Sole Trader – Reducing your tax
As a Sole Trader, you want to ensure that you are claiming as much as possible to keep your tax bill down. After all, your profits result from your hard work and perseverance. When you work for yourself, the last thing you want to do is pay more tax than is necessary. In this article, we will look at some things which are often overlooked and which can reduce a Sole Trader’s tax bill.
What reduces Tax?
Any legitimate business expense will help reduce your tax. The direct items you use in your trade, such as stock, are obvious but there are items which are sometimes missed. Ensuring that these are correctly claimed can help keep your tax as low as possible.
Tax Deductible items a Sole Trader sometimes misses
If you have a uniform that is solely for the purpose of your business, you can claim tax relief for the initial purchase and an allowance for “laundry”.
This includes protective clothing for tradesman and even stage costumes for entertainers. If however, your ‘uniform’ could be classified as everyday clothing, tax deduction does not apply. Find out more on the GOV.UK website.
Be careful on this point because the item must be either “protective” or carry a significant advert for your business. Steel toe-capped boots are ok, but ordinary shoes and trainers are not. A High Visibility jacket is fine but a fleece isn’t (unless it carries an advert).
Tools & Equipment
If you are a self-employed builder or mechanic, or any other sole trader who relies on tools, equipment or machinery to do their job, it’s possible to claim back tax on the cost of replacing and maintaining your equipment.
You are also entitled to claim relief when you first purchase the item and this will be done either by capital allowances or as an allowance expense, usually depending on the value of the item.
When you first start your business and continue to use tools and equipment you previously owned, it may be possible to “introduce” these to the business and treat them either as capital items or purchases. An expense frequently missed.
Travel & Motor Expenses
In most cases, Sole Traders won’t have a car that is solely for business use. However that isn’t to say that you can’t claim tax relief on travel and motor expenses. There are allowable business expenses for fuel, parking, repairs, servicing, breakdown cover and insurance. Crucially, it does not cover you any non-business driving costs.
Alternatively, and frequently, it may be more beneficial to claim “mileage” where you effectively charge the business for travel you do for business. Mileage can also be claimed for motor cycles and cycles used for business trips. Bear in mind that visits to possible customers, banks, post office – and even accountants – is “business”.
Read more on the GOV.UK website to see what is and isn’t an allowable business expense and determine what would be the best option for you and your business.
There are also options when purchasing a car or van for exclusive work use, where you can claim capital allowances on the value of your purchase, reducing your taxable profit. Purchasing a van usually means full (100% relief) is allowed but this is not so straightforward for a car unless you are using it for a specific purpose such as a dual-controlled driving instructor vehicle or a taxi.
Note that leasing or renting is treated differently to an outright purchase or HP. How you buy a vehicle can make a great deal of difference.
Ask for advice & help before purchasing a vehicle because the rules are complex and you want to achieve the best result.
Wages for family members
Over the years, we have come across many situations where a sole-trader has utilised the services of a child (old enough to work), a spouse or partner. If they are not working elsewhere, it may be possible to legitimately pay them a small amount and treat the cost as a deductible expense.
Please ask before doing this as there are criteria which apply.
Other Business Expenses
There are of course other expenses which tax relief can be claimed on. These include some household expenses if you work from home as a sole trader and definitely something to find out more about if you use part of your home for exclusive business use. This could be an office, workshop or garage.
Something to think about here is that “exclusive” use of part of your home could mean that it becomes liable to CGT (Capital Gains Tax) on sale. You may save tax now but pay more later. Best to discuss this first.
Most businesses have to be ever-changing to keep up with the latest trends. As a Sole Trader, you want to be at the top of your game, providing the best customer service. This means having the most up to date knowledge, systems and products whilst developing your skills – that is where courses come in. You will be pleased to know that training courses to enhance or improve an existing skill are deemed an allowable business expense by HMRC. There are exceptions, particularly “acquiring a new skill”, so be sure to find out more before jumping in head first and paying for those courses.
We are here to help you assess your business expenses and help to ensure you are getting the most from your hard-earned profits. Get in touch with us today to discuss your business and see where we can help you, save money.