A Guide To Record-Keeping And Expenses For Self-Employed Sole Traders
Whether you’re new or not to self-employment, record-keeping might sound like hard work. And while that may be true, it does come with its own reward – namely, that sole traders can claim back allowable expenses and pay less tax on their earnings.
HMRC has a number of rules about record-keeping though. Mostly, they relate to the storage of receipts and other documentation after you’ve filed your Self Assessment tax return for that tax year. By not adhering to them, you run the risk of losing out on any tax relief – or worse, being penalised by HMRC.
So, to ensure you get the tax-saving benefit of expenses, we’ve asked Mike Parkes from GoSimpleTax to set the record straight on record-keeping and provide guidance on how to claim.
What expenses can sole traders claim for?
There’s a whole host of expenses you can claim as a sole trader, and they can potentially net you big savings if you utilise all that are available to you. Generally, people are aware that equipment purchases qualify as expenses, but there are many others.
Travel and accommodation
As a sole trader you may have to cross up and down the country for long stints at a time, basing yourself near a site far from home. Luckily, HMRC considers hotel stays viable expenditure. The accommodation records (how long you’ve booked) should be as close as possible to the proposed timescale of the project you’re there to oversee.
You can also claim tax relief on mileage or travel bookings made over the year, as well as meals on overnight trips. To ensure you stay within the bounds of eligible allowances, it’s worth consulting the gov.uk website.
Legal and financial costs
If you need to hire an accountant to support you in your venture, you can claim on their total costs. This may also be the case for any other professional services you may need for business purposes. Likewise, you can claim against bank costs such as overdraft and credit card charges. Costs like professional indemnity insurance premiums and lease payments can be claimed back, although there are rules if you’re using cash basis accounting.
As you are using these services purely for the purpose of driving your business forward, HMRC will permit marketing exercises as eligible expenses. That’s great news for sole traders who use flyers to drum up work, for example, or need a website that advertises their services.
While you operate as a self-employed individual, you may also represent certain authorities when you’re caring for patients or vulnerable people. As a result, you may be expected to purchase a uniform or your own PPE.
Fortunately, you’re able to claim for it as an allowable business expense. Provided that what you’re purchasing is either a uniform or necessary protective clothing needed for your work, you’ll qualify for tax relief.
What’s more, if you need to purchase any additional PPE for your role (say, gloves and face masks), this is also considered an allowable expense.
Rent for premises
If you rent a space purely for business purposes, then that too can be classed as an allowable expense.
If you work from home, you’re entitled to claim a proportion of your gas, electric, water, broadband and telephone bills as allowable expenses. There’s no exact science to this, but generally you’d divide the bill by the number of rooms in your house and then divide that figure based on the amount of time you work from home. The GOV.UK website has a good example. If that sounds too complex, then you can claim simplified expenses.
If your freelance work requires you to pay a membership fee or would benefit from you purchasing a trade publication, these costs can be claimed back on. However, this does not extend to political party subscriptions.
These are just some of the examples of expenditure that you can claim on, but they highlight the wealth of opportunities available to all sole traders – provided they keep the relevant records. Claiming these expenses through your Self Assessment tax return helps to further reduce your tax liability and maximise your take-home pay.
What records should I keep?
In order to qualify for tax relief, you need to be able to present receipts when asked by HMRC. But to be wholly compliant, expenses aren’t the only figures you’ll need to report. In fact, if you’re self-employed, you’re legally required to keep records of the following:
- All sales and income
- All business expenses
- VAT records if you’re registered for VAT
- Records about your personal income
- Your COVID-19 support grant
You won’t need to submit all of the above as part of your Self Assessment tax return. However, HMRC may ask you for them should they launch an investigation. Additionally, it helps you to work out your taxable income when you’re filing.
If HMRC does launch an investigation, you’ll need to provide evidence of your finances. This will need to come in the form of:
- Receipts for goods and stock
- Bank statements and chequebook stubs
- Sales invoices, till rolls and bank slips
Only with all of the above will you be able to safely claim any relevant expenses and stay on the right side of the taxman.
How long should I keep these records for?
Where businesses have to store receipts for six years, sole traders are only required to store theirs for five. That’s at least five years after the 31st January submission deadline of the relevant tax year.
This allows HMRC to investigate your accounts over a long period of time should they believe it necessary. Obviously, if you have claimed relief but misplaced the evidence, you may be penalised by HMRC all the same. So it’s best to invest in more than a wallet or a desk drawer for your receipts.
Where should I store records?
Ideally, electronically. Train tickets and similar paper receipts are near impossible to keep in good quality for that length of time – especially if you’re lugging them around for up to five years in your coat pocket. You could have a physical filing system, but the amount of admin that would be required to keep it in order could quickly get exhausting.
Tax software, on the other hand, allows you to store certain documentation online. Some allow users to take photos of receipts from their phone, for instance. They can then upload the image to the app, keeping it secure in case you ever find yourself under investigation.
However, it’s worth bearing in mind that there are documents that HMRC will expect you to hold on to in their original form. Such documents usually show that you’ve had tax deducted. For example, if you’ve been an employee in that tax year, your P60 will prove your exemption.
GoSimpleTax software submits directly to HMRC and is the solution for freelancers and the self-employed alike to log all their income and expenses. The software will provide you with hints and tips that could save you money on allowances and expenses you may have missed.
Trial the software today for free – add up to five income and expense transactions per month and see your tax liability in real time at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading.