As a sole trader, here's some guidance of what you can and can't claim as an allowable expense:
In short, entertaining clients (even if it's all business, no pleasure) can't be claimed.
This is a blanket rule that HMRC has because it's hard to draw a line between business and pleasure when it comes to this type of expense.
This applies to entertaining clients, prospects, third parties, and also yourself.
If you have employees, then staff entertainment is a separate concept, which you can claim for (within certain limits).
If you have any transactions that aren't business related, then you should mark them as "Personal".
This means they'll be excluded from your income, expenses, profit and tax calculations.
If you make regular payments to your personal account from your business account, you could call this your wages.
As you’re a sole trader, there's no distinction between you and your business.
This means that paying yourself is effectively the same thing as moving money between your own accounts.
It isn’t counted as an expense, and doesn't impact your profit or tax calculation.
Getting help with accountancy, bookkeeping or tax advice relating to your self-employed business counts as a tax deductible expense. This means you'll get a tax deduction against any fees you pay for your Coconut subscription!
If the advice doesn't relate to your business, then you should mark this as expense as 'Personal'.
The cost of banking / current account services you use in your business are tax deductible.
If you have a connected bank account, You can claim for the interest you pay on loans or overdrafts, provided they relate to your business.
You can't claim interest on your personal overdraft.
If you make loan repayments, these should be categorised as 'Transfers'.
Hiring a specialist to help with your work or projects is a deductible expense.
If you buy new equipment for your work, such as a laptop, then you can claim for this.
If you use the equipment for private use as well, then you should work out what percentage you use for business, and only claim for that amount when you do your tax return.
You can claim a "reasonable" amount for food & drink (or subsistence as it's sometimes called) if you're travelling outside your normal work pattern.
Eg if you work from home and head to a client, you could claim for your lunch. But if you head to the same client every day, then you can't claim.
An exception to this rule is if your job demands you to travel from job to job, such as a plumber - in this case you can claim for the meals that you have while you're on the move.
"Reasonable" isn't defined, so let your conscience guide you - if it's anything too lavish, then you should categorise it as entertainment.
You can claim for the cost of insurance for your business, such as contents insurance for an office, professional indemnity insurance, or business equipment insurance.
If you buy personal insurance, such a insurance for your home or family, should be classed as a 'Personal' cost.
If you promote your business, you can claim for costs like advertising, design work, sending mail outs etc.
Certain promotion tactics might actually class as entertaining, like taking a potential client out for drinks - these should be categorised as 'Entertainment'.
As a general rule, if the item you've purchased is for use in your business, and only your business, then you can claim it as a business expense.
You should try your best to categorise the expense in the relevant category.
If you have a business phone, then this is fully tax deductible.
If you use your personal phone for business, then you can claim for the business portion.
You'll just need to have a sensible way of working out the business portion. Eg look at how many business vs personal calls you make in a given month.
If you're putting the full cost of your phone through your Coconut account, make sure you deduct the personal portion from your phone expenses when you do your tax return.
If it’s software that you use in your business then you can claim it.
If you use other freelancers, agencies or other suppliers to help you deliver your products or services, then you can claim these costs in full.
You can claim the costs of your training and development that's relevant to the job that you do.
If you retrain in something totally new however, that can't be claimed, and should be marked as 'Personal'.
So travel is one of the trickier expenses to know whether you can claim. We'll do our best to categorise this for you, but it's up to you to decide whether it's allowable or not.
If you're travelling for business to somewhere that isn't your usual place of work, and isn't a regular occurrence, you can usually claim the expense.
If you work from home
If you work from home, then generally you can claim any travel you do for work.
The Regular Exception
If the travel you do to clients is regular, ie same time same place each week, then that wouldn't be allowable. But if your visits aren't predictable, then you can claim. Bit bizarre we know. We think HMRC is a fan of spontaneity.
The Itinerate Worker
If your work demands that you travel to a different location for each job, such as a plumber or mobile hairdresser, then you are what HMRC calls an 'itinerate worker'. You can claim all your business travel.
HMRC's Simplified expenses
If you rack up a lot of mileage on car travel, you might use HMRC's simplified allowances instead of claiming for each travel expense. You can find more on this here.
If you use any vehicles in your business, the rules for claiming the running and purchase costs are different:
There are two options for claiming your vehicle running costs:
1. Claim your business use
Keep track of all your vehicle related expenses:
Then when you do your tax return, work out what percentage of those costs is private use and deduct that.
If you've recorded these costs in Coconut, make sure you make this adjustment when you do your tax return.
To work out the private use, you should keep a log of your business and personal travel to show how you work out a percentage that you think is business. If HMRC take a look they'll want to know how you've worked it out.
2. The Mileage Method
Instead of claiming your business use on the actual costs, you can log your mileage and claim a fixed amount per mile of business travel instead of the vehicle running costs.
45p per mile on the first 10,000 miles, then 25p per mile on anything over.
You'll need to keep a log of your mileage.
You may be able to claim a "capital allowance" for the business portion of any cars, vans or other vehicles you use in your business (provided you're not using the mileage method above).
If you're purchasing a vehicle for your business, an accountant or advisor will be able to give you more specific guidance about the tax rules that apply.
If you work out of an office, you can claim expenses for:
Using your home as an office
If you work from home at all, there are two ways to claim a tax deduction:
1. Business % of actual costs
You can claim for the business portion of the cost of running your home. You can include the following costs:
You need to work out a "reasonable" percentage for business use, there's an example of this on the Gov website.
To figure out how much business use you can claim for, you should take into account how many rooms you use for your business in your home for what amount of time.
When you do your tax return, you'll need to make sure you only include the business portion in your claim.
2. Flat rate
HMRC also offers a simplified flat rate approach, provided you work more than 25 hours a month from home. This lets you claim from £10 to £26 per month depending on how much you work from home.
You can see the rates here.
If you use the flat rate method, you should exclude any actual running costs from the amount you claim, and just work out the flat rates.
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As part of HMRC’s Making Tax Digital, sole traders will soon be required to complete 4 tax submissions per year instead of 1.
Take a look at the latest sole trader tax rates for the 2021/22 as well as our advice on how to prepare for the new tax year.