What are simplified expenses and what do they cover?October 27, 2021
Unless you're accounting-savvy or have at least had a lot of practice in the field, figuring out your own taxes can be hard. From knowing what exactly you can and can't claim tax relief for to figuring out how much your taxable profit really is, navigating this part of being a business owner can feel like a mathematical minefield.
In an effort to make taxes less, well, taxing, HM Revenue and Customs (HMRC) offers sole traders the option to calculate their business costs through a simplified expenses method.
It's worth noting that simplified expenses are only applicable to a handful of tax deductions, although these deductions are arguably the most complicated to work out. However, recognising the times you can use simplified expenses can save you a lot of time when working out your business expenses for the tax year.
In this article, we'll be looking at what exactly simplified expenses are and when you can use them, with a few exemplar calculations to demonstrate how it's done.
What are simplified expenses?
In short, the simplified expenses scheme is used by sole traders and business partnerships (but not limited companies) to calculate some of their allowable expenses using flat rates set by HMRC. These flat rates are used as an alternative to working out every business expense accrued manually, making it easier for self-employed people to work out the total amount of Income Tax they need to pay at the end of the tax year.
Flat rates can be used to calculate the allowable business expenses of the following:
- Working from home
- Vehicle and business mileage costs
- Costs of living at your business premises
While a singular flat rate definitely makes figuring out your expenses a lot easier, it doesn't necessarily mean that you'll have a lower tax bill than if you were to do you calculations manually.
To find out if using simplified expenses to calculate your allowable business expenses could save you money, you can use the gov.uk simplified expenses checker.
Working from home
Whether it's a dedicated home office or just the kitchen table, simplified expenses can be used to calculate the business expenses incurred when working from home.
To make a successful claim, you must be working from home for a minimum of 25 hours a month, and can only claim for the following expenses:
- Utility bills
- Other similar expenses
To claim for other expenses, such as telephone or broadband, you'll need to work out the proportion used for business purposes.
For the tax year 2020/21, the working from home allowance based on the number of hours you've worked from home is outlined in the table below.
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
If you regularly drive for work purposes, odds are the cost of running your vehicle will creep up alongside your mileage output. Although you won't be able to claim for your daily commute, there are a few tax deductions you can claim when it comes to travel expenses.Business trips made by bus, train or plane can be claimed back as an allowable expense by adding the ticket costs incurred to your accounting records. However, if you hit the road for work using your own vehicle, to claim back you'll need to keep track of every business expense made, whether it's insurance, repairs, servicing or fuel, to work out the total cost of running your vehicle in a tax year.Instead of setting aside a hefty proportion of time to go through these calculations, many sole traders instead prefer to claim mileage allowance, a simplified expense that makes it much easier for sole traders to work out the cost of running their vehicle.
The expenses below are applicable to the following vehicles:
- Cars (excluding those designed for commercial use, such as black cabs, hackney carriages and dual control driving instructors’ cars)
- Goods vehicles (e.g. vans)
The following table outlines simplified expense mileage rates for the tax year 2020/2021:
|Vehicle||Flat rate per mile with simplified expenses|
|Cars and goods vehicles first 10,000 miles||45p|
|Cars and goods vehicles after 10,000 miles||25p|
To make the most of these tax breaks, make sure you keep track of your business miles in a mileage log, detailing every business trip you take. However, be sure that you refer only to the trips that are business orientated — miles accumulated from visiting your friend in Scotland might raise some questions from HMRC.
Unfortunately you cannot claim for riding a personal bike, but may be able to claim back on a bike bought for business purposes only, alongside any future running and maintenance costs.
Living at your business premises
If you're running a guesthouse, bed and breakfast or a small care home, you might decide to live at your business premises. If this is the case, you can use flat rates to work out your running costs as an alternative to calculating the amount spent on business use and private use.
To work out the amount you can claim, the first step is to calculate the total expenses for the premises.
Example: You and your partner live in the bed and breakfast that you run for the entire year. Your business expenses for the year come to £15,000.
Next, using the flat rates outlined by HMRC in the table below, subtract the amount you use the premises for personal use based on the number of people living on the premises and claim the rest as business expenses.
|Number of people||Flat rate per month|
Example: 12 x £500 per month = £6,000
£15,000 - £6,000 = £9,000
If someone lives at your business premises for part of the year, you can only use the relevant rate to work out your allowable expenses for the months they are there.
For instance, if you and your partner have a family member who only stay for a few months of the year, you'll only be able to claim the higher rates for those months.
Flat rate: 9 months x £500 per month = £4,500
Flat rate: 3 months x £650 per month = £1,950
Total = £6,450
£15,000 - £6,540 = £8,550
Working out your allowable expenses for your Self Assessment tax return is hardly an ideal way to spend an evening, but with the flat rates set out by HMRC calculating your costs doesn't have to be complicated.
However, this isn't to say these flat rates will necessarily save you more money. If you're not sure if it's worth using simplified expenses to figure out your business costs, reach out to an Ember accountant for the best ways to get more of your money back.
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