The complete guide to self-employed expenses 2021.

If you are self-employed, did you know that certain business expenses can be deducted from your tax bill?

Freelancers, sole traders and contractors are all classed as self-employed, so to avoid paying more tax than needed, claiming allowable business expenses is important. However, not all business expenses are allowable expenses. You need to be aware of what costs you can claim on your tax return.

But how do tax-deductible business expenses work if I’m self-employed? What costs can I claim as capital allowances? How do I use simplified expenses?

All of these questions and more will be answered in this guide. Let’s take a look.

How Do Tax-Deductible Self-Employed Expenses Work?

So, in a tax year, those who are self-employed are charged a tax that is based on the amount of profit they’ve made. However, to lower your tax bill, there are some expenses that can be claimed.

For certain purchases, HMRC will allow you to deduce the cost for certain necessary business-related purchases. These will be taken from your profit, therefore reducing the tax owed. On the other hand, If you run a limited company, there are different rules.

What Costs Can Be Claimed As Allowable Expenses?

Some are still unaware of the expenses that can be claimed by the self-employed. These will allow you to lower your tax bill, saving you money. Below is a list of allowable expenses:

Travel costs	Example – phone bills and stationery
Office costs	Example – parking, fuel and public transport fares
Clothing expenses	Example – uniforms
Staff costs	Example – salaries or subcontractor costs
Financial costs	Example – insurance and banking charges
Advertising or marketing	Example – website costs
Training courses	Example – courses related to your business
Things bought to sell on	Example – stock and raw materials
Costs of business premises	Example – lighting, heating and business rates

If you use your £1,000 tax-free ‘trading allowance’, then expenses cannot be claimed.

What Can Be Claimed As Capital Allowances?

For those that use traditional accounting, you are able to claim capital allowances when buying business-related items such as:

Equipment
Machinery
Business vehicles, for example, cars, vans, lorries

Again, if you use your £1,000 tax-free ‘trading allowance’, then capital allowances cannot be claimed.

You cannot claim capital allowances if you use your £1,000 tax-free ‘trading allowance’.

For those using cash basis accounting and then purchasing a car for your business, it can be claimed as a capital allowance. However, any other item that is bought and kept by your business should use the normal method of claiming allowable expenses.

What If I Use Something For Both Personal And Business Reasons?

Allowable expenses can only be claimed for the business costs. Let us say for example you have a mobile phone bill that costs £100 for the year. If you spend £20 on personal calls and £80 on business calls, then £80 can be claimed as business expenses.

What If I Work From Home?

If you are self-employed and work from home, there are some expenses that can be claimed. Below is a list of expenses where a proportion of the costs can be claimed:

Heating
Electricity
Council Tax
Mortgage interest or rent
Internet and telephone use

However, you will need to find reasonable methods to divide the costs. For example, if you use certain rooms for business purposes or the amount of time spent working at home.

What About Simplified Expenses?

Working out your expenses can be overwhelming and stressful. However, you can use simplified expenses to avoid complex calculations, utilising flat rates rather than working out your actual business costs. These flat rates can be used for the following:

Vehicles
Working from home
Living on your business premises
On the other hand, simplified expenses don’t have to be used, it is your decision to use what suits your business.

What Can Use Simplified Expenses?

Sole traders as well as business partnerships that have no companies as partners can use simplified expenses. However, limited companies or business partnerships involving a limited company cannot use simplified expenses.

What Types Of Expenses Can You Use Flat Rates For?

Flat rates can be used for the following:

Business costs for some vehicles
Working from home
Living in your business premises

All other expenses must be calculated by working out the actual costs.

How Do I Use Simplified Expenses?

Step 1	Firstly, you need to ensure you keep records of all the hours worked at home, business miles for vehicles and the number of people living at your business premises over the year.
Step 2	Next, at the end of the tax year, you need to use the flat rates for working from home, vehicle mileage and living at your business premises and work out the expenses.
Step 3	Finally, in your Self Assessment tax return, you must add these figures into the total expenses. There you have it, the three-step guide to using simplified expenses. We recommend using the gov.uk website for more guidance and advice.

How Does HMRC Determine If I’m Self-Employed?

HMRC uses a set of standard questions to distinguish between self-employed and people who work under a ‘contract of service’. Those answering ‘yes’ to the questions will likely be accepted as being self-employed. Some of the questions include:

Do you ever risk your own money?
Do you often have to work for numerous different people?
Do you ever agree to complete a job at a fixed price, no matter how long the job could take?
At your own time and own expense, do you have to correct unsatisfactory work?
At your own expense, do you have the ability to hire someone to do work?
Do you have the ability to decide when you want to work, what work to do, how you do it and where it is done?
When working, do you provide the majority of equipment needed?

What Travel And Accommodation Expenses Can I Claim For?

Below is a list of travel and accommodation expenses that can be claimed:

The travel and accommodation for business trips or the travel and accommodation between different places of work.
The running costs of your car or any other vehicle. This includes petrol, diesel, car tax, insurance, servicing and repairs.
Private use of the car can only claim a proportion of the costs equal to how much the car is used for business purposes.

We recommend keeping a record and log of the mileage used for business purposes, as well as all bills and receipts.

What travel and accommodation expenses can’t be claimed?

Any travel between your home and workplace.
The cost of purchasing a new vehicle – remember, it may qualify for capital allowances.
Any meals, unless it is a reasonable amount for meals on overnight trips.

What Is The Deadline For Submitting A Self-Assessment Return?

The deadline for filing your paper version Self Assessment tax return was on 31 October 2021 at midnight. For the online version, you have until midnight on 31 January 2022. We recommend doing it online to give yourself more time.

Can Legal And Financial Costs Be Included In Self-Employed Expenses?

For business reasons only, if you require the use of an accountant, solicitor, surveyor or architect then this can be included in your calculations.

If you need to hire a professional like an accountant, a solicitor, a surveyor or an architect for business reasons, you can include the cost in your calculation. Bank, overdraft and credit card charges, as well as interest on bank and business loans, can be included.

However, if you prefer to use cash basis accounting, only up to £500 in interest and bank charges can be claimed.

For those using traditional accounting, bad debt such as money you don’t think you’ll ever receive and won’t receive can be claimed. This is because, through traditional accounting, this debt can be included in your turnover.

What Legal And Financial Costs Cannot Be Included In Self-Employed Expenses?

Any debts that have not been included in your turnover.
Any debts that are related to the disposal of fixed assets such as land, buildings and machinery.
Any bad debts that have inaccurate calculations.

When using cash basis accounting, debt cannot be claimed in this way, as only income you’ve received is recorded. You also cannot claim fines for breaking the law as business expenses, as well as financial arrangements, overdrafts and repayments of loans.

What HMRC Advice And Guidance Is There?

There are free, HMRC ‘talking points’ meetings where you can understand tax better, as well as tips on completing returns and other issues. They are regular and available here.

We know that taxes can be over-complicated and stressful, especially if you are self-employed, it is the last thing you want to be doing.

Even worse is the addition of fines and penalties for mistakes made on tax returns. Make sure to glance over the guidelines on the government’s website as well as ask for professional advice if you need it.