Self employed business costs

[CarDoodle]

Hi all - I’ve got a hobby that generates a small income which has revenue that has crept over the £1000 trading allowance threshold. My understanding is that I need to pay tax on the profits to the extent they exceed this £1000 amount (I am already registered for self assessment for unrelated reasons).

For direct costs I think it’s quite straight forward.

I am less sure on mixed use items - for example I bought an iPad during the year which has been used mainly for this sideline, but also a bit of my ‘day job’ and a bit of social use. Can I claim for a portion of this, and do I make the portion up?

I’m considering a few other mixed use purchases (mainly a proper laptop as my one has packed in and I need access to a full desktop OS for an aspect of this hobby business) so knowing how they are treated would be useful as may impact timing of when I buy things as we close in on the end of the year.

For claiming I was planning on doing standard accruals based accounting vs the cash accounting approach. I think the likes of a laptop / iPad etc would receive 100% capital allowances and be fully deductible in year 1 anyway.

Thanks for any responses

[Simpo Two]

CarDoodle said:

I am less sure on mixed use items

You can either decide on a proportion of business vs private use and claim that, or just go 'bah' and shove it all through which is probably what most people do.

[Eric Mc]

HMRC expects costs that have a dual nature (i.e part business/part personal) to be split in a fair and equitable way so that only the business portion is claimed as a deduction against the business income.

They prefer costs such as this to be shown in full initially and the the "private use" to be added back to the profit. In this way they can see what type of personal; use adjustment the taxpayer is making.

They even provide a double column of boxes in the "expenses" part of the "self employed" pages of the self assessment tax return to allow the taxpayer to enter this information.

[CarDoodle]

Eric Mc said:

HMRC expects costs that have a dual nature (i.e part business/part personal) to be split in a fair and equitable way so that only the business portion is claimed as a deduction against the business income.

They prefer costs such as this to be shown in full initially and the the "private use" to be added back to the profit. In this way they can see what type of personal; use adjustment the taxpayer is making.

They even provide a double column of boxes in the "expenses" part of the "self employed" pages of the self assessment tax return to allow the taxpayer to enter this information.

Thanks for this - I’ve not triggered that form previously so that’s a helpful pointer and I can set up my tracker to present my figures like this.

Are there any ‘rule of thumb’ allocation methods that are often applied or is it truly done on a case by case, expense by expense basis? There isn’t a huge volume of transactions so I should be able to do it line by line if needed.

Another query - part of the income is derived from advertising on a website that reviews products. Is the cost of buying these products to then review for the website deductible as an operating expense? For example if it was hi-fi equipment would the cost of getting new speakers in periodically to test out & review be reasonable to claim?

While it is part of the cost base of the website, I guess I am then left with a big surplus of equipment that could be seen as a ‘benefit’. Gut feel this is OK as long as any disposal proceeds are then taxed as income, but appreciate any thoughts? If this is normal business practice & allowable it would allow me to re-invest in the business and hopefully grow a little more quickly.

Edited by CarDoodle on Monday 8th February 09:40

[Eric Mc]

Case by case - expense by expense.

Every business is different and unique. You just need to be able to support your reasoning if you are ever queried - which can happen but is quite rare these days. In days gone by HMRC (and its predecessor, the Inland Revenue) were much more switched on and alert than they are today and queries on sole trader accounts and private use adjustments, and the reasoning behind these adjustments were pretty common.

They are almost non-existent today.

Another area that should always be accounted for is use of materials purchased for the business but used by the proprietor personally. That is very common in pub and restaurant businesses but can apply to almost any business where there is a potential for the owner of the business to personally consume goods that were originally intended to be sold on as part of the normal trading activity.

And - get an accountant.

[CarDoodle]

Thanks Eric - think I might need a bit of advice as you say. I do work in finance, just unfortunately nowhere near income tax.

What sort of cost would you think is reasonable to get a bit of guidance on this, or would you expect it to be packaged up with a self assessment package? I have a contact at a local firm I can reach out to for this, but would be useful to have a baseline. From memory that cost itself can be deducted when calculating profit, so likely a worthwhile investment if it keeps everything above board.

[Eric Mc]

Dealing with self employed accounts is usually merged into completing the client's self assessment tax return as well - although not always. It's up to the client and the accountant to decide on how they want to go ahead.

In my view, it makes life easier and more "joined up" if the two are done together.

Regarding whether accounting fees can be claimed against your taxable income, the strict rule is that those fees that are incurred in preparing and completing accounts are allowed as a cost in those accounts. Fees incurred in preparation and completion of the tax return only, including fees in connection with tax planning and advice, are NOT allowed.