The January 31 tax return deadline is an annual nightmare for all those who pay tax by self assessment. Don’t make things worse by paying too much – make sure you get your business expenses right.
By midnight on 31st, you must have filed your tax return, and have settled any outstanding balance for the 2008-09 tax year. Depending on their circumstances, some people may also be asked to make their first ‘payment on account’ against their estimated bill for 2009-10.
This year will see a large number of taxpayers file a tax self-assessment for the first time. Many of those who turned to self-employment as the downturn began to hit will be completing their first set of accounts and paying their first tax bill. It can be a confusing process – particularly if you have not been required to do something similar before.
Many self-assessment taxpayers end up paying far over the odds in Income Tax, simply because they don’t realise the breadth of things they can claim against tax. At the other end of the spectrum, though, there is a good chance that you will be investigated by HM Revenue and Customs at some point in your life if you remain a self-assessment taxpayer for an extended period. All too frequently, those who are the subject of investigations find themselves with large retrospective bills because they misunderstood the rules regarding what can and cannot be claimed for.
It is therefore important that you know what, exactly, you can claim back against tax. These items are known as ‘allowable expenditures’.
There are a number of distinctions that must be understood from the outset. The first of these is the difference between capital expenditure and business expenditure. Capital expenditure covers items that are kept by a business and that will directly help you earn profit. So, buying a new computer would be counted as capital expenditure, but leasing one would not. Business expenditure covers other costs that are incurred wholly and exclusively for business purposes. So, if you were leasing the computer rather than buying it, you would be able to claim that as business expenditure.
Business expenditure and capital expenditure are claimed for in different ways. Business expenditure is generally offset against your business income at the end of each tax year. Different types of capital expenditure are treated differently, and you should seek advice from HMRC about individual claims.
So what are the most common business expenditures that you might claim for?
If you use the services of accountants, solicitors, or similar professionals, you can claim the cost back against your income. This includes the cost of hiring an accountant to complete your self-assessment.
Cost of stock
If you are a retailer you can claim the cost of your stock as a business expense. You should remember, though, that you must claim the items at their wholesale price – not at the price at which you sell them on.
Cost of finance
If you use corporate finance products like a business loan or overdraft, you can claim the cost of such a facility as a business expenditure.
The cost of things like phone line, internet connection and postage can all be offset against your business income.
Expensing your home office
Many self-employed people work primarily from home, and there is perpetual confusion regarding whether or not it is possible to make claims on the basis that your home is your premises. In fact, the rules are relatively simple. If you can clearly delineate between costs incurred for business purposes and miscellaneous personal costs, you can make a claim.
For example, you might have an office in a spare room from which you work. HMRC would be likely to accept a claim for mortgage interest, for example, assuming that you worked in that room from 9 to 5 on weekdays, and that it was used for no other purpose. It should be noted, though, that the taxman is particularly suspicious of claims of this kind. Some advisors suggest making a flat-rate claim of £2 per week in order to not appear suspicious.
If you make a loss
If your business made a loss during the tax year, you can also claim tax relief. The loss can be offset against income from other sources accrued during the same year, or you can wait and offset it against profits made in subsequent years. This is common for businesses in their first few years of trading.
It is important to remember that if the taxman is suspicious of a claim, they will investigate – and this can be an expensive proposition. As a result, you should only make claims that are easily verifiable and entirely necessary. Always consider seeking professional advice from an accountant if in doubt (you can always claim the cost against tax!) – but remember to do this quickly, as the deadline is very close.