‘Simples’! Claiming simplified expenses

Sarah Bradford explains how the self-employed can use the simplified expenses system to reduce their record-keeping burden.

 

Failing to deduct allowable expenses when computing profits is tantamount to paying unnecessary tax. However, to ensure all allowable expenses are deducted, it is first necessary to be able to identify those expenses – a task which imposes something of a record-keeping burden. 

 

For many people running a business, recording expenses is nowhere near the top of the list of priorities; with more pressing business matters to attend to, it is easy to let keeping track of expenses slip. 

 

However, the simplified expenses system makes it possible to ‘have your cake and eat it’ and benefit from a deduction for certain expenses with minimal record keeping.

 

The simplified expenses system enables businesses to claim a deduction for certain types of expenses by reference to flat rates rather than on the basis of actual expenditure. 

 

Simplified expenses can be used for:

• vehicle costs; and 
• the additional costs of working from home.

They can also be used to work out the disallowable amount where the business premises are also the proprietor’s home (as may be the case for a person operating a hotel or care home). 

 

It is not necessary to use simplified expenses for all eligible expenses – a business could, for example, use the flat rates to claim a deduction for business vehicle costs, but deduct the actual additional costs of working from home.

 

Any deduction for expenses falling outside the simplified expenses system must be calculated by reference to the actual costs incurred.

 

The simplified expenses system can be used by sole traders and by partnerships comprising only of individuals and can be used regardless of whether the cash basis or the accruals basis is used to calculate profits.

 

Companies and partnerships with at least one corporate partner cannot use the simplified rates.

 

Sole traders and eligible partnerships can claim a deduction for business vehicle costs by reference to a mileage rate, rather than the actual cost of fuel, insurance, repairs, servicing, and suchlike. 

 

However, the option to claim simplified expenses is not available for a vehicle in respect of which capital allowances have been claimed. This is because the flat rates include an element for the depreciation of the vehicle. Similarly, where the cash basis is used, simplified expenses cannot be claimed if the cost of the motorcycle or goods vehicle has been deducted in computing profits under the cash basis capital expenditure rules (these rules do not allow the cost of a car to be deducted in computing profits).

 

Flat rate deductions are available in respect of a car, motorcycle or goods vehicle which is used for the purposes of the trade unless the vehicle is one in which in respect of which simplified expenses are prohibited. The permitted deduction rate, in pence per mile, is set out in the table below.

 

Car or goods vehicle First 10,000 business miles: 45p per mile

Subsequent business miles: 25p per mile

Motorcycles 24p per mile

 

The amount of the deduction is found by multiplying the number of business miles in the tax year by the appropriate rate.

 

John is a sole trader operating an organic fruit and vegetable delivery business. He has a van which he uses mainly for the purpose of the business, but also for some private mileage.

 

In the tax year in question, he undertakes 25,732 business miles.

 

To reduce the need to keep track of actual expenses, he opts to use the simplified expenses system. To keep matters simple, he uses the cash basis to prepare accounts, but has not claimed a deduction for the cost of the van in computing his profits.

 

Under the simplified expenses system, John is entitled to a deduction for the tax year of £8,433 (i.e. (10,000 miles @ 45p per mile) + (15,732 miles @ 25p per mile)).

 

The simplified rates do not need to be used for all vehicles; however, once they have been applied to a particular vehicle, they must continue to be applied to that vehicle as long as it continues to be used in the business. 

 

The trader can use the method that gives the best result for the particular vehicle. For example, if the cash basis is used and mileage is relatively low, it may be better to claim a deduction for the cost of a van or a motorcycle and claim actual expenses rather than use the simplified rate, as it may take a very long time to cover the cost of the vehicle at the simplified expenses rates. 

 

The simplified expenses only apply to vehicle costs. Parking costs and other travelling expenses (such as those incurred using public transport) can be deducted (by reference to the actual costs incurred) in addition to any deduction claimed using the simplified expenses system.

 

Small businesses are often run from home. While any costs attributable to the business are deductible in computing the profits of the business, in reality these are tricky to work out – electricity bills (for example) are not split between private and business use. Although a deduction can be claimed by apportioning bills on a ‘just a reasonable’ basis, this is time-consuming and far from an exact science – deductions based (for example) on the number of rooms may give a misleading result.

 

The simplified expenses system provides an easier method for working out the deduction based on the number of hours for which the home is used for business use. The rates are set monthly and the deduction is given in terms of a flat rate per month. The hours on which the deduction is based are the total hours of business use in the month by anyone working in the business. However, they can only be used by someone working at least 25 hours a month from home (below this level any deduction must be based on actual costs).

 

The rates are as set out in the table below.

 

25 to 50    £10

51 to 100    £18

101 or more    £26

 

Maria is a sole trader running a celebration business from her home. She opts to use the simplified expenses rates to claim a deduction for the additional costs of working from home. She works 80 hours per month.

 

She claims a deduction of £216 (i.e. £18 per month).

 

The flat rate deductions do not cover telephone or internet costs. Consequently, a further deduction for the business proportion of these costs (on an actual basis) can be claimed. 

 

Where the trader lives on the business premises, as may be the case for someone running a guesthouse or bed and breakfast, using simplified expenses removes the need to split premises costs between those attributable to the business and those that relate to private use. 

 

Instead, the approach is to work out the total premises expenses and use the flat rates to work out the disallowable private element.

 

The flat rate disallowance is set at a monthly rate and depends on the number of people living in the property:

 

1 £350

2 £500

3 or more £500

 

Bill and Sue run a guest house, which is also their home. To simplify matters, they use the flat rates to work out the private element of the premises costs. 

 

Their premises expenses are £20,000 a year.

 

The private element, calculated using the flat rate for two people living on the premises, is £6,000 (i.e. £500 x 12). Therefore, they can claim a deduction of £14,000 (i.e. £20,000 - £6,000) for premises costs in working out the profits of their business.

 

Use of the simplified expenses does not eliminate the need to keep records entirely. 

Mileage records must be kept where the vehicle rates are used; and if the rates are used to claim a deduction for the use of the home, a record must be kept of the number of hours for which the home is used for business purposes.

 

The simplified rates are not generous and may not give the highest deduction. Compare actual expenses to the deduction at the simplified rates to check that the time savings are worthwhile. HMRC have a simplified expenses checker (available on the Gov.uk website), which can be used for comparison purposes.