Self-employment is booming. Around 40 years ago just 8.7 per cent of the workforce was self-employed.
By 2008 that figure had risen to 12 per cent, but a relatively recent surge has seen it rise to 16 per cent of the workforce today.
That’s because, in part, a globalised, digital economy, makes it easy to manage the often complex business of finding work and managing your finances.
It doesn’t make it foolproof though, and whether you’re contracting, freelancing or otherwise self-employed, to be successful it’s essential that you handle your business properly. And one of the most crucial areas to get right is expenses.
What can I claim for?
When we talk about expenses in general, we’re referring to running costs. Typically this covers day-to-day things relating to office, travel, subcontractors’ fees, insurance, training and advertising and marketing expenses.
All can be claimed but with certain professions there are additional expenses that can be set against tax.
This might include clothing and uniforms, for instance.
What about big-ticket items?
Freelancers, contractors and the self-employed can claim capital allowances on items that they have bought or kept for use in their businesses.
It’s usually possible to deduct the full cost of this ‘plant and machinery’ from profits before tax using the annual investment allowance (AIA).
Businesses can claim up to £200,000 each year although the CBI is lobbying to increase the amount.
You can deduct the full value of an item that qualifies for AIA from your profits before tax, and will probably need to pay that tax should you sell the item.
However, you can claim AIA on most of the equipment needed to get a business ready for the year ahead, with the exception of cars, anything you owned for personal reasons prior to using them for the business, and any gifts.
What mistakes do people typically make?
“Where individuals complete their own returns, one of the typical mistakes we see is personal expenditure being listed as an expense of the company,” says Elaine Kelly, Head of Practice Solutions at ClearSky Contractor Accounting. This is usually due to a lack of understanding by the person making the claim.
“An example would be the self assessment tax payments. Clients will look at this and say that this is the tax as a result of their business. While you can see the logic, this is very much a personal expense. Another example on a similar note would be Class 4 National Insurance payments, which are now collected via tax returns.”
What happens if I claim something incorrectly?
More often than not, HMRC will simply get in touch with a notice for how much you need to pay and by when.
To avoid any nasty surprises, you’ll need to take extra care with costs such as telephones, utilities (if you work at home) and travel by car, as these usually consist of a mix of business and personal use.
If in doubt, contact the HMRC helpline on 0300 200 3310. Keeping your receipts and a spreadsheet of what you bought as well as when and how you paid for it is also essential.
“As accountants, we see a complete range of expenses that are attempted to be claimed,” says Kelly. “These can be anything from Netflix to personal insurance payments. If anyone is in any doubt, I would suggest appointing an accountant who deals with these questions every day.”
Having a good accountant who can ensure that you’re up to date with any changes in policy means that you can focus on your business.
The regulations for travel and subsistence expenses for those working through umbrella organisations employing contractors, for example, have changed significantly over the past year
Will these rules be the same next year?
Tax rules have a nasty habit of changing while your eyes are on the business, rather than your accounts.
Chris Bryce, chief executive of the Association of Independent Professionals and the Self-Employed (IPSE), the membership body that supports contractors, independent professionals and freelancers warns freelancers about forthcoming changes in the IR35 rules.
“Currently, a contractor is responsible for determining that the work they do counts as self-employment, so they’re taxed accordingly,” he says.
“But the Government is planning to shift the responsibility on to clients – who will most likely minimise any risk by labelling all their contractors as working like employees, regardless of whether this is accurate.”
Whatever the other advantages of becoming a limited company rather than a sole trader, it makes no difference to the expenses and AIA that can be claimed.
While belts remain tight for many businesses in the current climate, the self-employed can ill-afford extra costs.
As always, consult a tax professional before making any decision to do with your business, and ensure you know the rules, so that HMRC takes a wedge from your costs, and not your profits.
If you’re struggling with the intricacies of VAT, or any other tax issue, it pays to speak to an expert.
Specialist firms such as ClearSky Contractor Accounting can offer all the advice and administration support you need to make sure you’re always on the right side of HMRC.