Freelancer expenditure: Is your spending capital, business, or private?

Now that freelancers and sole traders are au fait with the most common expenses for the self-employed; how to claim them and with what paperwork, let’s turn to the three categories of expenditure which such sole-person businesses incur, writes Nilam Chawla, a senior manager at chartered accountancy firm Moore Kingston Smith LLP.

Which category does your freelancer expenditure fall into?

In particular, 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 relief and if so, how the relief will be applied will depend on which of these categories the expense falls into.

Capital expenditure

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 (if you have one!), 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.’ And unfortunately, what may be considered to be ‘Plant & Machinery’ is a difficult area. It is therefore best to obtain professional advice from your accountant on this aspect.

Please Note: The cost of purchasing capital items are generally not deductible expenses against self-employment income. 

A deduction may be available if you are using the cash basis of  accounting scheme however, or 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. These documents can then be reviewed by your professional adviser to determine whether the corresponding item qualifies for tax relief.

Business expenditure

Tax relief is available on business expenditure which is 'wholly and exclusively' incurred for carrying on and earning the profits of your business.

Please Note: 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 HMRC’s ‘wholly and exclusively’ test, tax relief will only be available provided the business expenditure is not capital expenditure (see above section) 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.

Private expenditure

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 often referred to as your 'drawings', or the private part of any expenditure that is for both business and private purposes.

Please Note: Private expenditure is not eligible for tax relief and you cannot claim a deduction for such expenditure from your self-employment income.

What about freelancer expenses incurred for both business and private spending?

Expenditure incurred for mixed private and business purposes is non-allowable expenditure. An example for freelancers would be the cost of travelling to see a client and then taking a few days of holiday at the same time!

If you can separate the expenditure between business and private purposes, the business part would be allowable.

So, in a case of a hastily arranged trip -- where you don’t have time to itemise expenditure or keep receipt, and where that trip is for both for business and leisure purposes, it would be difficult to separate the expenses which are for the business. Therefore, you would not be able to claim any expenses. On the other hand, if during the trip you used a car separately for business and private purposes, it is possible to separate the expenses and the proportion of expenses that relates to. But remember:

  • Business use is allowable
  • Private use is non-allowable

Finally, if in doubt…

As a freelancer on the above trip who is driving, you would 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. And as per any of the expenditure categories above, if in doubt, talk it out with your accountant!