If you are self-employed or in a partnership make sure you claim your expenses correctly

As a sole trader or partnership you can claim back any expenses incurred that relate directly to your business. Claiming as much tax relief as possible will no doubt be one of your biggest priorities as a small business owner.

What is tax relief and how does it work?

Tax relief allows you to deduct some payments you make during the tax year from your gross income. The income received by your business, less allowable expenses incurred in the course of running your business, is your taxable profit. You will pay Personal Tax and Class 4 National Insurance Contributions (NICs) on your taxable profit.

You can claim tax relief in addition to any other personal tax allowances that you are entitled to. This means you will take home more of your income and pay less tax.

Claiming expenses correctly can help to minimise the income tax and Class 4 NICs you will pay, while ensuring you work compliantly within HMRC rules.

Wholly and Exclusively;

HMRC will only allow you to claim tax relief on expenses which are 'wholly and exclusively' for carrying on and earning the profits of your business. Any costs you want to set against income to reduce your taxable profits must be for the benefit of your business.

In practice, the expense may have both a business and a personal element and it is important that you only claim for the proportion that relates to the business. 

What about the personal element?

The personal element of the expense is called “Drawings”. As a sole trader or partnership any money you take out of your business account for personal use are Drawings. This includes not only private expenses, but also any regular wage-like sums that you take out (sole traders and partners in a partnership are not employees, so cannot go on the payroll and be paid a wage). Personal pension payments are also a Drawing.

It is important to make sure that Drawings are kept out of your business profit and loss account so that you don't claim tax relief on them by mistake so make sure you explain your costs correctly in your books.

What business expenses don't count as "wholly and exclusively"?

If you spend money on something that is for mixed business and private use, then unless you can accurately identify the part that is just for business and the part that is private, you cannot put any of the cost through your business accounts. The whole expense will be recorded as Drawings.

HMRC call this the "dual purpose" test. If you had a personal reason for incurring the expense, even if you also had a business reason for it, then the expense would be disallowed in its entirety - unless it could be accurately split between the part that was for business and the part that was personal..

Here’s an example;

Buying ordinary clothes will nearly always fail the dual purpose test and have to go to Drawings, because you cannot distinguish between the business and private part of this expense.

That applies even if you buy a business suit that you wouldn't wear anywhere else apart from on business. You could wear it elsewhere so it is not wholly and exclusively for business use.

On the other hand, protective clothing, or a uniform, or a "costume" if you're an actor or other entertainer, would usually pass the test and be OK for inclusion in the business's expenses.

More detailed guidance an all aspects of claiming expenses can be found at HMRC

In summary;

If you are a sole trader or a partner in a partnership, then you are not subject to the same restrictions as employees (including company directors) when it comes to taking money out of the business. This is because legally you are the business but you must still make sure you put anything you draw out of the business, which includes private expenses, to the correct place in your accounts - which is almost certainly Drawings.