You have every right to deduct these costs, where possible, from your business income, to arrive at the correct taxable profit. In a way, calling the cost of doing business ‘Expenses’ makes them feel a little naughty, like something you are getting away with. Traditional (accrual based) accounting gives a more thorough view on your trading position, as it counts invoices that may not have been paid and can apportion costs over the period that you receive the benefit, to help give a more accurate position of your true profit and loss. Cash Basis may not be suitable for your circumstances. HMRC won’t let every Self-Employed person use this method – you need to have a turnover of less than £150,000. For a self-employed person with a relatively simple business, it will keep your tax affairs easier to understand. What is Cash Basis? It’s when you record a transaction at the point you receive or pay the money. Accountingįor many of you, Cash Basis accounting will be the method that you are using. These are known as Simplified Expenses, and can be used for vehicle costs, working from home and for those living in their business premises. There are other expense areas where HMRC have created these clever work arounds if you want to avoid the complexities of calculating the exact amount yourself. To do this, HMRC issue a standard rate per mile you can use to calculate the expense.
For example, when you use your car for business, they have created a simple method of calculating the cost of doing so, which includes petrol, depreciation and maintenance costs. In some situations, HMRC have come up with a number of easy ways to calculate these expenses. Then there are some expenses which a proportion of is for your business activity and a proportion of is personal - so for example you may use your mobile phone for both business and personal calls.ĭeducing what is an allowable business expense is not always straight forward, but with a little research you can become your own expenses expert. Some expenses are fully an expense of your business, but are not tax deductible, for example business entertainment. Generally speaking, you can deduct expenses that fully relate to your business activity, but not personal expenses. The purpose of this guide is to highlight what expenses you can and cannot deduct from your income for tax purposes, and to try to unravel some of the hidden complexities surrounding the issue. Profit for tax and National Insurance purposes = £25,000 You can reduce the amount of tax and National Insurance you pay by ensuring you deduct all your allowable business expenses from the taxable amount. As a self-employed person you pay tax and National Insurance on the amount you earn from your business activities, and indeed any other incomes, at the prevailing rate.
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