A guest post by Customer Service Guru:
In late 2013, HMRC laid out plans for a new method of expense calculation for business owners called simplified expenses.
The new scheme is designed to make calculating business expenses easier for self-employed people and is now in full use; however, it may not make sense for all businesses, so in order to make the best judgement, you’ll need to know how it works.
What are Simplified Expenses?
Simplified Expenses are flat rates that can be used to calculate business expenses instead of working out their actual costs. It is helpful in the way that it reduces the need to store large amounts of paperwork in order to calculate one’s business outgoings at the end of the tax year; instead only the number of hours for each expense needs to be recorded.
When you run your own business, there are countless self-employment expenses to be aware of. These include:
- Utility bills and other running costs for business premises
- Office supplies and equipment
- Uniform and protective clothing
- Staff wages
- Stock/raw materials for sale
- Insurance and bank charges
- Advertising and marketing costs.
All of these expenses however can be claimed back when you file your self assessment tax form at the end of the year. However, you may use something for both business and personal reasons – a home landline perhaps, or mobile phone. In this instance you would need to work out the proportion of hours that it was used for business purposes.
However, thanks to Simplified Expenses, this may no longer be the case. Whilst you will need to calculate the actual costs for many of these expenses, the simplified flat-rate method can be used to calculate:
- Costs of running a business vehicle
- Expense of working from home
- Expense of living at one’s business premises.
How to Do It
If you wish to use the Simplified Expenses method to calculate your business expenses, you will need to have a record of/start recording all business miles covered over the year; the hours you spend working at home per month and how many people live at your business premises throughout the year (if relevant).
For each expense you wish to calculate, check the flat rate specified on the gov.uk website. For example, for the first 10,000 miles on any business motor vehicle, you are able claim 45p per mile, whilst every mile after the 10,000 mark is claimed at the rate of 25p per mile. You would need to multiply the number(s) of miles covered below and above 10,000 by the specified flat rates to work out how much you can claim on mileage overall. (There is also a lower rate available for motorbikes too.)
When you complete your self assessment tax form at the end of the tax year, you will be able to enter the total simplified amount, plus any other calculated costs, for your overall business expenses.
Things to Consider
- It’s important to know that not everybody is eligible to use the Simplified Expenses method. Only sole traders, unincorporated businesses or business partnerships that do not serve other businesses are able to use it – limited companies cannot.
- If you intend to claim simplified expenses for a vehicle, the vehicle cannot already be included in your general business expenses and you cannot have already claimed capital allowance for the vehicle. Other travel expenses like public transport can still be claimed, meanwhile.
- Those that work from home will need to do so for a minimum of 25 hours per week in order to use the simplified method. Simplified Expenses also do not cover phone or internet bills – just utility bills for the home.
- Living in one’s business premises will usually apply to owners of hotels, guest houses or care homes, for whom their home is also their business. This expense is based merely on the number of people who live at the premises at any one time and will be subtracted from your overall premise outgoings to calculate your business expenses.
Need to see Simplified Expenses in action? Below are some examples of how it might work.
a) You run a business vehicle that has run 13,000 business miles throughout the year. At 45p per mile for the first 10,000 miles and 25p for every mile after, it would be worked out like this:
10,000 x 45p = £4500
3000 x 25p = £750
Total claimed: £5250
b) You work from home 15 hours per week, which is roughly 60 hours per month. One month you only worked 30 because you were on vacation.
At a flat rate of £10 for 25-50 hours per month and £18 for 51-100, this would be calculated like this:
11 months x £18 = £198
1 month x £10 = £10
Total claimed: £208
c) You live at your business premises six months of the year with your partner and two children. The rate per month for three people living on premises is £650:
6 x £650 = £3900
Your total business expenditure for the year might have been £18,000, in which case you would subtract £3900 from £18,000 to leave £14,100. This last figure would be the amount you could claim as business expenses.
Could Simplified Expenses Help Me?
Simplified Expenses has some perks, particularly for self-employed individuals or for those running very small businesses. However it is not for everybody – try using the Simplified Expenses Checker on the gov.uk website to gain further insight into how it would suit your business.
Simplified Expenses can help cut down business and indeed household costs, without needing to store and process mountains of papers at the end of each tax year. However, like any flat-rate scheme (and the new Cash Basis scheme that was also introduced in 2013), Simplified Expenses could even have you paying more than you would if you had calculated the exact costs.
Also, with so many other business expenses to think about that aren’t covered the Simplified Expenses method, many business-owners will probably prefer to work all of their expenses manually in order to claim a more accurate amount on their tax return.
For more detailed advice, it is recommended you speak to a professional before diving into this new scheme, to see whether you will be better off.