SIMPLER INCOME TAX: Only self-employed workers can use HMRC simplified business expenses.
The simpler system uses easy flat rate calculations for working out income tax. But, it only works for vehicles, home working, and business premises expenses.
HMRC self-employed simplified expenses are not compulsory. You can work out whether it suits your business beforehand and then make the decision.
Who Can Use Simplified Expenses
To start using the simpler income tax calculations you must be operating as either:
- An individual sole trader.
- A business partnership (with no companies as partner).
There are strict rules for simplified expenses users. Limited companies or business partnerships involved with a limited company do not qualify.
What Does Simplified Expenses Cover
You cannot use flat rates for all types of business expenses. But, you can use them to calculate:
- Business costs for vehicles.
- Living in the same premises as the business.
- Working from home.
Note: All other ‘expenses if you are self-employed‘ will need working out using the actual costs.
Using Simplified Expenses
- You must keep business records if you are self-employed and working. You will need to keep certain records for simplified expenses as well. They include:
- The business miles used by the vehicles.
- How many hours you work at home.
- How many people live at the business premises over the course of a year.
- You will use the flat rates to work out your expenses at the end of the tax year. The simplified expenses rates apply for vehicles, working from home, and living at the business premises.
- Total up the amounts and include them in the total for your expenses using a Self Assessment tax return.
Simplified Expenses Vehicles
The HMRC flat rate system lets you calculate expenses for a car, van, or a motorcycle. You use simplified system mileage rates instead of the actual running costs. Thus, it ignores the cost of buying and maintaining the vehicle. As a rule, that would include fuel, insurance, servicing, and repairs.
Note: You cannot claim simplified expenses for any vehicle you already claimed capital allowances on. The same applies if you included it as an expense when working out the business profits.
- Cars and goods vehicles first 10,000 miles: 45p flat rate per mile with simplified expenses.
- Cars and goods vehicles after 10,000 miles: 25p flat rate per mile with simplified expenses.
- Motorcycles: 24p flat rate per mile with simplified expenses.
An Example: At the end of the tax year your company record shows you drove 12,000 business miles for the year.
Calculation: 10,000 miles x 45p = £4,500
2,000 miles x 25p = £500
The total amount you could claim would be = £5,000
You do not have to apply the flat rates for all the business vehicles (if you have many). But, once you apply the flat rates for a vehicle, you must continue to do so while you use it for the business.
Note: You can continue claiming all other travel expenses and parking on top of the vehicle expenses. Typical examples include train, bus, and taxi fares.
Simplified Expenses Work from Home
You work out allowable expenses using a flat rate based on the hours worked from home each month. Often, the system makes it easier to calculate expenses when running a business from home.
It avoids having to calculate the proportion of personal and business use for your home. As a rule, you would have to work out how much of the utility bills get used in the business.
Telephone charges and Internet expenses are not included in the flat rate system. Thus, you should work out the actual costs of these bills to claim the business proportion.
Note: You must be working 25 hours (or more) a month from home to use HMRC simplified business expenses.
- 25 to 50 hours of business use per month: £10 flat rate per month.
- 51 to 100 hours of business use per month: £18 flat rate per month.
- 101 and more hours of business use per month: £26 flat rate per month.
An Example: Your records show you worked 30 hours from home for 9 months. But, you worked for 70 hours during 3 particular months:
Calculation: 9 months x £10 = £90
3 months x £18 = £54
The total you could claim would be = £144
Simplified Expenses Living at the Business Premises
It is not uncommon for businesses to use their business premises as their home as well. Typical examples would include a bed and breakfast, a guesthouse, or a small care home.
Using simplified expenses makes it easier to work out the calculations. Otherwise, you would have to divide your private and business use of the premises. You calculate the total expenses for the business premises with HMRC simplified expenses.
Use flat rates to subtract an amount for personal use of the premises. The amount gets based on the number of people living on the premises. You should claim the rest as standard business expenses.
- 1 person: £350 flat rate per month.
- 2 persons: £500 flat rate per month.
- 3+ people: £650 flat rate per month.
An Example: You and your partner are running a guesthouse and live there for the whole year. Your total business premises expenses are £19,000.
Calculation:
Flat rate 12 months x £500 per month = £6,000
You would be able to claim: £19,000 – £6,000 = £13,000
What if another person lives at the same business premises for part of the year? In this case, you can only deduct the relevant flat rate for the months that the other person lives there.
An Example: You and your partner are running a guesthouse and live there for the whole year. Your child stays at university for 10 months of the year. But, he comes back to live at your home for 2 months during the summer.
Calculation:
Flat rate: 10 months x £500 per month = £5,000
Flat rate: 2 months x £650 per month = £1,300
Total = £6,300
You would be able to claim: £19,000 – £6,300 = £12,700
Note: As a rule, using the simple tax system could save your business money. But, you can try the simplified expenses checker beforehand to compare what you may be able to claim.