A freelancer's guide to expenses
Covid-19 has had huge impact on sole trader income and with the 1.25% increase in National Insurance Contributions of April 6th 2022, it is important to ensure that you are maximising your claim for expenses to mitigate the HMRC liabilities due on your profits.
As a freelancer or self-employed individual, the expenditure you incur is likely to fall within one of three categories: Capital, Business, or Private.
In this two-part freelancers’ guide to expenses, I will first reveal the most common expenses for which the self-employed may claim a deduction for from HMRC, writes Nilam Chawla, a senior manager at chartered accountancy firm Moore Kingston Smith LLP.
And I will detail the necessary record-keeping requirements for each common expense. In part two, I’ll cover the three expenditure categories.
Use of Home
Many freelance or self-employed people are based at home and do not have separate business premises. Where you use your home as an office, a deduction is available for ‘reasonable costs’ incurred.
The deduction claimed must be calculated on a reasonable basis. For example, if you use one of the four rooms in your house as an office for a full normal working week, you could claim a deduction of 25% of eligible and relevant home costs.
Eligible costs would include a proportion of:
- Rent or Mortgage interest;
- Water Rates,
- Council Tax,
- Repairs & Decorating for the office or common parts,
An alternative basis is to claim a Flat Rate deduction if you work 25 hours or more from home, in accordance with rates published by HM Revenue & Customs which are:
Hours Worked Flat Rate Per Month
25 to 50 £10
51 to 100 £18
101 plus £26
So for example, if you worked 50 hours per month from home for 10 months, and 110 hours per month for 2 months, you can claim:
£10 x 10 = £100
£26 x 2 = £52
Using the Flat Rate deduction method is however more than likely to result in a more modest claim.
Please Note: a claim for use of a home for business purposes may have possible implications on the capital gains tax main residence exemption, when you come to sell your property.
Travel & Motoring
Travel expenses are only allowed in relation to business journeys. This does not include the cost incurred in relation to your ordinary commute from home to your usual workplace.
Travel expenses may be incurred in a number of forms, the most common of which are:
- Using your car for your business
Where you use your car for making business journeys, you can deduct the cost in relation to the business use. There are two ways of working out how much you can deduct:
- A fixed rate for each mile travelled on business, using the HMRC fixed mileage rates; or
- A proportion of the actual running and servicing costs of the car such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT, worked out using detailed records of business and private mileage to apportion your recorded expenditure.
The current fixed mileage rates from HMRC are 45p per mile for the first 10,000 business miles you do in your car each year, and then 25p per mile after that. This mileage includes travelling to and from temporary locations and between different sites. You will need to keep a log of your journeys.
If the mileage rate is used, you cannot claim a separate deduction for costs of running and servicing the vehicle. You also cannot claim a deduction for capital allowances.
For example, if your annual business mileage was 6,000 miles, your private mileage was 4,000 miles and your annual running and servicing costs were £5,000, you can claim the fixed rate per mile of 45p per mile x 6000 = £2,700. Or you can claim £5,000 x 60% (% of business miles to total miles) = £3,000. You will need to keep receipts for your car running and servicing costs.
Where you use a hire-car for your business travel as a sole trader, the costs allowed in relation to car hire will depend on a number of factors including:
- Whether the car is on a short-term hire (< 45 consecutive days);
- Date hire contract entered into for long-term contracts;
- CO2 emission of the car.
For short-term car hire (for example, cars hired for less than 45 days consecutively), the full cost is deductible. For long-term car hire, and for contracts entered into after April 6th 2009, where the CO2 emission is more than 50g/km, only 85% of the hire charge cost is deductible. This reduction does not apply if you are using HMRC’s cash basis of accounting scheme.
For example, if the hire costs of a long-term contract for a car with CO2 of 100g/km was £5,000, you would only be eligible to deduct £4,250 (£5,000 x 85%), from your business income. Original receipts must be provided and speeding, parking or clamping fines cannot be claimed.
Car parking charges
Parking costs for a business trip can be claimed -- as long as an original receipt detailing date and cost is available for each date claimed.
Rail, bus, taxi and air travel
Fare costs for business travel including travel to and from your home and temporary place of work can be claimed where receipts are provided.
Associated travel costs
Road, bridge/tunnel tolls, congestion and ULEZ charges incurred while on business may be claimed. Original receipts are required for all items except toll fees.
Food & Drink
While working away from home as a self-employed person, you can claim the cost of subsistence.
For example, the cost of food and drink incurred as a result of the business trip. Original receipts must be kept.
A reasonable cost per night may be claimed. However you must keep all receipts.
If you’re claiming accommodation rental costs, your rental agreement must meet HMRC Dual Purpose rules.
Basically, you must already be maintaining a property and are renting another property for the purposes of your contract. Please Note: You can claim only for the working week (for example, five days out of seven).
Training and Tuition
Any training or tuition to do with your current work can be claimed as long as you are able to evidence:
- a receipt for the full amount,
- your current role / occupation,
- the name of the training course/tuition,
- a description of the training course/tuition, and lastly;
- how the training relates to your current role /occupation.
Manuals & Textbooks
A reasonable amount may be claimed for the cost of manuals and textbooks required for business purposes. But receipts are required.
Costs for certain subscriptions may be eligible for deduction. These include:
- Subscriptions to appropriate professional bodies
- Professional journals, books.
- Professional indemnity insurance.
Please see HMRC’s website for further details of allowable subscriptions.
Business calls from home or a mobile are fully claimable. However, these must be itemised and line rental costs and internet costs are not recoverable unless you have a specific separate line for business purposes only. You must retain a copy of your itemised telephone bill.
Internet & Broadband
The business use proportion of internet and broadband costs are fully claimable.
Any business-related post can be claimed for, but original receipts must be provided.
A deduction can be claimed for any stationery such as paper, pens or printer ink you use for your sole trader business.
Claims must be for a reasonable amount (i.e. in line with the business you run), and you’ll need original receipts to validate claims.
You claim the cost of accountancy and other professional fees such as solicitors fees incurred for business purposes.
Premiums for business insurance can be claimed including insurance for business assets and equipment. Invoices and insurance details must be kept.
Instead of claiming your actual business expenses, you can choose to deduct the ‘Trading Allowance’ which is currently £1,000 per annum.
The full amount is available even if you are self-employed for only part of the year, making it ideal for ‘gig economy’ workers.
The HMRC trading allowance is beneficial where you do not have many business expenses. But please note, the allowance cannot be used to create a loss.
Cash Basis of Accounting?
In this article (which is part one of two on freelancer expenses), reference has been made to the cash basis of accounting which affects claims for expenses such car-hire and capital expenses.
Freelancers operating as sole traders can use this method if they are a small, self-employed business and have a turnover (currently) of less than £150,000 per annum. This is a simpler way of accounting for income and expenses, whereby you can report income and expenses when received and paid and not the date that income and expenses are invoiced. So some self-employed businesses may find it easier to use this basis -- definitely check it out if you’re not already using it or if your accountant has not mentioned it to you!
Editor’s Note: This guide by Moore Kingston Smith provides a brief synopsis of some of the types of expenses that can be set off against trading income, for tax purposes. It is of a general nature only. It does not constitute legal or tax advice nor does the distribution or receipt of this material create a client-adviser relationship. Readers should seek specific advice in relation to any decision or course of action.
More on starting up and setting up your company.
11th February 2022