I am a sole-trader who has been trading for 3 years. I currently have rented office space, however I am in the process of extending my home to provide me with the facilities to work there instead. What build / equipment costs, if any, can I write off against tax?
The expenses claimed against income for Income Tax purposes must be ‘wholly and exclusively’ for the purposes of the trade or business. If you run your business from home, a proportion of the expenses of the residence used for business, such as a study/office, surgery or workshop can be charged against profits.
Provided a discrete room or space is for the business, it is usual to calculate the proportion of the house occupied by the business and charge the appropriate percentage of council tax, heating and lighting and so on, to the business. If a shared telephone is used, the business proportion can be charged to the business.
Care must be exercised, however, to ensure the claim for use of house as an office is proportionate. If you sell the property at some future point the Inland Revenue might take the view that the area used as an office should be disallowed from the exemption for the main domestic residence for Capital Gains Tax, with the result that part of any gain on the sale of the house is subject to Capital Gains Tax.
Any significant equipment purchased for the business would be capital expenditure and would qualify for ‘capital allowances’ (the Inland Revenue term for measuring wear and tear of assets). So in a typical list of equipment, a computer and office equipment are capital items and qualify for a 50% (of cost or valuation) as a first year allowance (if this is your first year) or 25% (if not your first year) writing down allowance.
Also, if a car is used in the business a proportion of the cost of running a car – petrol, repairs or servicing might be allowable as well, as a 25% writing down allowance. Alternatively you can charge 40p per mile (up to 10,000 miles).
To claim car expenses against your business profits you need to keep a record of mileage to justify the claim. Other items might be eligible as deductions in your self assessment return if they appear to meet the ‘wholly and exclusively used in the business’ test.
Clothing is generally not allowable unless there is some specific work related items which are not wearable outside the business.
Probably the best place to look for further details is the Inland Revenue’s Notes on Self Employment which can be located by clicking here.