A Guide To Simplified Expenses For Small Businesses

Simplified expenses provide an easy method for many small unincorporated businesses to determine their taxable income using the cash basis approach. This method enables business owners to be taxed on the actual cash that comes in and goes out, making the accounting process much simpler than the intricate calculations required by larger companies.

What Works Well?

Using the cash basis helps alleviate the administrative burdens associated with preparing traditional accounts. Businesses don’t need to accrue for income not yet received or for expenditures that haven’t been paid.

To further simplify accounting, HMRC introduced simplified expenses for small businesses. Instead of calculating the exact costs of specific expenses, HMRC permits businesses to deduct standard or flat-rate amounts for certain expenditures. These simplified expenses apply to:

  • Standard mileage rates for business use of cars or motorcycles.
  • Flat-rate expenses for business use of the home.
  • Flat-rate adjustments for the personal use of business premises.

Taxpayers should keep track of relevant data, such as business miles driven, hours worked at home, and the number of occupants at the business premises during the tax year. At the end of the year, businesses can use HMRC’s flat rates to calculate these expenses, which are then reported in the self-assessment tax return.

Vehicles

HMRC offers flat-rate mileage allowances that cover all vehicle-related running costs, including insurance, repairs, servicing, and fuel. The current rates are as follows:

  • First 10,000 miles: 45p per mile
  • Exceeding 10,000 miles: 25p per mile
  • Motorcycles: 24p per mile

Businesses can choose whether to use these mileage rates, but if they opt for them, they must consistently apply them for as long as the vehicle is in use for business purposes.

Additionally, businesses can claim other travel expenses such as train journeys and parking fees on top of the mileage rates.

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If a business purchases a car for business use, it can claim capital allowances, but this applies only if the business does not use simplified expenses to calculate vehicle-related costs.

Use of Business for Home

If certain criteria are met, businesses can claim a monthly deduction for using their home for work. The current rates are as follows:

Number of hours worked Monthly Amount
25 to 50 £10.00
51 to 100 £18.00
101 or more £26.00

The number of hours worked in a month should reflect the hours spent entirely on work done at home for the business.

Business for Mixed-Use

For premises that serve both business and personal purposes, businesses can deduct expenses related to non-business use. The allowable deduction equals the incurred expenses minus the non-business use amount. The non-business use amount depends on the following applicable amounts for each month during the tax year:

Number of relevant occupants Applicable Amount
1 £350
2 £500
3 or more £650

A relevant occupant refers to anyone who occupies the premises as a home or stays there outside the scope of business activities.

Benefits

Simplified expenses can significantly reduce both business and household costs while minimizing the need for extensive paperwork. This approach falls under the umbrella of HMRC simplified expenses, making tax reporting simpler for small business owners.

However, businesses should be cautious; flat-rate schemes can sometimes lead to a higher tax liability. This scheme may not suit everyone, so it’s essential to evaluate all options before proceeding.

 

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