An introduction to income and expenses

Self-employed - running a business and paying tax

To get your tax bill right, you need to know your profit. Your profit is the difference between your business income and your business expenses. You need accurate records so that you can get the figures right. Special rules apply to the cash basis of accounting, which is available from the tax year 2013-14 (see previous section).

In many small businesses, the boundary line between business and private expenditure can be difficult to find. Wherever possible, keep business and private expenses separate. Have a separate business bank account and use it only for business expenses. If you do have expenses which are partly for business and partly for private purposes, then keep a clear record of what you have done.

Business income is the amount received from your customers for the goods or services that you have sold to them. It includes any amount received for expenses or materials you invoiced to your customers.

Business expenses are the money that you have to spend in order to run your business.

Note: If you exchange or barter – i.e. you work for someone, or give them goods in exchange for them giving you goods or services – then you must include both the ‘sale’ and the ‘expense’ in your business records. E.g. James paints Andy’s house in exchange for Andy giving James a lawnmower. James must include in his sales the value of the painting work – this would normally be the market value of the lawnmower, so long as the deal was commercial – his business expenses would only include the cost of the lawnmower, if he used it exclusively for business.

General rules – What expenses can I claim for in my self-employed business?

The general rule is that as a self-employed person you can deduct from your income expenses which are ‘wholly and exclusively incurred’ for the business.

Examples of the expenses that are allowable include:

  • the cost that you paid for the goods that you resell, or materials you use
  • payments to employees and outside contractors, including tax and NI paid on employees’ wages. (Your own tax and National Insurance are NOT a business costs and as such are not allowed to be deducted).
  • rent, rates, gas and electricity for your business premises, or a share of the costs of your home if you work there (the share of your home expenses that will be allowed must reflect an accurate calculation of how much these expenses are incurred for the business as opposed to for your own personal use)
  • telephone, postage, insurance and advertising costs
  • motor expenses and other travel costs relating to ‘business travel’. Business travel does not include travel from home to your business premises. If you work from home, but also have other places of business, the situation needs special care. HMRC may not accept that travel from your office at home to another permanent place of business is  business travel. If this applies to you, it would be best to take advice
  • commuting from home to your business premises is not usually a business journey for tax purposes; unless your business base is at home, then you can claim for travel out to your customers.
  • Any VAT paid on any of your expenses which you have not been able to reclaim from HMRC. To reclaim VAT you will need to be registered for VAT .

Detailed guidance on allowable expenses and other matters can be found in the HM Revenue and Customs Business Income Manual

TaxAid Tip

If you take goods out of your business for your own personal use, (e.g. if you run a small supermarket, and you take food for yourself from the shop without paying for it) you must make a record of what you have taken and include it in your business records at sale price.