Want to be your own boss? Claiming exspenses.

In my article in the last Playground magazine, I looked at the tax issues involved with setting up in business. In this article I will focus on what expenses you can claim as a tax deduction against business income once you start working.

A self-employed individual pays income tax on their annual business profits calculated as income less allowable expenses. The general rule is that expenses are only allowable if they are incurred wholly and exclusively for the purpose of the business. In practice, where expenditure has a dual purpose it is possible to apportion the expenditure between business and private use using an appropriate percentage.

All the basic costs associated with starting up a business can be claimed against future income. These include the purchase of stock and materials, stationery design and printing, telephone installation and fees for professional advice. A claim can also be made for expenditure incurred in the 7 years before the business starts, if it can be shown that this expenditure relates specifically to the new business.

Purchases of equipment and fixtures, such as office furniture are classed as capital expenditure. It was not previously possible to deduct the whole cost of capital expenditure in one go. Instead relief was given via an annual claim for capital allowances. From 6 April 2008 a new annual investment allowance has been introduced which allows small businesses to claim 100% of the cost of capital expenditure in each year up to a maximum of £50,000.

Any transport costs for business visits to clients or to purchase stock and equipment can be claimed. If you use your own car then any business mileage can be reclaimed at 40p per mile up to 10,000 miles per year and 25p per mile thereafter. It is important to keep a detailed mileage log showing business trips made to support this claim.

If you run your business from home you will be able to reclaim a proportion of your household running costs as a business expense. This proportion depends on how much work you do from home. If the work done at home simply relates to bookkeeping work such as producing invoices and maintaining accounting records then the proportion of business use is likely to be low. The Revenue will allow a claim for £3 per week to cover the running costs without requiring a detailed breakdown.

Self-employed workers with a dedicated home office either as part of a bedroom or as a self contained room may be able to claim a larger proportion of household fixed costs and running costs using the following methods of apportionment:-

Rent/ Council Tax/Insurance/Cleaning - apportion by square metre of room space used or by number or rooms used for business as a percentage of total rooms in the house (excluding halls and small bathrooms). This figure should then be adjusted for the percentage of time the rooms are occupied during the week for business purposes.
Mortgage interest - as rent, unless part of the mortgage was obtained specifically to create a separate office
Gas & Electricity- apportioned by metered use, or square metre/room numbers as above
Telephone (including line rental) - apportion by call time

At the end of the business year a basic profit and loss account should be prepared for the business showing income earned and expenses claimed. It is very important to keep all invoices and receipts relating to business expenses to back up the amounts claimed in the accounts. This paperwork must be kept for six years.

Article written for Summer 2008 issue by

Juliet Morris ACA
Redshield Accountancy Services
Tel - 01892 667606
Mobile - 07973 844685
E-mail: juliet@redshield.co.uk