Sole trader simplified expenses: when they save you money

What are simplified expenses?

Simplified expenses are flat-rate deductions that HMRC allows sole traders and partnerships to use instead of calculating actual business costs. They cover three areas: vehicles, working from home, and living in your business premises. The idea is straightforward: instead of tracking every receipt and splitting costs between business and personal use, you claim a fixed amount per mile, per month, or per person.

Vehicle expenses: flat rate vs actual costs

The simplified expenses rate for business mileage is:

• 45p per mile for the first 10,000 business miles per year
• 25p per mile for each business mile above 10,000

This covers fuel, insurance, road tax, servicing, repairs, and depreciation. You cannot claim any of these separately if you use the flat rate. You can still claim parking fees and congestion charges on top.

Actual costs work differently. You track all your vehicle expenses for the year, then claim the business proportion based on your mileage records. If 80% of your miles are business, you claim 80% of all vehicle costs.

Which is better? It depends on your vehicle costs and mileage. A tradesperson driving a new diesel van with high running costs (insurance, servicing, depreciation) will usually save more claiming actual costs plus capital allowances. Someone driving an older, cheap-to-run vehicle doing fewer miles may find simplified expenses give a bigger deduction. Use the mileage calculator to compare both methods for your situation.

How to calculate actual vehicle costs

Calculating actual costs requires meticulous record-keeping but can yield substantial savings. Here’s a step-by-step guide:

1. Keep all receipts for fuel, servicing, repairs, insurance, tax, and MOT.
2. Maintain a detailed mileage log. Note the purpose, date, and distance of each journey.
3. Calculate the total mileage and the business proportion.
4. Apply the business mileage percentage to all vehicle-related costs.
5. Claim capital allowances if applicable, using tools like the capital allowances calculator.

This method suits those who are organised and have higher vehicle running costs.

Working from home: flat rate deduction

If you work from home for at least 25 hours per month on business administration (invoicing, quoting, record keeping, scheduling), you can claim:

• 25 to 50 hours per month: £10 per month
• 51 to 100 hours per month: £18 per month
• 101+ hours per month: £26 per month

These amounts are small but require zero evidence of actual costs. The alternative is calculating the actual proportion of your household costs (rent/mortgage interest, council tax, electricity, gas, broadband, water) that relates to business use. This is more work but usually gives a bigger deduction.

For most tradespeople who spend evenings and weekends on admin, the flat rate gives £120 to £312 per year. Actual costs typically give £500 to £1,500 depending on your home and how much space you use for business.

Determining your actual home working costs

To calculate actual costs:

1. Identify the rooms used for business and calculate their proportion relative to the whole house.
2. Record your monthly utility bills and rent or mortgage interest.
3. Apply the business-use percentage to each bill.
4. Claim the total as your working from home deduction.

This method is more time-consuming but can be beneficial for those with significant home office expenses.

Living in your business premises

If you live above your shop or in a property that is primarily your business premises, you can claim a flat-rate deduction for private use instead of splitting all costs. The rates depend on how many people live there. This is less common for tradespeople but relevant if you run a workshop or yard with accommodation.

Understanding the rates for living in business premises

This deduction is advantageous for those who combine living and working spaces.

The catch: you cannot switch back easily

Once you use simplified expenses for a vehicle, you must continue using simplified expenses for that vehicle for as long as you use it in your business. You cannot switch to actual costs partway through. This matters because capital allowances (particularly the Annual Investment Allowance) on a new van can give a much larger deduction in the first year than the mileage rate.

For working from home, you can switch between simplified and actual costs each tax year. There is no lock-in.

Who simplified expenses suit best

Simplified expenses work well if you:

• Drive an older, low-value vehicle with modest running costs
• Do relatively low business mileage (under 10,000 miles)
• Want to spend minimal time on record keeping
• Use cash basis accounting (which pairs naturally with simplified expenses)

They are less suitable if you have a new or expensive vehicle, do high mileage, or want to claim the AIA on a van purchase. Run the numbers for your specific situation before committing.

FAQs

Can I use simplified expenses for my van and actual costs for working from home?

Yes. You can mix and match between the three categories. Use simplified for vehicles and actual for working from home, or any other combination.

Do I need to keep mileage records?

Yes. Even with simplified expenses, you must keep a record of your business miles to support your claim. Log the date, destination, purpose, and miles for each business journey. Apps like InvoiceAdept can track this automatically.

Can a partnership use simplified expenses?

Yes, but vehicle expenses are claimed per partner, not per partnership. Each partner claims for their own vehicle. Working from home is also per partner. Living in business premises is claimed once for the partnership.

Are there any tools to help calculate expenses?

Yes, there are several tools available such as the day rate calculator, invoice generator, and VAT calculator. These can assist in managing and calculating various business expenses efficiently.

How do simplified expenses affect tax returns?

Simplified expenses are reported on your self-assessment tax return. They streamline the process by reducing the need for detailed records, making your annual filing quicker and potentially lowering your tax bill.