The UK has seen the fastest growth in self-employment in Western Europe over the past year, according to the Institute for Public Policy Research (IPPR).
There are many types of expense that you can claim and HMRC have just created a new guide…
Pre Trading expenses
Many business owners incur in costs before they actually start in business. You can go back up to 7 years can claim costs as pre-trading expenses.
Let’s says you want to start a home based business, you need to create an office at home or build an office in the garden. This means that you have building costs as well as equipment costs before you start trading. These costs are submitted to the new business as an expense claim by the owner on the first day the business starts.
Also you might have legal cost for contracts or renting offices or equipment, you could have costs for product development, stock, samples, or even a motor vehicle.
You can check more about pre-trading expenses legislation.gov.uk or at HMRC.
However, what happens when you have paid VAT prior being VAT registered? You can reclaim any VAT you are charged on goods or services that you use to set up your business.
Normally, this will include:
- VAT on goods you bought for your business within the last 4 years and which you have not yet sold
- VAT on services, which you received not more than 6 months before your date of registration
You should include this VAT on your first VAT return. If you have doubts as to whether you should be VAT registered or not, take a look at VAT Notice 700/1: should I be registered for VAT.
Simplified or Actual Expenses
Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. You don’t have to use simplified expenses. You can just decide if it suits your business or not.
Simplified expenses can be used by:
- sole traders
- business partnerships that have no companies as partners
You can use flat rates for:
- business costs for vehicles
- working from home
- living in your business premises
You must calculate all other expenses by working out the actual costs.
In order to find out which method works best for you, you can use the Government expense checker
Don’t forget Capital Allowances and the Annual Investment Allowance
Buying equipment, even if it’s on finance, is a great way to reduce your tax bill, the 100% AIA can be used on the date you buy the asset.
Currently, the Annual Investment Allowance is £500,000 and this has been reduced to £200,000 in January 2016.
It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!
Sole Trader Example
The personal tax allowance is currently £10,600 (2015/16)
Let’s assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.
It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.
Employers are saving £6k by opting for Self Employed Freelancers…
A survey by PeoplePerHour has shown that the self-employed segment of the labour market in both the UK and USA is growing at a rate of 3.5% per year – faster than any other sector. Should this growth continue for the next five years, researchers predict that half of the working population could be self-employed freelancers by 2020.
The survey also suggests that small businesses that hire freelancers instead of full-time employees could save £6,297.17 per annum. The survey shows that the average waste or spare capacity for each employee in a SMEs is 1.9 hours per day.
The research identifies a number of key drivers behind the shift from employment to self-employment, including “the availability of ubiquitous and inexpensive computing power, sophisticated applications and cloud-based services“. [Lawdonut]