The annual self-assessment is no favourite among the tasks of the self-employed, but it is unavoidable. One way to increase its appeal is to use it as a money-saving exercise. Knowing what you can legitimately claim for is a big advantage, so here are some of the lesser known allowable expenses that just might change your bill into a rebate.
1. Provisions Away From Home
The taxman’s opinion on food and drink is that it is necessary for survival rather than necessary for business. Many of us may consider survival and business to be the same thing, but nonetheless there are some strict rules to adhere to when claiming for consumables. You can claim for ‘reasonable’ costs of food and drink when traveling on business, if:
- The nature of your business takes you far from home, or
- You’re making an ‘occasional business journey outside the normal pattern’, for example, you work from home and are traveling to another city to meet a new client, or
- You stay overnight on a business trip.
If you’re wondering what HMRC’s definition of a ‘reasonable’ cost is, it’s safe to say that anything up to a substantial meal at a good restaurant is allowable. Luxurious orders such as Fillet steak or lobster are probably best avoided, and alcohol could certainly come under question. Remember, HMRC doesn’t try to dictate what we’re allowed to spend, it only tells us what we can offset against tax, and it very much makes the rules.
2. Help From Your Spouse
Believe it or not, the self-employed are allowed to pay their spouse to help with secretarial work, then offset the wages against tax. However, this is only worth doing if your partner remains beneath the threshold for paying tax or national insurance contributions. If they aren’t earning money elsewhere, a wage of £10 per week will leave them just beneath the threshold. To pay beyond this would mean setting up an official payroll, on which they would likely end up paying more tax than you would save. Be aware that:
- HMRC may demand evidence of payments. The best way to provide this is to set up a bank transfer and, as always, hold on to statements.
- Your partner must declare the income on his or her own tax return.
- HMRC may demand evidence of the work done.
3. Use of a Home Office
If part of your home is clearly designated for work then its running costs are a business expense. Your claim should be proportionate to the space used. The easiest way to calculate your claim is to simply divide your total living costs by the number of rooms in your home. Assuming you only use one room for business, the number you’re left with after this sum will be the amount you can offset against tax. ‘Living costs’, in this context, includes rent or mortgage interest (but not mortgage payments), insurance, heat and lighting.
Another thing to be considered is the time spent using the space. The taxman will not allow you to claim for the full cost of the room if you only do five hours of office work per week, even if the room has no other use. Be reasonable with your calculations and make sure you can back up your claim with evidence of your working patterns throughout the year.
These are all legitimate claims as of May 2012 and with the proper evidence they should stand up against even the harshest inspector.
Musician’s Union Tax Savings Guide, HMRC
[Disclaimer: Daniel Cox is not qualified to give financial advice and as such cannot be held liable for any disagreements with HMRC.]