HMRC Simplified Business Expenses for Sole Traders
To retrench the taxable profits, it’s essential to figure out substantive business expenses and claim them. It often becomes arduous and time consuming for self-employed to work out each and every business cost. To ease the pain of doing so, HMRC has laid down a simplified expenses scheme which enables registered sole traders to claim certain business expenses at a flat rate instead of getting stuck in lengthy calculations for finding out the exact expenditure.
At present, the scheme for sole traders has been prescribed for the following types of expenses:
- Vehicle expenses
- Expenses Working from home
- Living at business premises
Once you choose whether to claim an actual or simplified expense, you need to stick to it throughout the life of the asset or till the business shuts down. In other words, once you choose to enroll in the scheme then you can never go back to claiming actual expenses again.
Prerequisites for Opting Simplified Expenses Scheme
- Only sole traders and partnership firms, in which no company is a partner, can opt for the scheme.
- There needs to be proper records backing the business miles traveled, the number of hours spent working at home, and the number of people living at the business premises in a year.
- If simplified expenses have been claimed, then actual expenses for the same cannot be claimed.
The simplified expenses scheme for prescribed expenses has been explained below:
1. Simplified Expenses Working from home
When business is being run from home or if an individual is engaged in freelancing, the crucial thing is to divide the proportion of residential expenditure for business and personal purposes.
Keeping a seamless record of the time spent in the area where the business is being run and the percentage of time spent in them becomes a herculean task. This is where a simplified business expenses scheme intercedes. HMRC has provided the scheme to make such a calculation less complicated by using the flat rates. These expenses can be calculated using a flat rate based on the number of hours one has worked from home. The simplified expense flat rates per month for 2018-19 and 2019-20 are:
- £10 per month for working 25-50 hours per month
- £18 per month for working 51-100 hours per month
- £26 per month for working 101 and more hours per month
Points to be noted:
- These expenses cover the cost of rent, utilities, heating, lighting, and other services.
- It does not cover the internet and telephone/broadband cost of which needs to be proportioned by their actual use of business purposes.
- The working from home simplified expenses can be claimed only if the time spent on running the business is 25 or more hours.
2. Simplified Vehicle Expenses
The simplified expenses scheme can be used for claiming the cost of buying and running vehicles such as cars, goods vehicles, and motorcycles.
The simplified flat-rate expenses per mile for 2018-19 and 2019-20 are:
- for cars and goods vehicles for first 10000 miles - 45 pence per mile
- for cars and goods vehicles over 10000 miles - 25 pence per mile
- for motorcycles - 24 pence per mile
Points to be noted:
- If capital allowance on a vehicle has been claimed already, then simplified expenses cannot be used for such a vehicle.
- If vehicle expenses have already been included as a part of expenses while calculating business profits, then simplified expenses cannot be used for such a vehicle.
- Running costs shall include the cost of insurance, fuel, servicing, repairs, and similar costs.
- If there are multiple vehicles being used, then expenses may be claimed at actual costs for some and as simplified expenses for others.
- You can download our business mileage book.
- You can read about simplified expenses for vehicles in our article Business mileage allowance.
3. Living at business premises
At times, there might be need of using the business owned guest house for personal purposes or even a self-employed running- bed and breakfast might require staying at business premises. In such cases, it becomes convenient to use HMRC simplified expenses in order to claim business expenses instead of working out the split between expenses for personal and business use. However, the way of using simplified expenses is a bit different in this case.
Two steps involved;
Firstly, HMRC flat rate expenses are used to determine the amount for the personal use of the premises.
Then, the amount will be deducted from the total business premise expenses.
The simplified expenses flat rates per month for 2018-19 and 2019-20 are:
- £350 per month for one person living on the premises
- £500 per month for two people living in the premises
- £650 per month for three or more people living in the premises
Points to take into account:
- If someone lives at the business premise only for a part of the year, then it is required to deduct the relevant flat rate expense only for the months they lived there.
- The total actual expenses relating to the premises need to be calculated but splitting the expense between personal and business use isn’t required.
As a last crucial note, simplified expenses ease-out calculations for the mentioned costs only, for all the other costs exact figures need to figure out. The simplified business expenses are ideal for a business whose accounting and tax affairs are pretty simple and straight. It is a scheme to simply reduce the time and efforts involved in crunching the numbers to figure out the actual costs. However, where claiming actual expenses saves money, opting for simplified expenses can prove to be a bad idea.