What expenses can a sole trader claim?

The 'wholly and exclusively' rule

As a sole trader, you pay tax on your profit, that is your income minus your allowable business expenses. Claiming every legitimate expense therefore reduces your taxable profit and the tax you pay, which is entirely proper and expected.

The test HMRC applies is whether a cost is incurred wholly and exclusively for the purposes of the business. If it is a genuine business cost, it is usually allowable. If it has a private element, you can often claim the business proportion but not the private part. Costs that are purely personal are never allowable. Keeping that principle in mind will answer most day-to-day questions.

Common allowable expenses

The following are the categories most sole traders can claim, provided the cost is genuinely for the business:

• Cost of goods and materials bought for resale or used in providing your service.
• Office costs, stationery, printing, postage, phone and internet (business proportion), and software subscriptions.
• Premises costs, rent, utilities and business rates for business premises.
• Travel, business mileage, train and bus fares, parking, and accommodation on business trips (not ordinary commuting).
• Staff costs, wages, subcontractor payments and related costs if you employ anyone.
• Professional fees, accountancy, and some legal and professional costs.
• Insurance, business insurance such as public liability or professional indemnity.
• Marketing, advertising, website costs and promotional materials.
• Bank and finance costs, business bank charges and some interest.
• Equipment and tools, often treated as capital allowances rather than a simple expense, so worth checking how to claim.
• Training that updates skills you already use in the business.
• Work clothing such as uniforms and protective gear, but not everyday clothes, even if you only wear them for work.

What you cannot claim

Just as important is knowing what is not allowable, because claiming disallowable costs invites problems if HMRC looks closely.

• Personal expenses and anything with no business purpose.
• Client entertaining, generally not allowable for tax.
• Everyday clothing, even if bought specifically to look smart for work.
• Ordinary commuting between home and a regular place of work.
• Fines and penalties, such as parking or speeding fines.
• The private share of any cost used partly for personal reasons.
• Your own drawings, money you take out of the business is not an expense.

Some costs sit in a grey area, particularly where there is mixed business and personal use. The safe approach is to claim the business proportion, keep a note of how you worked it out, and ask if you are unsure.

Working from home

If you run your business from home, you can claim a proportion of your household running costs, things like heating, electricity, and a share of internet and phone. There are two broad approaches.

The actual-cost method

You work out the business proportion of your actual household costs, usually based on the number of rooms used for business and the time they are used for it. This can give a larger claim but takes more record keeping to support.

Simplified expenses (flat rate)

HMRC offers a flat-rate method for use of home, where you claim a set monthly amount based on the number of hours you work from home each month, rather than calculating actual costs. This is simpler but may be less generous than the actual-cost method, depending on your situation.

Travel and mileage

Business travel is allowable, but ordinary commuting to a regular workplace is not. For vehicles you have two options, and you generally stick with one for a given vehicle.

Simplified mileage (flat rate per mile)

You claim a fixed amount for each business mile driven, which is intended to cover fuel, servicing, insurance and wear. You keep a log of your business mileage rather than every running cost. The per-mile rates are set by HMRC and change from time to time, so confirm the current figures before you rely on them.

Actual costs

Alternatively you claim the business proportion of your actual vehicle running costs, and may be able to claim capital allowances on the vehicle itself. This can be worthwhile for higher-cost vehicles but needs fuller records.

Which method works out better depends on your mileage, your vehicle and your costs. For the self-employed, it is a good example of where a quick check with your accountant can put more in your pocket, legitimately.

Keeping records

Whatever you claim, you need to be able to show it was a genuine business cost. HMRC expects you to keep records of your income and expenses, and to retain them for the required period. In practice that means:

• Keeping receipts and invoices, digital copies are fine and far easier to manage.
• Separating business and personal spending, ideally with a dedicated business bank account.
• Recording transactions as you go rather than reconstructing them at year end.
• Noting the basis for any apportionment, such as use of home or vehicle.

Good bookkeeping, especially in cloud software, makes all of this close to automatic and means nothing is missed at year end. It also makes your Self Assessment return quicker and cheaper to prepare.

If you are not confident you are claiming everything you are entitled to, or you are worried you might be claiming something you should not, request a consultation and we will review your expenses and make sure your return is both accurate and efficient.