actually received in that tax year and the costs actually incurred.
Regardless of the base used, you should keep ALL RECEIVES for at least seven years. Use an accounting software or receipt tracking app to digitally save them. HMRC can locate you for a spot check. Hence, you will need to provide every receipt for expenses and income for your business.
Work from home or rent office space
Many freelancers work from home – either for financial reasons or for personal reasons. Others like to rent a desk in an office – or have a membership in flexible workspaces for those days when the same four walls mess them up!
You can claim some of the costs of working from home as eligible costs on your tax return. Unfortunately, you can't spend all of your council taxes or council utility bills – but you can spend some of them.
Rooms that you can lock in
Use the number of rooms in your house for the calculations. You can include living areas, bedrooms, kitchens, office space, and even garages if you work in them. You cannot use lobbies, porches, or hallways (including mezzanines). However, if you have a garden room on your main power supply, this can be included.
Count how many rooms you have in your house. Divide your monthly bills by the number of rooms you have. Say your bills are £ 350 and you have five rooms – that's £ 70 per room. Then look at how long you have been using each room for work.
Let's say you work 100 hours a month. You will spend 50 hours in the living room (room costs £ 70 x 50% time = £ 35), 30 hours in the kitchen (£ 70 x 30% = £ 21) and 20 hours in your garden room (£ 70 x 20% = £) 14). So that's £ 35 + £ 21 + 14 = £ 70 allowed in spending.
Why not use a room?
Even if you have a dedicated home office, make sure you use it for some personal use. This can consist of storing personal items in it or sometimes watching a movie on your laptop in it. Why?
Capital gains tax! If you are selling your home and only used one room exclusively for work, you are opening up to a huge CGT bill. Therefore it is better to calculate the percentage of time than just the use of a room!
Invoices that are an eligible expense
Calculate each bill: rent or mortgage interest (not the full repayment of the mortgage), electricity, gas, council tax, water. Your telephone and broadband bills can be calculated based on a percentage usage rather than room calculations.
Office equipment and furniture
Are you using a specific desk, chair, or filing cabinet? Have you bought light bulbs for the lamp on your desk? Perhaps you have a bulletin board on the wall for your important documents and reminders.
Anything you buy that is solely for your business is eligible. If there is personal use – such as an office chair that you sit in to watch YouTube on your lunch break – you cut the portion of the time you spend on personal activities down to the expense.
Power cords, surge protectors, monitor risers: anything and everything you use to equip your office space can be included.
This includes business expenses such as postage, envelopes, printer ink, paper, and stationery. You can also include software purchases – including monthly subscriptions to things like Dropbox or Office 365.
Computers and technology
Do you use a desk with a PC and monitors? A laptop on a stand? A specific phone for work?
You can discount all of these costs as an allowable expense! However, you should ensure that this is counted as an acceptable expense and not an investment. An eligible spending is used for less than two years – e.g. B. Rent, bills and stationery. If you're using cash accounting, computers are also acceptable expenses. However, if you are using traditional bookkeeping, the equipment is a capital allowance.
As with the other things, if you are using your computer or mobile phone for personal use, you must have a fair claim.
Contractor costs and fees
"You have to spend money to make money" is really very true when it comes to starting and running an independent business.
One of the best investments you can make in your business is getting the right people to do the job. While many self-employed people running their own businesses are accountants, marketers, salespeople, doers, and social media managers at the same time, it's actually better to hire people when you can.
You can offset the cost of fees such as accountants and lawyers as an allowable cost. Using a professional will save you a lot of time and help you avoid potentially massive (and costly) headaches in the future.
If you need a helping hand running a booth at an exhibition or if you want to pay someone to run your social media, those costs are also below allowable costs. This is different from an employee: you have to use contractors here instead of putting someone on the payroll. If you are looking for an employee, you must be a limited liability company and pay employer's social security and pension contributions. If you use contractors, you pay the set fee on the invoice excluding the above costs.
Sole proprietorships DO NOT NEED to have a separate bank account – however, it is advisable to set up an account. You can use a checking account instead of a business account, which often means no bank charges.
However, if you want to access business credit cards, loans, and even work with public organizations, you'll need a business account. These are chargeable – but you can set off monthly fees as permitted costs. You can also claim overdraft fees, credit card interest payments, leasing charges and currency conversion fees.
Those who use traditional bookkeeping can also claim bad debts. This is the case when a customer hasn't paid you. You need to prove first that you tried to get the money back. However, if you are out of luck (e.g. if your customer has gone bankrupt), you can write it off against your winnings.
Insurance counts too
As a business owner, corporate insurance is essential. The professional liability insurance protects you at least against claims from customers. If you operate exhibition stands or people visit your premises, you also need statutory liability insurance. These costs are all part of the allowable costs.
You can't run a business if you don't shout about it! Anything you do to market your business can count towards eligible costs.
When you set up your website, your hosting and domain costs are allowable costs. Your flyers, business cards and online pay per click ads are also counted! When you have a product to sell, sending free samples to reviewers is considered marketing.
Attend an event? Those branded pens, stress balls, key rings, and anything else you need to give away as tempting freebies are considered a legitimate marketing expense. The same applies to print advertising in your local newspaper or in national magazines and newspapers, to listing your company in a directory and to your direct advertising costs.
Unfortunately, taking potential customers out to dinner doesn't count as marketing. "Customer entertainment" is not an acceptable output.
Clothing and uniforms
Would you like to receive t-shirts with your logo? What about branded hoodies? You may want to wear a sleek uniform that is only used for your work such as B. if you run your own cleaning business.
You can claim branded clothing as a marketing expense. You can also claim uniform costs – AND you can also claim laundry costs for uniforms.
However, you cannot claim clothes that you would normally wear at home. Or even a business suit for meetings when you usually wear jeans and a hoodie! The rule with clothing is very much that it must either be considered marketing (i.e., a brand) or be used as a uniform "wholly and exclusively" for your business.
This is an interesting one. You can include things like trade magazines in your allowable spending, as well as membership in recognized industry organizations if those are related to your business.
Continuing education also counts as an allowable expense if it builds on a skill you already have for your company. For example, if you're a freelance event producer, your job will be primarily marketing. So you can apply for a Marketing Diploma or even a full CIMA qualification. However, you couldn't make up your mind whether to change your career as a bricklayer and consider this course an acceptable expense.
This still leaves your opportunity base pretty broad, especially if you are a sole proprietorship. For example, let's say you are a freelance writer. Many writers benefit from learning how to use graphic design software. So the online Photoshop course might count. Or any business related course like an accounting qualification is also qualified.
Participation in specialist conferences and events is also part of professional development – so make sure that you also state your ticket costs as a permitted expense!
Travel and vehicles
If you commute to an office regularly, you cannot claim these costs as an expense. Everything else, however, is a big check mark in the "Yes, you can make a claim" column!
Train, bus, and even airfares count when you are traveling for business purposes only. If you are buying a vehicle for your business ONLY, you can count the purchase as a capital expense (or lease fees as an allowable expense). All MOTs, insurance, maintenance, repairs, parking and fuel are also allowed.
If you drive to work in your personal car, you can claim mileage costs. This is based on the fairly high HMRC mileage, which should cover fuel costs as well as any wear and tear that has arisen.
Other costs to consider
There are many other costs that may be acceptable. You have to wonder if it is being used "entirely and exclusively" for business purposes. Here are some examples you might come across – it all depends on your job and whether you are ONLY using something for your business with no personal use.
Trade journals are a clearly permissible expense, as are subscription-based software such as GSuite or Dropbox. But did you know that there are other things you can claim – including buying books and newspapers, or even subscriptions like Netflix and Spotify ?!
You need to demonstrate real business use. Playing Netflix while working for Office Entertainment doesn't count! However, if you are an actor or an aspiring film director, for example, you can justify the subscription as a research tool. Same goes for Spotify if you're a musician or a podcaster, or even things like Twitch if you're a gamer trying to generate income from streaming.
In 99.99% of the cases this is not washed with HMRC. However, if you are a sports model, for example, your job is to stay fit and look healthy. If you are a personal trainer, fitness equipment also counts as an allowable cost.
Haircuts and beauty treatments
If your job is based primarily on how you look – i.e. H. If you are a model or an actor – you can try to claim hair and beauty treatment costs. You need to be able to prove that the cost was a legitimate business claim when asked!
Often times, when you travel anywhere for business meetings or events, you have to travel a long distance from home. You are entitled to claim your accommodation expenses as an Eligible Expense if your trip is 100% business related.
If, as in hotels, you are traveling away from your main workplace for an overnight stay or a longer trip, you can take into account the overnight stays. That doesn't mean you go all out and have a Dom Perignon steak dinner, however – the cost must seem reasonable.
We cannot emphasize this enough: contribute to your retirement! The self-employed often put themselves last, especially their older selves in the future. Start putting money into your retirement every month – even if it's a small amount.
While it is not an allowable tax return expense, there is another section that will ask you to declare your pension contributions. It is important that you state your total annual contributions here, as you can make the most of the tax breaks on offer – free money for your pension pot!
One of the funniest claims we've heard HMRC accept is a watchdog. You are entitled to security costs for your business premises. If your dog is considered a watchdog, technically you can claim the purchase, maintenance, vet bills, and food! However, always remember that HMRC can audit you at any time. So if you are thinking of listing your Chihuahua as a guard dog, you might think twice …
More tips for freelancers
This epic guide is just part of many in our freelance franchise. We're here to help you find your way around your freelance business. See these articles for more help.