How To Claim Tax Expenses For Tools And Vehicles If You're A Sole Trader
Purchasing tools, equipment, or a vehicle can be a hefty expense for small businesses, especially for new ventures and budget-conscious sole traders.
The good news is, you can claim tax expenses for tools, equipements and vehicles, necessary for your business. This helps lower your taxable income and eventually your tax bill.
What Are Capital Allowances?
Sole traders can also enjoy tax relief through capital allowances. You can deduct capital allowances from your profits to offset the expenses of purchasing equipment and vehicles. The capital allowances you choose determine the varying amounts you can claim.
Most sole traders operate on a cash basis. HMRC has recently said that cash basis is the 'standard' and people need to opt for accruals/traditional accounting with capital allowances.
List of Common Tax-allowable Expenses for Sole Traders
- Cost of Goods Sold (COGS)
- Office Supplies
- Utilities
- Vehicle Expenses
- Mileage Claims
- Equipment and Tools Purchase Cost
- Rent/Lease Payments
- Marketing and Advertising
- Training and Development Costs
- Website Costs
- Bank Charges
- Subscriptions and Memberships
- Client Entertainment
- Telecommunications Expenses
- Home Office Expenses
- Bad Debts
How To Claim Tax Expenses For Equipment?
You can only claim tax expenses for equipment if you utilise cash-basis accounting. This involves entering your revenue and expenses into your financial records as soon as you get money or are paid. These are purchases of computers, printers, and other equipment that you maintain within your firm.
You must claim your revenue and costs as "capital allowances," which is another kind of company tax relief if you employ traditional accounting. This reports income and expenses on the invoice date rather than the payment date.
Whether you operate your business from an office or from home, the same regulations apply.
Example Scenario: Jane is a sole trader operating a graphic design business and purchases a new laptop for £1,200 to use for her work. By opting for cash-basis accounting, she can claim this expense as a tax-deductible expense, while using traditional accounting, she would need to claim capital allowances on it over its useful life.
Now, How About A Mobile Phone?
The cost of the purchase, the monthly contract fees, and any call expenses associated with a mobile phone that you use only for business purposes can all be written off as tax deductions. But if you have a personal phone and use it for work sometimes, you can only charge part of the cost to your work expenses.
When in doubt about whether an expense is allowed or not, HMRC suggests reaching out to the Self Assessment helpline. Otherwise, you can also consider using Taxd, an online tax software, to guide you throughout the process of maximising tax deductions.
Tax Expenses For Tools
You can deduct all of your work-related tax costs for purchasing, maintaining, repairing, and replacing tools if they are necessary for your sole proprietorship and are never used for other purposes.
It is also possible to claim training fees as a permitted expense. It goes without saying that the training must be applicable to your present job and sole proprietorship, strengthening your current skill set rather than imparting new ones.
Claim Tax Expenses For Vehicles
With traditional accounting, purchasing a vehicle for your sole trader business allows you to claim the entire cost as a capital allowance. When using cash basis accounting, purchasing a car for your sole trader business requires claiming it as a capital allowance.
However, this is only applicable if you're not utilising simplified expenses, which involve claiming a flat rate instead of calculating actual costs. Vans and other vehicles can be claimed as allowable expenses.
Permissible expenses may cover car and van insurance, vehicle maintenance, fuel for business trips, vehicle rental, licence fees, and breakdown coverage. You can even seek reimbursement for travel expenses like parking, train, bus, airfare, and taxi fares.
Additionally, hotel room charges and reasonable meal expenses during overnight business trips are also eligible for claims.
Securing Capital Allowances
Sole traders can claim capital allowances in their annual Self Assessment tax return. Just make sure to provide the necessary details on the supplementary page SA103.
To unlock the benefits like annual investment allowance, 100% first year allowances, the super-deduction or special rate first-year allowance, make sure to claim them in the accounting period when you bought the item.
How Do I Claim My Self-Employed Business Expenses?
To claim tax relief for work-related expenses, you need to fill the P87 form. Follow the steps given:
1. Eligibility Check
When filling out this form, ensure you meet these criteria:
If you are an employee under PAYE and do not require self-assessment tax return filing.
Your total expense claim exceeds £2,500 during the tax year and have not been reimbursed by your employer.
2. Download Form 2820 in Adobe PDF
Collect the most up-to-date P87 form from HMRC or other official sources and ensure it is complete to avoid processing delays 15.
3. Complete Your Form
When filling out this form accurately and completely, all required sections:
In Section 1: Personal Details, include your full name, address, contact number, date of birth, and National Insurance Number (if applicable).
In Section 2: Employment Details, enter your employer's PAYE reference number, job title, and industry type (if you're claiming flat rate expenses).
In Section 3: Flat Rate Expenses (if applicable), specify an amount based on industry standards if you're claiming these expenses.
In Section 4: Professional Fees and Subscriptions, list any professional fees or subscriptions for which you’re claiming relief.
Finally, in Step 4: Provide Evidence, submit proof of these expenditures.
For uniform and tool expenses, provide receipts if claiming exact amounts; when making mileage claims, keep a log documenting business journeys (date, start/end postcodes, etc).
4. Sign and Date Your Form
Do not sign the P87 form without signing and dating it; any unsigned forms will be rejected 12.
5. Submit Your Claim
Mail the completed P87 form directly to HMRC at BX9 1AS in Bedford.
5. Keep Records
Keep copies of your completed form and supporting documents in case HMRC decides to query your claim later on. Maintain copies for your own records for safekeeping in case HMRC needs clarification about any part of it.
Important Notes:
Claims can be made up to four years after the end of each tax year. To ensure accurate information is submitted in order to avoid delays or rejections 24. By following these steps carefully, you can successfully claim tax relief on work-related expenses using the P87 form.
Final Thoughts
Mastering tax expense claims can transform your cash flow. As a sole trader, understanding what expenses you can and cannot deduct simplifies tax season. Take your time to understand your expenses, seek advice if necessary, and avoid overpaying taxes.
With Taxd, an online self-assessment software, you can simplify your tax return. Our online tool ensures you maximise all available deductions and submit a tax-efficient self-assessment. We've made the process simple and easy to complete. Start your return today and only pay when you file.
FAQs
1. What are capital allowances and how can I claim them?
Capital allowances are a type of tax relief available to sole traders to offset the cost of purchasing equipment, machinery, vans, lorries, or cars for business use. The amount you can claim depends on the type of asset and the accounting method you use.
2. What is the Annual Investment Allowance (AIA)?
The Annual Investment Allowance (AIA) allows you to claim the full cost of eligible assets up to a certain limit in the year you buy them. For the tax year 2023-2024, the AIA limit is £1,000,000.
3. Can I claim capital allowances on vehicles?
Yes, you can claim capital allowances on vehicles that you use for business purposes. However, there are different rules for cars and other types of vehicles. For cars, you can claim writing down allowances, which is a percentage of the car's value each year. For other types of vehicles, you can claim a higher rate of capital allowances.
4. How does cash-based accounting differ from traditional accounting for claiming expenses?
Unlike traditional accounting, businesses that use cash-based accounting only report invoices and expenses in their tax return after they are paid in full. This implies that you will not be required to pay tax on any invoices until your customer has paid you, but it also means that you cannot claim an expense until the bill has been paid.
5. What records do I need to keep to claim tax expenses for tools and vehicles?
You should keep receipts, invoices, and other records to prove the cost and business use of any tools, equipment, or vehicles you want to claim tax relief for. HMRC may ask to see these records if they are querying your tax return.
6. Who needs to file non-resident tax return in the UK?
If you live abroad but receive income from the UK property or workdays in the UK, you will likely need to file a UK tax return. You cannot file your tax return online using HMRC website. You can use an accountant or HMRC-recognised software, like Taxd, which is often much more affordable.