Your partnership:
Income tax

If you are self employed you will need to pay income tax on your business profits. You should fill in the self employment pages of your income tax return and the tax is collected under the self assessment system.

Your profits are calculated as your business income less the business expenses that you are allowed to set against tax.

A distinction is drawn between capital expenditure and revenue expenditure. If revenue expenditure conforms to the general rule then it is allowed in full.

Relief for capital expenditure such as, for example, the cost of your computer and car, is given in the form of capital allowances.

Related literature:

An introduction to self assessment

An introduction to the tax system for self employed

Business expenses

The general rule for whether or not an expense is deductible for income tax purposes is that the expense must be incurred wholly and exclusively for the purpose of your business.

Typical expenses include:

Purchases of goods for sale by your business

Rent and rates

Employee costs

Telephone

Light and heat

Motor and travel expenses

Administrative expenses such as postage and stationery

Accountancy fees

Bank charges and interest

Hire purchase interest

If you are self employed, any amounts you take out of the business are classed as drawings and not wages or salary. You should not operate PAYE on these amounts and they do not reduce your profit. You could, however, pay a salary to your spouse so long as the salary was reasonable in relation to the work performed.

Where an expense includes an element of private use, such as possibly in the case of telephone, motor expenses and the lighting and heating of a home office, you must work out the proportion of those expenses that are applicable to your business.

You do not get any tax relief on certain expenses such as business entertaining or fines.

Is there any tax relief for working from home?

If you use your home for business purposes, HM Revenue & Customs will allow you to claim the proportion of household expenses allocated to the room that you use.

You should keep a record of the household expenses and the time that the room is used for business purposes which together form the basis of the claim. You should keep a record of usage for a representative period to demonstrate your typical pattern of home working, in order to work out the proportion of expenses you can claim. We will help you to calculate the apportionment and also ensure you don�t fall into a capital gains tax trap when you sell your home.

If you have a separate telephone line installed which is used purely for business purposes, tax relief can be obtained for the full costs of that line. It is more normal to share the domestic line which means that you must work out the proportion of business to private calls and in this case the line rental charge itself is normally treated as private.

The cost of furniture or equipment used at home for practice purposes will be eligible for tax relief in the form of capital allowances.

Can I claim for all of my motor expenses?

The treatment of motor expenses as regards income tax relief and whether or not you can reclaim the VAT is quite complex. You can read more about the VAT treatment by clicking here

Running expenses

Motor expenses will include petrol, oil, maintenance costs, road fund licence, insurance, car cleaning and any other costs associated with the upkeep of the motor car.

You will be able to claim against income tax the proportion of your motor expenses that relate to your business. You will need to work out the overall business and private proportion of your mileage and you should do this by keeping a mileage log. Your mileage from home to your business is not eligible business mileage.

Related literature:

A guide to maintaining a mileage log for the self-employed

Car parking

You can claim tax relief on the cost of car parking for the purpose of your business, but car parking at the business itself is treated as part of the cost of travelling from home to your principal place of business, and is not tax deductible.

Car purchase

You do not get full tax relief for the cost of a business car in the year that it is bought outright or on hire purchase. Instead relief is obtained by way of capital allowances, and we explain this further below.

Car leasing

There are special rules governing tax relief for car leasing. Generally speaking you can claim the leasing costs subject to deducting the private proportion, but you do not get any capital allowances. Ask for our advice if you are intending to lease a car with a market value in excess of �12,000 as the full leasing cost will not be tax deductible � there is a permanent disallowance of a proportion of the cost based on the application of a formula.

Tax relief on your car and computer

You may already own a car or computer prior to commencing self employment. If so, you will bring them into your tax calculations at valuation on commencement.

Your car and computer are classed as capital expenditure for the purpose of obtaining income tax relief. Relief is not given directly against your profit for the year, as it would be if they were revenue expenses, and instead, relief is given in the form of capital allowances.

Capital allowances take the form of either writing down allowance (WDA) or first year allowance (FYA). FYAs are available on the cost of plant and machinery and are available only in the year of acquisition. The rate changes from year to year and is announced in the Budget. The cost of your computer falls into the category of plant and machinery and therefore FYAs are available. In the second and subsequent years of ownership, WDA is claimed at the rate of 25% per annum on a reducing balance basis.

In the case of your car, FYAs are not available, and only WDAs are available. These are calculated at the rate of 25% per annum on a reducing balance basis, except that for �expensive� cars (with a cost of more than �12,000), WDA is limited to �3,000 per annum.

For capital expenditure which is partly business and partly private, the capital allowance claim is adjusted so that you only claim for the business element. This will be the case for your car, but the likelihood is that your computer will be used wholly for the purpose of your practice and a claim made in full.

If you sell or scrap the car or computer for less than its written down value, you will obtain relief for the difference between the written down value and the proceeds, if any. Alternatively, if the asset is sold at a value in excess of the written down value, there will be tax to pay on the profit.

You do, therefore, eventually get full tax relief on the difference between the cost and sale proceeds of the car or computer for the time they are used for practice purposes, subject to a deduction for private use.