Business expenses and working from home
In general, nearly all the expenses incurred wholly for business purposes will be allowable for tax purposes, with the exception of entertaining expenses, fines and penalties.
One of the most common types of allowable business expenses will be telecommunication costs (i.e. telephone calls and internet connection charges). If you use the same landline or mobile phone for both personal and business calls, then you will have to be careful to only include the costs of the business calls as your trading expenses. The computer and office equipment you have bought will qualify for capital allowance claim but maybe restricted if you use them both for business and private purposes.
There are cases where you may have to join professional bodies or trade associations before you can commence trading or you need to carry out research in order to get inspiration for your own work. For these situations, the subscription fees you paid, books or journals you bought, exhibitions or show that you attended or fees you have paid to your subcontractors can all be counted as allowable business expenses.
Due to the nature of your self employment, you may have to acquire special tools, props or clothing (for health and safety reasons, or to enable you to carry out your performance if you are a performing artist). Such items are also regarded as allowable expenses. Any associated cleaning or maintenance costs will also fall into the category of allowable trading expenses. However, costs of ordinary everyday clothing, even if they are bought specifically for business use, are not allowable for tax purposes.
Finally, accountancy costs and other professional services you need in order to run your business are also allowable expenses.
Working from home
For self employed artists who work from home, you should be entitled to claim some of your premises costs. The HM Revenue & Customs will generally allow the following:
- Additional light and heating costs for occupying the premises as your office/workshop
- The increase in insurance premium for having to insure the business equipment or pieces of your artwork stored at your home.
It is a misconception that you can simply claim a percentage of your mortgage interest, domestic and water rates as costs for use of home as office.
HMRC has specifically disallowed non-business running costs of premises when these are used partly for business. They are of the view that you will be liable for your domestic and water rates irrespective of whether you work from home or not. Claiming part of your mortgage interest on your private residence as business expenses may prevent you from claiming a 100% capital gain tax exemption on the future disposal of your home. You are only allowed to claim tax relief on interest on loans and overdraft used solely for business purposes.
Good housekeeping is essential. For smaller businesses, you may find using Excel to record your transactions will suffice. However in cases where you have a large volume of transactions or they are of a complex nature, you should consider using some accounting software for your business.
Remember that whatever format you decide to record your business transactions, it is important that you keep good accounting records and retain them for six years.
You may have to produce such supporting documents if HMRC enquire into your personal tax returns or VAT returns. This is regardless of whether you have made a profit or loss on your self employment business.
© Anna Bulmer 2012
The article is for information only, and not for the purpose of providing accounting and taxation advice. Consult an accountant for accounting and taxation advice on specific matters.