Self-employed: deducting expenses for tax purposes - cash basis accounting

If you are only starting your business, or even when you work for yourself for a number of years, but your turnover is not more than £300,000.00 a year, you most probably use a cash basis to calculate your tax. You might be wondering then, which expenses can you deduct from your income to calculate your taxable profit. The simplest way to think about it is to ask yourself two questions: Would I have bought it/ pay for it, if I wasn't self-employed? Am I going to use it for business purposes? Always remember, that on the cash scheme, you only take into consideration expenses that you have paid for in the financial year you're submitting your assessment for. For example, if you have an online shop, you have probably bought stock and maybe are paying fulfilment fees. These are obviously expenses of your business, but you might also decide to take part in an online course about marketing. Would you have bought access to this course if it wasn't for your business? Are you going to use the knowledge that you gained in this course to improve your sales? If so, it is your allowable expense, and you can deduct it. It sounds simple, yet there are some expenses that are a little bit more tricky than that. Take a look at some of the most popular examples:

If I had an office, I could deduct the rent and other costs of the office as my expense. I work from home, will I lose out on tax-deductible expenses?

No, you can claim some part of your house bills, rent, and council tax as your business expense. There are two ways to calculate how much you can deduct. You could estimate how much of your house bills account for your business needs. Making this sort of estimations, you have to use common sense, and try to make the estimation as accurate as possible. For example, if you only use one room for your business, and you don't use much electricity, you could simply divide your weekly bills by the number of rooms that you have in your house, and then by seven days. You will end up with the cost of using one room in your house for one day. This would be your daily rate to calculate your home office expenses. The other way to calculate your deductible expense of working from home is to use simplified expenses which are flat monthly rates provided by HMRC.

In my business, I want to use tools that I have owned before. Can I deduct it as an expense?

As you are using the cash basis, you will not be able to deduct your tools as an expense in this case. This would be possible however if you were using the traditional accounting method, through the use os Writing Down Allowance. In the cash basis reporting, you are only allowed to deduct expenses and expenditures that you have paid for in the current accounting period.

I want to host a marketing event. I can treat it as an expense, right?

This is a tricky question. Some events are seen by HMRC as entertainment, and the rules regarding entertainment are a bit complicated. There are two types of entertainment: business entertainment, and employee entertainment. The first type is when you entertain your customers or suppliers, hoping to make new, or better business with them. Your event will be categorised as business entertainment, if it is providing entertainment for free, for person or people, who are not your employees. Business entertainment is not an allowable expense, employee entertainment, on the other hand, is. Employee entertainment is entertainment offered to your employees, but there are some rules that have to be followed to make sure it is an allowable expense.

There is one situation in which your event could be an allowable expense, even if it was for people who are not your employees. It would have to be strictly a marketing event, with no entertainment provided. A structured event, with a program, which for example, clearly outlines the benefits of your products, could be on some occasions an allowable expense.

I have just bought a car for my business. Is this an allowable expense?

Car is not an allowable expense, but you can claim the capital allowance for this purchase unless you have chosen to use simplified expenses for this vehicle.