When you’re sitting down to work on your personal tax return as a sole trader, it is very tempting to add up every receipt you’ve received in the past year and find some way to deduct it from your taxable income. However, that approach could land you in an extremely sticky situation if you are selected for a Revenue audit. Keeping proper accounts will benefit you in the long term, and it’s important to understand what you can and cannot claim as expenses in your personal tax return. To help you do that, I will be looking at some of the key areas where you can note your expenses to reduce your tax liability.
Light, heat and phone expenses are essential to running your business, so the Revenue allows you to deduct these from your taxable income. If you have an office outside of your home, adding these expenses up is quite simple. Matters are more complicated, however, where most of your business is conducted in a home office. In this case, you should try to make a reasonable estimate of what expenses stem from your business. If you don’t have a separate ‘work phone’, go through the bill to work out which calls were personal, and which calls were business related. This can be a long process, so it’s best if you do this on a month-by-month basis throughout the year. As for light and heat, deducting the portion of your electricity and heating bill that comes from working at home is the norm. Around a third of the overall bill – accounting for eight hours a day – is a reasonable estimate.
Salaries, staff costs, sub-contractors and consultancy fees probably make up a bit part of your yearly expenses. It’s important to keep track of these throughout the year, and also to keep both invoices and receipts for every piece of work you contract out. This is why the all-too-common practice of ‘under the table’ payments is seriously dangerous for a small businessperson, who is then left unable to legitimately claim for services they have paid for.
Motor, travel and subsistence expenses are another area where being organised and knowing what’s allowed is essential. You are entitled to claim relief for travel expenses incurred in the course of your business. This includes travel to and from meetings, parking, accommodation where required, and fuel costs if you drive yourself. You are also entitled to claim subsistence – the meals you paid for while travelling – up to quite generous maximums. Some businesspeople abuse this and will seek to write off personal holidays as expenses. If the Revenue select these people for audit, however, they’ll find themselves paying significantly more – thanks to penalties and interest – than they would if they had followed the rules.
Ultimately, there are two golden rules to claiming your business expenses on your tax return – be organised and be honest. If you are feeling daunted by your tax return, we can help, even at this late stage. Give us a call and we can set up an initial meeting quickly.