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When you become self-employed, you will want to know how your income will be taxed and how much of it will be taxed. As a sole trader or a partnership, you will be able to deduct eligible expenses from your total income to be left with the profit, which is liable to income tax at the appropriate rates. However, knowing what you can claim for can involve trawling through a minefield of information and this is one of the areas you should look at as soon as you start your business. Knowing what you are able to claim for could minimise your tax bill, leaving more profit for reinvestment in the business.

Although expenses which are for the business may be claimed, any private expenditure isn’t allowable. You are responsible for any private expenses and won’t be able to claim them as expenses. There are special reliefs which can be claimed for items classed as ‘capital’. These are items which would be purchased to improve or buy an asset to use for your business, usually a one-off cost. If you need more detail of various expenses, tax reliefs and allowances, contact a professional advisor as most allowances and reliefs have differing time limits for claims.

Any items which you purchase, or costs you incur purely in the running of your business, may be claimed as expenses. Capital items like machinery or premises are not claimed as business expenses but can still be claimed. The most common type of expenses claimed are rent or rates, business portion of utility bills, stationery and phone costs, car and travel expenses, accounting fees, business loan interest and much more. The main expenses will either be for the business, for private use or for capital.

Anything that you spend on buying, improving or creating an asset which is used during the course of earning a profit is classed as capital expenditure. The purchase of business premises, machinery, computers and furniture are all classed as capital expenditure. Not all capital expenditure will be eligible for tax relief and you will have to fulfil the criteria for claiming.

To be able to claim business expenses they must be used ‘wholly and exclusively’ for the business. If expenditure is used for both business and private use, only the business use will be eligible as an expense. The whole amount of any expense which was incurred ‘wholly and exclusively’ for the business may be deducted from your business profits.

A business usually incurs similar types of expenses, including capital allowances, motoring expenses and expenses related to business premises. Capital allowances may be claimed for fixtures and fittings, plant and machinery and some types of building. If you use a vehicle for business, you may be able to claim expenses. However, you must decide which of the two ways to claim is more beneficial to you. You can claim for mileage travelled using the fixed mileage rates provided by HMRC or you can calculate the actual cost of business travel.

The costs of maintaining business premises may also be claimed as an expense, from rent to repairs and property insurance. If you work from your home, you can claim for any costs incurred for the business use, but not private usage.

You can claim for allowances and tax reliefs by completion of a self assessment tax return. The earliest year that can be claimed for now is 2008-09, which must be claimed before 5th April 2013. You can usually claim for the last four years for any allowances or tax relief which may be due.



About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

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