If you think expenses sounds like a fancy word that’s only swung about in big businesses, you’re wrong. As a freelancer (sole-trader or limited company), no matter the size of your business, you’re eligible to claim expenses too. Expenses are a purchase related to your business that is often made using your personal money or business bank account. The rules for claiming expenses depend on whether you’re a sole trader or limited company.
What expenses can I claim?
If you’re a sole trader, you’ll be able to make purchases through your business account, keep a record of this — whether that’s an invoice or receipt — and claim it back when you complete your self-assessment return, therefore lowering your taxable income.
If you’re a limited company and pay for an expense from your personal account, the expense can be claimed from your business bank account directly. Again, lowering your taxable income.
For example, Terry works as a freelance photographer and has set up his business as a sole trader. Terry needs to purchase a new camera. This would be classified as a business need and eligible to be filed as expenses when Terry is doing his self-assessment. Terry’s camera costs him £500. When filling out his self-assessment, Terry makes the following calculation:
£15,000 profit — £500 expenses (the camera) = £14,500 taxable income
Expenses are subtracted from business profits meaning your taxable income is lower (this is a good thing!).
“Brilliant!”, you may think, “I can claim back all those expensive artisan craft beers I bought in the pub last night whilst discussing my latest photography project!” Well, not quite.
Generally, the rule is that the expense has to be “wholly and exclusively” for your business.
What you can claim is very dependent on your type of business. For example, a computer game developer may be able to claim for a PlayStation, whereas a lawyer wouldn’t. Whichever business type you are — sole trader or limited company — you’ll need to think very carefully about whether the purchase you are putting through as expenses is a benefit to the functioning of your business and whether the purchase is completely necessary for the business to function.
Not everyone will work in an office, especially if you’re a creative freelancer. But everyone uses pens, stationery, and postage. These are classed as office equipment and will be eligible for expenses claims. Computers and software also fall under this category.
If you’re a sole trader or a limited company, you’ll be able to claim certain travel expenses. Journeys that you make outside of your normal commute, for example, a business trip to London when you live in Brighton — could be claimed as an expense. If you decided to drive from Brighton to London, you could claim fuel expenses via milage (more info on allowable mileage expenses below) or overall fuel cost.
Train, taxi, air, bus and toll charges can also be claimed as expenses. If you needed to stay overnight, this could also be claimed. But again, the same rules apply — the journeys have to be “wholly and exclusively” for business purposes. Sadly meaning your much-hyped weekend in Prague with the lads will have to come out of your personal funds.
Sadly, your new Levi jeans will have to come out of your personal finances. Clothing expenses are only applicable to work uniform — if it carries a company logo — protective clothing e.g. steeltoe boots or protective eyewear and, if you’re an actor or entertainer, costumes.
If you’re a sole trader working from home for more than 25 hours per week you’ll be able to claim expenses. This simplified, flat rate expense claim saves on having to calculate the proportion of business use you’re getting from your utility bills. Be prepared, it’s not a lot!
Hours of Business use per month
25–50 = £10 flat rate p/m
51–100 = £18 flat rate p/m
101+ = £26 flat rate p/m
Use this simplified, flat rate expenses system and calculate your expenses whilst filling out your self-assessment.
For a limited company, the HMRC offers a flat-rate £4 a week claimable expense. An alternative to this is to calculate exactly how much heating, water, electricity and rent your home office or business takes from your utility bills. You’ll need to consider what proportion of the utility is being used solely for business needs.
Think of business needs as equipment. For example, Terry would be able to purchase a new camera for his freelance photography business and claim that as an expense. Sure, Terry might think that his new Armani suit is essential to his business look, but is it really needed? No, it’s not, and the HMRC wouldn’t count this as a business need. This is where it’s imperative to think about whether the purchase is “wholly and exclusively” for your business. The main benefit of keeping accurate receipts and records — yes, even for that pack of business biros you purchased — is that it can lower the amount of profit on which you pay tax.