If you operate a business selling online via Amazon, eBay or Shopify, there are certain things you can claim as allowable expenses (online advertising campaign fees, stationery) and some you can’t (lunch).
If you work from home, you can claim a reasonable proportion of those expenses, too. Get it right and you can save a lot of money in tax.
What is an allowable expense?
Allowable expenses include the costs it takes for a business to operate day to day, which you can deduct from your profits before tax, resulting in a reduced tax bill.
To qualify, expenses must be business-related. Examples include:
- office costs, for example stationery or phone bills
- travel costs, for example fuel, parking, train or bus fares
- clothing expenses, for example uniforms.
Expenses can also be ‘dual purpose’, meaning they can be used for work and personal use, like a mobile phone.
In this case, you are entitled to offset the cost of the expense used for work, usually by determining the proportion of time it is used for work.
Allowable expenses for ecommerce businesses
The list of allowable expenses is long, so we’ll focus on the ones most relevant for ecommerce business owners.
Just in July 2020, Growth Intelligence found that 85,000 businesses had gone online. With the two lockdowns we’ve seen since then, many of these are probably relying on working from home, an easy way to offset your profits.
The self-employed can claim for a proportion of costs like heating, electricity, council tax, and mortgage interest and rent.
Alternatively, you can offset the rent, power and insurance costs of an office from your profits.
You can also reclaim fuel and mileage on business travel, or part of the running costs of the vehicle, including insurance, repairs and servicing, and parking.
The cost of postage, packing materials, subscriptions for postage meters, envelopes and delivery charges can also be offset against your profits.
Regular office supplies to streamline your business procedures are also eligible, from printing and ink to stationery.
You can also deduct the cost of goods you intend to sell on from your taxable profits, which is crucial for ecommerce businesses.
Your business requires the internet to function and a website to advertise on, so a proportion of your internet bills and the cost of building a website are allowable expenses too.
There are a multitude of other allowable expenses that you could take advantage of that we don’t have the time to touch on here; contact our team to learn more.
How to claim allowable expenses
First, you must work out the amount of money you are looking to offset, including dual-purpose expenses.
If you work from home, then you will have to devise a reasonable method to divide your costs.
HMRC gives the example of an individual with four rooms in their home, one of which they use as an office: their electricity bill for the year is £400 and assuming all the rooms use equal amounts of electricity, this individual could claim £100 as allowable expenses.
Alternatively, you can skip the sometimes complex calculations involved in dual-purpose expenses and opt to pay a flat rate, listed on the HMRC website.
This is also the case with offsetting travel expenses; you can either work out a suitable percentage of the full running costs to be taken off the personal use costs, or adhere to HMRC’s business mileage flat rates.
You must keep a record of your expenses as proof you are making an eligible claim.
If you are a sole trader or a partnership, you will need to record your allowable expenses in your self-assessment return, while owners of limited companies will do this in their company tax return.
Contact us to talk about what allowable expenses you can claim.
