When you’re trying to make every penny count as a small business owner, the last thing you want to do is pay more tax than you need to. Keeping track of the business costs and expenses that may be allowable for tax relief can make a big difference. But some of these expenses are less obvious than others.
What’s an allowable business expense?
The term ‘expenses’ can describe several different types of business cost. If you’re self-employed, your business will have a whole variety of running costs. You can claim tax relief on some of these costs if they are deemed by HMRC to be ‘allowable expenses’.
For sole traders and partners in partnerships, claiming tax relief in this context means subtracting the value of the allowable expenses you incur throughout your accounting year from your sales figure at the end of the year to calculate an amount of ‘taxable profit’. You then use that figure to calculate your Income Tax liability for the year in question.
For example, if your sales come to £40,000, and you claim £10,000 in allowable expenses, your taxable profit will be £30,000. This is the amount on which you’ll pay Income Tax.
Limited companies are subject to different rules for allowable expenses but can deduct business costs from their profits when calculating how much profit the company is going to pay Corporation Tax on.
Where do you claim tax relief on allowable business expenses?
Sole traders and partners in partnerships
As you’ve heard, you would claim tax relief on expenses by working out the amount of profit you can expect to pay Income Tax on, with those expenses deducted from your income to make the profit figure, and filling out your Self Assessment tax return including those figures.
You can fill in your tax return either through HMRC’s online portal or, so long as you don’t need to fill in any pages that FreeAgent doesn’t support, through FreeAgent's Self Assessment functionality.
If you’re a sole trader, FreeAgent allows you to track business costs and expenses quickly and easily during your business’s accounting year and then calculates your Income Tax liability based on the data you enter.
FreeAgent may also be able to generate your Self Assessment tax return within the software. It auto-populates most of the additional information required and then allows you to file your completed tax return directly to HMRC.
Partners in partnerships can’t file directly to HMRC through FreeAgent but they may be able to use the income and costs figures that FreeAgent calculates to help them file through HMRC’s online portal.
If you’re a director of a limited company, you need to enter the total amount of allowable expenses the company incurs in its accounting year on the company’s Corporation Tax return in order to claim the tax relief available to the company.
You can do this either through HMRC’s online portal or, so long as we support all the functionality you need, through FreeAgent’s Corporation Tax return area, which populates your Corporation Tax return with the expense data you enter throughout the accounting year.
Five business expenses that may be allowable for tax relief
Here are some of the business expenses you might not have realised may be allowable for tax relief.
1. Using your home for business and insuring its contents
You might already know that rent for your business premises could be an allowable expense for tax relief, but did you know that expenses associated with using part of your home for business purposes could be too? Take a look at our infographics for sole traders and limited company directors to learn more.
Along with more obvious business costs like utilities, security and home broadband, the cost of insurance for your business can also be an allowable expense for tax relief. This might include contents insurance for an office or a specialist home business policy. There’s more information in our guide on working from home expenses.
Please note that this relief is typically more generous for sole traders and partnerships than for limited companies.
2. Council tax
Along with mortgage interest and rent against the cost of your tax bill, council tax is a business expense that may be allowable for tax relief. The proportion of council tax that may be allowable will typically depend on the proportion of your home that’s being used for business. If your home office accounts for 20% of the space in your property, then you could be allowed to claim up to 20% of the cost of your council tax as an allowable expense when you complete your tax return. Please note that this cost is typically only allowable for sole traders and partnerships, not for limited companies.
3. Travel claims that go beyond mileage
If you’re using your own car for business, you may already be claiming tax relief for running costs like petrol by including your business mileage in your accounts at HMRC’s approved rates. In addition, you may be able to claim tax relief on non-vehicle travel costs, such as food and drink or hotel rooms for overnight business trips. Find out more about which vehicle and travel expenses are allowable for tax relief on the government’s website or in our guide to claiming travel and accommodation expenses.
4. Bad debts
If you use accruals basis accounting, you can claim tax relief for ‘bad debts’. These are amounts of money you’ve invoiced your customers for, and therefore have in your sales, but you won’t get paid for them. See the government’s self-employed expenses guide for more information.
5. Marketing materials
Certain marketing activities and materials may be allowable expenses for tax relief. These include advertising in newspapers or directories, bulk mail advertising (i.e. mailshots), giving out free samples, and website costs. However, expenses relating to event hospitality and entertaining clients, suppliers and customers are typically not allowable for tax relief.
For more information on which expenses are allowable for tax relief, you can download our free guide, the A-Z of small business expenses and costs. If you're in any doubt as to what tax relief you can claim, you should seek further advice from an accountant.
Find out more about how FreeAgent can help you organise and automate your expense management processes.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.