A guide to record keeping and expenses for sole traders

Contributor -

Mike Parkes, technical director, GoSimpleTax.


A self employed woman sorts through her expenses and receipts

Whether you're new to self employment or not, record keeping might sound like hard work. And while that may be true, it does come with its own reward – namely, that you, as a sole trader, can claim back allowable expenses and pay less tax on your earnings

HMRC has a number of rules about record keeping though. Mostly, they relate to the storage of receipts and other documentation after you've filed your Self Assessment tax return each tax year. By not adhering to the rules, you run the risk of losing out on any tax relief – or worse, being penalised by HMRC.

Simple TaxNeed help with your self assessment tax return?

GoSimpleTax makes your self assessment tax return quick and easy, helping you figure out which expenses and allowances you can claim.

Get SimpleTax for £39.10 with our 15% Donut discount.

Register here for your 15% discount

What expenses can sole traders claim for?

There's a whole host of expenses you can claim as a sole trader, and they can potentially net you big savings if you utilise all that are available to you. Generally, people are aware that equipment purchases qualify as expenses, but there are many others.

They include:

Travel and accommodation

As a sole trader you may have to travel up and down the country for long periods of time, staying overnight far from home. Luckily, HMRC considers hotel stays viable business expenditure. The accommodation records (how long you've booked) should be as close as possible to the proposed timescale of the project you're there to oversee. 

You can also claim tax relief on mileage or travel bookings made over the year, as well as meals on overnight trips. To ensure you stay within the bounds of eligible allowances, it's worth consulting government guidance on expenses for the self employed.

Legal and financial costs

  • If you need to hire an accountant to support you in your venture, you can claim on their total costs. This may also be the case for any other professional services you may need for business purposes. Likewise, you can claim against bank costs such as overdraft and credit card charges. Costs including professional indemnity insurance premiums and lease payments can also be claimed back, although there are rules if you're using cash basis accounting.

Marketing costs

As you are using these services purely for the purpose of driving your business forward, HMRC will permit marketing campaigns as eligible expenses. That's great news for sole traders who use flyers to drum up work, for example, or need a website to advertise their services.

Clothing expenses

While you operate as a self-employed individual, you may also represent certain authorities when you're caring for patients or vulnerable people. As a result, you may be expected to purchase a uniform or your own PPE.

Fortunately, you're able to claim for it as an allowable business expense. Provided that what you're purchasing is either a uniform or necessary protective clothing needed for your work, you'll qualify for tax relief.

What's more, if you need to purchase any additional PPE for your role (say, gloves and face masks), this is also considered an allowable expense.

Utilities

If you work from home, you're entitled to claim a proportion of your gas, electric, water, broadband and telephone bills as allowable expenses. There's no exact science to this, but generally you'd divide the bill by the number of rooms in your house and then divide that figure based on the amount of time you work from home. If that sounds too complex, you can claim simplified expenses instead.

Subscriptions

If your freelance work requires you to pay a membership fee or would benefit from you purchasing a trade publication, these costs can be claimed back on. However, this does not extend to political party subscriptions.

These are just some of the examples of expenditure that you can claim, but they highlight the wealth of opportunities available to all sole traders – provided they keep the relevant records. Claiming these expenses through your Self Assessment tax return helps to further reduce your tax liability and maximise your take-home pay.

What accounting records should I keep?

In order to qualify for tax relief, you need to be able to present receipts when asked by HMRC. But to be wholly compliant, expenses aren't the only figures you'll need to report. In fact, if you're self-employed, you're legally required to keep records of the following:

  • all sales and income
  • all business expenses
  • VAT records (if you're registered for VAT)
  • records about your personal income
  • your COVID-19 support grant

You won't need to submit all of the above as part of your Self Assessment tax return. However, HMRC may ask you for them should they launch an investigation. Additionally, it helps you to work out your taxable income when you're filing your self assessment tax return.

If HMRC does launch an investigation, you'll need to provide evidence of your finances. This will need to come in the form of:

  • receipts for goods and stock
  • bank statements and chequebook stubs
  • sales invoices, till rolls and bank slips

Only with all of the above will you be able to safely claim any relevant expenses and stay on the right side of the taxman.

How long should I keep these records for?

Where businesses have to store receipts for six years, sole traders are only required to store theirs for five. That's at least five years after the 31st January submission deadline of the relevant tax year.

This allows HMRC to investigate your accounts over a long period of time should they believe it necessary. Obviously, if you have claimed relief but misplaced the evidence, you may be penalised by HMRC all the same. So, it's best to invest in suitable storage for your receipts.

Where should I store records?

Ideally, electronically. Train tickets and similar paper receipts are near impossible to keep in good quality for that length of time – especially if you're lugging them around for up to five years in your coat pocket. You could have a physical filing system, but the amount of admin that would be required to keep it in order could quickly get exhausting.

Tax software, on the other hand, allows you to store certain documentation online. Some allow users to take photos of receipts from their phone, for instance. They can then upload the image to the app, keeping it secure in case you ever find yourself under investigation.

However, it's worth bearing in mind that there are documents that HMRC will expect you to hold on to in their original form. Such documents usually show that you've had tax deducted. For example, if you've been an employee in that tax year, your P60 will prove your exemption.

Written by Mike Parkes, technical director, GoSimpleTax.

What does the * mean?

If a link has a * this means it is an affiliate link. To find out more, see our FAQs.