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Essential tax relief options for the self-employed

Posted onPosted on 18th Dec
Essential tax relief options for the self-employed

With less than six weeks before the Self Assessment deadline for 2018/19, many of the UK’s nearly five million self-employed workers will be gearing up to complete and submit their annual tax return.

Tax preparation specialist and managing director of DSR Tax Claims Ltd, David Redfern, offers his tips to ensure that those self-employed make full use of the tax relief options available to them in order to maximise the profitability and longevity of their businesses.

With the 31st January deadline for submitting a Self Assessment tax return fast approaching, time is running out for self-employed workers, who now make up 15% of the workforce, to get their tax return to HMRC in time to prevent receiving a penalty. However, in order to ensure those businesses run as profitably as possible, whether sole traders or those in a business partnership, care should be taken to ensure that they explore all of the tax relief options open to the.

Redfern stated: “In the current unsteady financial climate, business partnerships and sole traders need to ensure that they make their finances work for them in the best way possible. Not only should all income received be included on the Self Assessment tax return, but they should make sure that they are claiming all of their allowable expenses as well as utilising capital expenditure and other tax relief options where eligible. Successful businesses will ensure that they are as fiscally efficient as possible.”

Ensuring that all allowable expenses are claimed is an essential part of maximising a small business or sole trader’s financial efficiency. Business mainstays such as tools, equipment and stock as well as professional fees and legal fees are all considered to be allowable expenses by HMRC.

Redfern explained: “HMRC requires that all expenses claimed through a tax return are incurred wholly and exclusively for business purposes and should actually have been incurred, with receipts or invoices as proof of the expense.

“But while many people remember expenses such as tools or equipment, they forget all of the other business expenses essential to running a small business or sole trader operation such as legal or professional fees, insurance costs, bank charges, any costs associated with advertising the business – these are all part and parcel of running a successful, visible business and can be claimed as an allowable expense as long as they were picked up while running the business”.

Taxpayers should retain proof of the expense as part of their business records. Where the expense was only partly business-related, it should be pro-rated so that only the part of the expense which related to the business is claimed for. Legal fees will not be allowed if they pertain to any criminal activity on the part of the worker.

As well as those expenses which form the mainstay of the business, most self-employed workers will incur a number of incidental expenses on a day to day basis.

Redfern stated: “It is easy to forget daily running expenses, such as mileage, phone and home office costs and any expenses picked up through business travel, but over the course of the year, they can be pretty sizeable – especially if you are required to travel in the course of your work.

“Self-employed construction workers, for example, can cover considerable distances travelling between sites and at 45p per mile, these costs can soon mount up. However, not all day to day expenses are allowable – normal food and accommodation are not considered allowable, after all we all need to eat and to live somewhere so these are just considered to be the everyday expenses associated with life and this are not eligible for tax relief.

“Similarly, civilian clothing is not considered a business expense although safety and protective wear would be.”

Charitable donations can also be included on a tax return and claimed as tax relief.

When accounting for large business expenditure, Redfern advised taxpayers to look at capital expenditure rules to see if it would be more advantageous to claim for those expenses through capital allowances.

He explained “If you use traditional accounting methods, rather than cash basis accounting, you might be better to treat large scale business purchases as capital expenditure and claim capital allowances. These large items, such as plant and machinery, might qualify for the Annual Investment Allowance (AIA), which is currently set at £1 million. Plant and machinery doesn’t just relate to heavy industrial equipment, it can also relate to assets like intruder and security systems, computer equipment and the costs of any major refurbishment, although maintenance and repair costs cannot be claimed as capital expenditure”.

Cars and company vehicles do not qualify for AIA but self-employed workers can apply writing down allowances to them through the capital expenditure rules.

Employed taxpayers who are required to submit a Self Assessment tax return cannot claim the same range of allowable expenses as those who are self-employed, but there is a limited range of tax relief options available to them.

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