Allowable Business Expenses: What you need to know
Why are they so important?
Being self-employed we're a 'business' and businesses don't get taxed on their income, they get taxed on their profit (your income MINUS any 'allowable business expenses').
For example.... let's say you have £10,000 of total taxable income, but have £4,000 of expenses, instead of calculating how much tax you have to pay based on £10,000, HMRC will calculate how much tax you have to pay based on the remaining £6,000! So, as this demonstrates, if you're not recording and declaring your business expenses, then you're just paying more tax then you need to which is no good is it?
What is an allowable business expense?
Essentially, it's anything you spend money on throughout the tax year (6th April - 5th April) that 'wholly and exclusively' relates to the running of your business. There's a few expenses that have a clear personal benefit as well as a business purpose, like telephone bills. With these you're expected to be 'reasonable' about what percentage you might expense. This is ultimately your decision and responsibility. A good rule of thumb is whether you would feel comfortable defending the expense to HMRC as being entirely related to the running of your business. Would you be confident defending 90% of your telephone bill to HMRC? Probably not, but maybe 25%? 50%? This is probably more acceptable.
Equally, there's no 'limit' as such, to how much your allowable business expenses can total. They are what they are. Like a window cleaner needs to buy a ladder and a bucket in order to work, we too have to spend money in order to make money too.
How does it work?
Any expense that you'd like to deduct from your income needs to be recorded one way or the other - and there's no getting around this! Throughout the tax year, you should keep receipt evidence of your expenses in a logical and organised manner and then declare a total figure of them in your tax return in order to offset them against your income.
What do I need to keep hold of?
Although you don't need to provide any evidence/receipts for your 'allowable business expenses' at the time of actually completing your tax returns, HMRC can investigate the expense claims of any tax return you do and, even though it's pretty unlikely to happen, you need to have your evidence ready just in case! They should let you know within a year of the 31st January completion deadline if they are planning on investigating your accounts. You're meant to keep your evidence for at least 5 years after the 31st January submission deadline for each tax return you do. That's a lot of receipts right!? This, on top of the fact that the writing on receipts tends to fade over time or if it's been folded at all, is why storing your expenses evidence in an electronic form is a really clever way to go.
When I've had a business expense, I take a photo of the receipt (literally at the counter!) or a screenshot if on an email and upload it to the SansDrama Web App, where it's stored for me. No need to keep the paper copy and if HMRC come knocking, you just download a PDF 'expense report' for the tax year in question, easy. If you're not using the SD App, then have your evidence stashed away as best you can and make sure you record the date, vendor, value and description of the expense and make sure you know where to find the receipt should HMRC cme knocking. Remember: your receipts don't need to be categorised, they just need to be legible and available, even if you shove them into the bottom of your ruck-sack for months on end (this is what I used to do and I do not recommend it).
We get a lot of questions about using bank statements as evidence - this is NOT A GOOD OPTION! You want to be able to present your business expenses in the best possible way, as any other business would, so HMRC can clearly see that your claims are legitimate. Highlighted bank statements don't offer that - often the description is very generic, just the legal name of the company and no detail about what you purchased, a receipt will give you a far clearer understanding for what you spent your money on (and therefore how it is relevant to your business).
What about cash payments without a receipt?
We included this bit pre-CV19 as most dance classes were cash payments without receipts, however, most dance studios now provide electronic/emailed receipts. Luckily for us, HMRC don't tend to get too upset over low value cash payments - if you have a business expense that is more than £50, we strongly suggest requesting some kind of receipt. However, if HMRC were to investigate your tax return, the key thing is to be able to demonstrate that you have a good, logical recording system (i.e. you didn't just come up with a number at random when you filled in your tax return) for recording these cash payments. SD App users, no worries just record it as any other expense (minus the receipt obviously) and you're done. Not an SD app user? No problemo, any clear method that demonstrates a good recording system is fine - maybe you are really good with spreadsheets? No? Me neither...
What can I claim?
In a nutshell...whenever you're spending money on something that is genuinely part of running your business, then chances are that it will be deductible from your income.
The HMRC page explaining this is actually pretty good which is here but bee sure to keep your eye out for what you cannot claim (which sadly includes gym memberships under 'subscriptions') (https://www.gov.uk/expenses-if-youre-self-employed), but we're all about the performers here, so let's get specific!
- If you are part of a trade union (e.g. Equity) or casting sites (e.g. Spotlight, Casting Call Pro, Star Now, Mandy) subscription fees are completely deductible expenses. Subscriptions such as Spotify Music are unlikley to be allowable, but could be providing you were using it solely for hosting a class or doing research.
- Computers or Laptops
- Needs to be used for business purposes, like keeping on top of your finances (with SansDrama Online App of course! *wink wink*) looking for auditions, researching shows/roles etc. PLUS - any additional software like Microsoft Office to write and edit your CVs or any anti-virus software, maybe? Backup hardware and printers (for that last minute CV print - we've all been there trust me!) are all deductible expenses, too!
- Stationary or postage
- Don't forget you can also offset any stationary or postage relating to the running of your business too.
- Agent Commission
- Yes! Agent commission plus any VAT your agent takes is an allowable expense. Don't forget that you need to record it in your income too (e.g. You book a job that is worth £1000 and your agent takes £125 (12.5%) commission, leaving you with £875. To record this your 'income' would be £1,000 and your 'expenses' would be £125).
- Financial costs
- Hiring a solicitor for contract advice, paying an accountant to manage your finances, or even better using the SansDrama Online App to do it all for you, are all tax deductible expenses.
- Bank charges
- If you need a loan to be able to buy a laptop, for example, then a percentage of the interest costs will be allowable expenses. And it works the same way if a career development loan is taken out to fund certain training costs.
- Travel costs
- Every time you travel to go to a class, an audition, a networking event or to see a show (to name a few) you are incurring travel expenses for the running of your business. This is all allowable! So...Oyster card receipts, other weekly/monthly travel cards, taxi and Uber fares, train/bus/tube tickets and even flights (if you had an audition in Germany for instance) are all deductible! I tend to just download my oyster card statements from my tfl account on a monthly basis, highlight the relevant journeys, add them up and expense it all in one go.
The key thing is that this cannot be travel to your standard place of work - most of you will have your home as your base work location, but if you are working somewhere under a contract with no end date or the end date of your contract means you will have worked somewhere for 2 years consecutively by the end of it, then this will be considered your place of work and you cannot expense travel to here. For example, with a 1-year contract in a theatre, you should be able to include travel from home to the theatre as an expense. However, if your contract gets extended for a further year, then it stops being allowable travel as soon as it is extended (even if this is before the end of the first contract).
- Hotel stays
- That's right, if you're on a genuine business trip (say an audition in Germany), then hotel costs and even meals whilst you're on the trip are deductible expenses.
- Subsistence/Food costs
- As self-employed people, we can claim 'reasonable' costs of food and drink when we're travelling on business, if: we're making an 'occasional business journey outside the normal pattern'; or we stay overnight on a business trip (meaning we can claim the cost of accommodation as well as meals - know as 'subsistence'). The challenge is that it all hinges on the word ‘reasonable’ – so if you’re literally just doing what you normally would, then this isn’t really allowable. Likewise, you can’t really head to the most expensive restaurant you can find where you’re auditioning and claim this as an allowable business expense. However, so long as you’re keeping your meal price down under about £15 (or £40 for the day if you're staying overnight), you probably won’t draw too much interest.
- Clothing expenses
- Now as much as I'd love to expense every outfit I buy for a Friday night, the key with this one is that anything not used soley for business purposes, is not deductible *inner sob*. However, dance wear/shoes could be allowable expenses if used exclusively for your performing career.
- Advertising or marketing
- Self-promotion is key! So what can we expense? Promotional websites (including annual domain registrations), dance reels, singing reels, show reels (all the reeeeels!) subscriptions to casting websites, as well as stage make-up. Any head shots or portfolio images including hard copy prints of them all count as tax deductible. Even the entrance fees to networking events.
- Theatre tickets, ballet, opera and any other stage performance may be allowable business expenses (in addition to your travelling costs) and that includes any booking fees too. However, it needs to realistically be something you would be researching (for example, if you are exclusively a commercial dancer, it is unlikley you will be researching your next big role in the opera).
- Any training or workshops where you are enhancing your current business like singing lessons/dance classes/acting lessons/casting or audition workshops are all deductible but if you are adding another area of expertise onto your business (like training to be a yoga instructor) then this isn't deductable. Physiotherapy is not usually tax deductible as it is seen as being for personal use too unless you were injured during a run and needed it in order to continue the run (although hopefully the company your working for should cover you). The other medical expense that would be tax deductible is if you needed a medical in order to do a ship contract.
- Telephone Bills
- If you're anything like me, then you'll never be off the blooming thing! As mentioned earlier, If you're using your phone to generally run your career (such as calling your agent, emailing etc), then your line rental and call costs are absolutely deductible - but, ithere's clearly a personal benefit too so think honestly about what percentage of time is actually used for running your business and offset that percentage as an expense.
- Working From Home
- At-home-admin is a given being self-employed. We use our home as an office to do tasks such as show research or audition prep (much to the displeasure of my neighbours when I need to belt at 8am - sorry, not sorry!). The easiest way to do this is to use HMRC’s standard flat rates:
Hours of business use per month Flat rate per month Less than 25 £0 25 to 50 £10 51 to 100 £18 101 and more £26
- If you fancy trying to work out a percentage of the actual costs of buying and running your personal vehicle, eg insurance, repairs, servicing, fuel, then knock yourself out! However, the easiest method is using HMRC's simplified expenses - using a flat rate for mileage instead. You should know that once you use the flat rates for a vehicle, you must continue to do so as long as you use that particular vehicle for your business.
Vehicle Flat rate per mile with simplified expenses:
Vehicle use Flat rate per mile Cars and goods vehicles first 10,000 miles 45p Cars and goods vehicles after 10,000 miles 25p Motorcycles 24p
10,000 miles x 45p = £4,500
1,000 miles x 25p = £250
Total you can claim = £4,750
Dual purpose expenses
How do I claim them?
When it comes to completing your self-assessment tax return each year, you just pop the number of your accumulated expenses in the box when prompted and HMRC calculates a lower taxable income for you. Simple!
If you want to know what this tax bill calculation is going to be in advance, then you can see this in the 'summary' section on the SansDrama Web App as it offsets any expenses from your income live so you can see exactly what tax you currently owe/are due back whenever you fancy.