A freelancer's guide to expenses
As a freelance or self-employed individual, the expenditure you incur is likely to fall within one of three categories: Capital, Business or Private. In this freelancer's guide to expenses, the following is covered by Paul Spindler, a partner at chartered accountancy firm Kingston Smith LLP: the most common expenses for which the self-employed may claim a deduction for, and the necessary record-keeping requirements, as well as the three categories in which the expenditure falls.
Use of Home
A deduction may be available for reasonable use of home as your office. The deduction must be based 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;
- Gas, electricity, metered water rates, Council Tax, Insurance;
- Repairs, decorating, cleaning;
- Computer items e.g. printer cartridges, stationery etc
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.
More on limited company expenses.
Travel and 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 ordinary workplace.
Travel expenses may be incurred in a number of forms, the most common of which are:
Where you use your car for making business journeys, you can deduct the cost in relation to business purposes. There are two ways of working out how much you can deduct:
- A fixed rate for each mile travelled on business, using the fixed mileage rates; or
- The actual expenses, worked out using detailed records of business and private mileage to apportion your recorded expenditure
The current fixed mileage rates 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 such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT. You can also not claim a deduction for capital allowances.
For example, if you incurred £100 expenditure on petrol which was used to travel 800 miles in total of which 500 were business miles, you could claim using the fixed mileage rates £225 (45p x 500 miles) OR alternatively claim the business proportion of the actual expenditure being £62.50 (£100 x 500miles/800miles).
Where you use a hire car for business travel 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 for contracts entered into after 1 March 2009 where the CO2 emission is more than 160g/km, only 85% of the hire charge cost is deductible.
For example, if the hire costs of a long-term contract for a car with CO2 of 190g/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. The maximum car hire period allowed is 6 months and this must be covered by your contract.
Car parking charges
Parking 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 to and from your home and temporary place of work can be claimed where receipts are provided. For low-cost flights, both original tickets and online receipts are acceptable.
Associated travel costs
Road, bridge/tunnel tolls and congestion charges incurred while on business may be claimed. Original receipts are required for all items except toll fees.
Food & Drink
Whilst 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.
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. Note: You can only claim for the working week (for example, 5 days out of 7).
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 job description, the name of the training course/tuition and a description of the training course/tuition and how it relates to your role.
Manuals and textbooks
A reasonable amount may be claimed for the cost of manuals and textbooks required for business purposes - receipts required.
Costs for certain subscriptions may be eligible for deduction. These include:
- Subscriptions to appropriate professional bodies
- Professional journals, books etc.
- Professional indemnity insurance
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 cost are not recoverable unless you have a specific separate line for business purposes only. You must retain a copy of your itemised telephone bill.
Any business related post can be claimed for, original receipts must be provided.
A deduction can be claimed for any stationery such as paper, pens, printer ink you use for business. Claims must be for a reasonable amount (in line with the business you run) and you’ll need original receipts to validate claims.
The expenditure you will incur as a freelancer is likely to fall within one of three categories: Capital, Business or Private. Whether the expenditure will qualify for tax and if so how the relief will be applied will depend on which of these categories the expense falls into.
Capital expenditure is generally items that you purchase and own and which are used in your business to help earn profits.
The most common capital expenditure you are likely to incur is the purchase of, or alterations to, your business premises, vehicle, computers, machinery or office furniture.
Tax relief is not available on all types of capital expenditure, but only on assets which are considered Plant & Machinery. What may be considered ‘plant & machinery’ is a difficult area and it is best to obtain professional advice from your accountant in this area.
Note: The cost of purchasing capital items are not deductible expenses against self-employment income. A deduction may be available under Capital Allowance rules for any business use of the asset only. Again, the rules in this area are quite complex depending on the type of asset, so it is best to obtain professional advice in this respect.
If you do incur expenditure on what you believe to be capital items that are used in your business, ensure you retain copies of all purchase invoices/agreements which can then be reviewed by your professional adviser to determine whether it qualifies for tax relief.
Tax relief is available on business expenditure which is 'wholly and exclusively' incurred for carrying on and earning the profits of your business i.e. the sole purpose for the expenditure must be a business purpose.
Where there is some private benefit from the expenditure, you may still be eligible to get tax relief for the amount spent for your business, provided the private benefit was incidental and not the reason for the expenditure - or you can clearly identify and separate the expenditure between business and private purposes.
In addition to meeting the ‘wholly and exclusively’ test, tax relief will only be available provided the business expenditure is not capital expenditure or an expense which is specifically not allowable, such as expenditure on entertaining.
Tax relief for eligible business expenditure is given by allowing a deduction for the expense from your self-employment income.
Expenditure you spend on your day-to-day living expenses and your normal household expenses is private expenditure i.e. it has no business purpose for being incurred.
Private expenditure also includes any amounts you take from your business as a wage, which is referred to as your 'drawings', or the private part of any expenditure that is for both business and private purposes.
Note: Private expenditure is not eligible for tax relief and you can not claim a deduction for such expenditure from your self-employment income.
Expenses incurred for both business and private spending
Expenditure incurred for mixed private and business purpose is non-allowable expenditure. An example would be the cost of travelling to town to bank the business takings and do your private shopping at the same time.
If you can separate the expenditure between business and private purposes, the business part is allowable. So, if you use a car separately for business and private purposes, the proportion of the expenses that relates to:
- Business use is allowable
- Private use is non-allowable
You normally work out the allowable business and non-allowable private proportions based on the mileage covered for each. You should keep detailed mileage records to support a claim for business use.
Editor’s Note: This is a guide by Kingston Smith, that 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.
20th January 2020