Quite simply a business expense is money you spend to run your business. Your self-assessed tax return asks for this information so HMRC can work out how much tax you need to pay on your profits.
HMRC take your turnover figure and deduct allowable expenses and then work out your tax charge on the rest. This is known as ‘taxable’ profit.
For example, your turnover is £40,000, and you claim £10,000 in allowable expenses. You only pay tax on the remaining £30,000.
What is my Turnover?
Turnover is the term used to represent the total of all your income for your business. This includes but is not limited to sales, commission, interest and income from rent or shares.
It doesn’t include investments or loans you may have taken.
What is an Allowable Expense?
The term “allowable expense” represents expenses made to run your business, but only includes business purchases. If you’ve used business money to pay for a private purchase, you can’t include this as an expense. It would be classed as “owner’s drawings” instead, which is the term used for the money you have taken out of your business for yourself.
Client entertaining costs are also not an allowable expense.
How to claim expenses on your self-assessed tax return.
You need to keep records of all your expenses and what they were for. This can be on a spreadsheet, in an app or accounting software package. These records need to be kept for 6 years plus the current year and you will need to consider how they are backed up in case of emergency. You also need to ensure that your records are accurate.
If your turnover is below £83,000, you can choose to put the total figure of all your expenses on your self-assessed tax return. Otherwise, you will need to separate them out into totals for each of the following categories:
- Cost of goods sold
- Car, van and travel expenses (not including private use)
- Wages, salaries and other staff costs
- Rent, rates, power and other insurance costs
- Repairs and maintenance of property and equipment
- Accountancy, legal and other professional fees (this includes hiring a bookkeeper)
- Interest and bank and credit card etc financial charges
- Phone, fax, stationery and other office costs
- Other allowable business expenses
You also need to have registered your business with HMRC and set yourself up for online self-assessment. Then when you are ready, you log in to your account and answer the questions to complete your self-assessment.
What are Simplified Expenses?
Simplified expenses are just that – a simpler way to calculate the expenses that you can claim on your self-assessment. If you are a sole trader, you can use this instead of calculating each expense down to the penny.
Simplified expenses use a flat rate instead of the actual expense amount. It’s therefore much quicker to calculate, however, you would need to review this to make sure you’re not losing out, as the flat rates may be less than your actual expenses. HMRC has a simplified expenses checker to help you make this choice. Whichever way you choose to calculate your expenses, you must use the same method each year, you can’t swap between them without a very good reason.
There are flat rates for:
- Business costs for vehicles
- Working from home
- Living in your business premises (e.g. bed and breakfast)
- All other expenses still need to be calculated from the actual costs.
How to use Simplified Expenses
You still need to record things, such as mileage, as you would if you were to calculate the actual costs.
At the end of the year, you use the flat rates provided by HMRC to calculate your expenses.
This is what you then enter onto your self-assessment.
How can I help you with your business expenses?
I love taming those unruly numbers and ensuring everything is where it should be. The feeling I get when everything balances is just pure joy.
If you would like help getting your expenses in order, I offer a 1:1 Help and Advice session where we can discuss any questions you may have.
Or, I could do your bookkeeping for you. My bookkeeping packages include:
- A 30-minute consultation to discuss your current processes and needs and how I can help you with your business
- Collation of all your financial data and recording these transactions
- Bank reconciliation (matching your financial transactions to your bank statements)
- Regular communication with you to keep you up to date with my work
- Help and advice support by email