The key expenses every freelancer wants to claim; but can you?

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‘What about an iPhone?’ ‘And what about something to go on my new computer?’ No, these are not the questions-cum-demands of your imaginary spoilt niece who has come to stay with you for the weekend!

Rather, they are examples of just some of the questions that FreelanceUK readers are asking when it comes to the often opaque area of claimable expenses. And also impacting the ‘bottom line,’ freelancers are asking how to work out which other items of expenditure such self-employed people can claim for their sole trader business, writes Mike Parkes, director at GoSimpleTax.

Sole trader V Limited company

You’ll notice ‘sole trader’ business is specified above. That’s important because if you’re a freelancer who has their own limited company, the HMRC expenses rules on what the limited company incurs -- but can then claim back as an allowable expense, are spelt out in law in a different place to if you’re a sole trader. For limited companies, you need to see Section 46 Corporation Tax Act 2009 (CTA 2009), whereas, for sole traders, you need to see Section 34 Income Tax (Trading and Other Income) Act 2005.

For both types of freelancer – i.e. those with an incorporated business or without one, the considerations when it comes to claiming tax-deductible business expenses can be complex. But let’s look just at sole traders from now onwards.

When you've already got what you'd expense as a sole trader

The first thing to note is that the complexity around expenses can seem; well, all the more complex, because there are probably not many sole traders who do not already use an iPhone, a laptop, or indeed both devices. It is also likely that many freelancers, perhaps in the very early days of dipping their toe into freelancing – so maybe before they even started sole trading, bought a copy of MS Office or subscribed to Office 365, or Google Docs for Business (G Suite). These ‘somethings to go on your new computer’ are all great business tools, which are often purchased in a rush, pre-freelancing, with the tax and expenses treatment only looked at afterwards.

The key is this. The previously mentioned Section 34 Income Tax (Trading and Other Income) Act 2005 says that expenditure cannot be deducted in computing trading profits unless it is incurred “wholly and exclusively for the purposes of the trade,” profession or vocation.

So, as long as the expenditure items you’re looking at as a sole trader, whether it’s an iPhone or a new piece of software, satisfy these basic conditions, then you are able to claim a tax deduction.

How to claim (cont.) if you're self-employed -- even if there's personal usage

However, as a self-employed sole trader, it is likely that you will use, say, a mobile phone and a laptop for some personal stuff. Browsing the web, staying in touch with friends on Facebook; eBaying that spoilt niece. Whatever the activity; it’s non-business. Well, what happens then?

Thankfully, HMRC does take a pragmatic view. Indeed, their own guidance gives an example of using mobile for both personal and business. The key is to keep records to substantiate the business use. For the phone, it can be a case of identifying how many personal calls are made and adjusting your claim accordingly.

Estimations, questions, reassurance

For a laptop and piece of software, it will likely be harder to maintain such records. Therefore, an educated estimation may be all you can make. But you do need to be realistic in your estimations and consider things such how much time other members of the household use the laptop for homework or web browsing. Also, ask yourself a few obvious questions to inform your estimations. Do family members have their own devices? Does your work routinely involve the use of the laptop? Or is the computer used infrequently, and it’s mainly just for your invoices, book-keeping and tax records?

Lastly, freelancers, remember that while it is recommended to have a separate business, many sole traders pay for business items from a personal bank account or credit card. The reassuring thing if you do this, is that there is no distinction in law between an individual and a sole trader, so you can still claim any such expenditure incurred. Just don’t tell your niece or she’ll be staying with Uncle Moneybags again!

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