Top Self Employed Tax Questions
By Terry Cartwright
What is Business Turnover? Sales turnover is the total amount of income a business
earns before deducting business expenses. Turnover includes receipts of any kind
for goods sold or work done such as commission, tips, payments in kind, fees and
insurance proceeds. Include sales turnover in your financial accounts at the date
it was invoiced or earned and not the date received.
What is excluded from Business Turnover? Sales turnover excludes sales of fixed
assets such as premises, vehicles and plant and equipment. Also exclude business
start up allowances which are entered separately on the self assessment tax return.
Money introduced to the business is excluded being capital introduced and not sales
What business expenses are allowable? All running costs incurred solely for the
purpose of the business may be deducted as allowable business expenses including
goods bought for resale, employee wages, premises rent and overheads, administration
costs, vehicle running costs. Interest on loans and overdrafts can be claimed as
business expenses excluding the capital element of repayments. Higher business expense
levels accurately recorded can keep taxable profit below the higher tax rate.
Can the cost of buying and repairing plant and machinery be claimed? Repairs and
maintenance costs are allowable business expenses. The purchase cost including improvements
and replacement costs are not allowable business expenses, these costs being subject
instead to capital allowances. Depreciation is not allowed and replaced by Capital
Allowances for the purposes of calculating the tax payable.
What are Capital Allowances? Capital allowances are designed to write off the cost
of purchasing a fixed asset over the life of the asset rather than in the financial
year in which it was purchased. Capital allowances on the majority of assets are
based upon a higher rate of allowance in the year of purchase, First Year Allowance
with the balance of the cost being written off at a lower rate, Writing Down Allowance.
The full cost of any asset may be claimed as an expense in the year it is sold or
scrapped less the total of accumulated capital allowances that have been claimed
against taxable profits. Any sales proceeds over and above the written down value
after Capital Allowances is added back to net profits and becomes taxable. Cars
are subject to writing down allowances but not First Year Allowances unless they
are classed as commercial vehicles. DIY Accounting produce comprehensive accounting
software templates on excel spreadsheets to automate the accounting functions including
Is expenditure used for both personal and business reasons claimable? No. HMRC only
allow such expenses if the business expenses element of the cost can be separated
from the personal element. If you claim the travelling expenses to buy business
goods they can be claimed for tax purposes but would be disallowed if you also showed
evidence of personal items being purchased on the same journey. Using your home
phone is an allowable business expense if you claim specific identified business
calls in which case you would also be able to claim a similar proportion of the
Can vehicle costs be claimed when that vehicle is also used for personal use? Vehicle
running costs and expenses such as fuel, excise duty, insurance, repairs and breakdown
membership may be claimed as business expenses if the vehicle is used solely for
business purposes. Travel from home to work is not business use and disallowed.
Vehicle running costs, and capital allowances on vehicles, are split between claimable
costs and a disallowed cost depending on the proportion the vehicle is used for
business and personal use. Parking fees for business purposes may be claimed, parking
fines and penalties for motoring expenses are not claimable as business expenses
for tax purposes. Instead of vehicle running costs which for tax purposes would
include capital tax allowances on vehicles, mileage allowances of 40p per mile for
the first 10,000 miles and 25p per mile thereafter can be claimed in each tax year.
Can Business trips be claimed? Travelling expenses and modest lunch expenses may
be claimed. Hotel and reasonable costs of subsistence may also be claimed. If the
overnight residence happens to be with friends or family then a subsistence allowance
can be claimed as an alternative to the hotel bill. The cost of lunch may not be
allowed when staying away overnight. Lunch with clients is regarded as entertainment
and is not allowed. If you are accompanied on a business trip by family only your
cost is allowable and specifically only if the trip was purely for business purposes.
Expenses on combined business and personal trips are not allowed to be deducted
as business expenses on tax returns.
Can home costs be claimed? If part of your home is identifiable as solely for business
purposes then running costs can be claimed. The cost allowed is the proportion of
the total area of the home the business area occupies. For example, excluding shared
facilities of kitchen and toilet if the home has three bedrooms, living and dining
room and one bedroom is used solely as an office then 1/5 of home costs could be
claimed. The costs to claim would be heat and light, insurance, general and water
rates and mortgage interest excluding repayment amounts. Where mortgage interest
is claimed the revenue might also claim as a capital gain the increase in value
of that proportion of the home, such Capital Gains Tax being subject to tapering
relief over time.
Should business goods taken for my own use be included? Any business goods taken
for personal use should be added to sales at normal selling prices including items
supplied to family and friends at less than normal prices. He cost of providing
services for family and friends is not allowable as a business expense.
Can I deduct my salary or drawings as a business expense? You cannot deduct your
own wages, personal national insurance or drawings from the business as a business
expense as these are distributions of the business income after net taxable profit
has been calculated and not allowable expenses before tax..
Can I deduct my partner's wages? Yes partner's wages can be deducted as a business
expense although there are rules which would be applied in such circumstances to
ensure the amount paid is both real and reasonable. The business would need to operate
a PAYE scheme for that employee, deducting income tax and national insurance, the
work carried out must be real not invented and the rate paid reasonable for the
nature of the work and the time spent. Evidence may also be required that the amounts
were actually physically paid to that partner, for example in the form of a cheque.
Should Tax Credits be included? No these are excluded from business profits although
the level of credit received may subsequently be changed in the light of the actual
business profit earned compared with the amount declared when the Tax Credit was
applied for. HMRC do check that the net taxable profit shown on the tax return is
the same as that declared when the Tax Credit was claimed.
Can I claim expenditure incurred prior to trading commencing? Yes business expenses
incurred up to seven years prior to trading commencing can be claimed. The actual
date of the expenditure should be recorded although all pre-trading expenditure
is treated as having been incurred on the first day of trading.
Are pool cars taxable? Company cars are taxable as a taxable benefit while pool
cars are not taxable. To qualify as a pool car, private use should be incidental
to business use, the vehicle should not normally be kept at the employee's home
and the vehicle must be available and used by more than one employee.
Terry Cartwright is a qualified accountant in the UK and provides through his website
DIY Accounting a full range of Accounting Software and Payroll Software for
both small limited companies in the UK that produce a final set of accounts and
all Self-employed business fully automated on excel spreadsheets to automatically
produce the self assessment tax return.