A sole trader’s guide to expenses management
If you’re like most sole traders, you’re under claiming expenses and overpaying tax because you don’t have time to manage your expenses properly.
- The triple whammy from lost receipts – Losing a receipt has a big knock-on effect on the money you take home at the end of the day. If you don’t have the receipt you can’t claim the expense. You also can’t claim the VAT. All of which means you have to pay tax on a bigger income.
- Paying too much for travel – Our research shows that 95% of sole traders don’t keep records of journeys, which means they have to claim for petrol rather than mileage.
When you claim for petrol, you have to split the bill 50/50 between business and personal use. Thus, you lose out if you do a great deal of driving for business purposes, because you can’t claim the correct VAT and you can’t offset your income against the higher amount. This means you pay more VAT and more income tax.
Managing your business expenses correctly doesn’t have to take a large amount of time, and it can save you a large amount of money.
1. Keep records for all allowable expenses
As a sole trader, you can claim everything that’s not a personal expense.
For example, if you’re working from home you can claim ‘home office’ expenses, such as part of the utility bill, tea and coffee, home insurance, telephone and internet. If you claim your home as your office, your rates (house tax) may increase, and you can claim the increase as an expense as well.
You can also claim for expenses associated with entertaining customers – which sole traders often forget.
You will save time and hassle in the long run if you record expenses as you incur them. First of all, you then don’t have to worry about losing receipts. Secondly, the ink used on lots of receipt paper evaporates. Thus, if you shove receipts in an envelope or shoebox you may not be able to use them if you wait too long.
Here’s what to include in your expenses records:
- The receipt
- The project and/or customer the expense is associated with
- If it relates to entertainment, the person’s name, company name and reason for entertaining
- If it relates the travel, the mileage
This is the base level of record you need to ensure you’re claiming properly and that your returns stand up to scrutiny, should tax authorities re-open them a couple of years down the line.
2. Reduce the amount of paperwork you process
- Photograph your receipts – Not only does this avoid the disappearing ink problem, but it means that you and your accountant aren’t spending lots of time sifting through little pieces of paper. A photograph is just as valid as the original in terms of the audit trail you need to maintain, and being able to sort and search your receipts digitally will drastically reduce time spent on expenses. You can log the receipt in 5 seconds and process a day’s expenses in 10 minutes. Compare this to between 5 and 9 hours per month, which is standard for paper receipt-based expenses management.
- Record voice memos with the detail about the expense – If you have a smartphone you can record a voice memo. Rather than writing out who you entertained or which project the mileage was for, just spend 10 seconds speaking the information into your phone. The memo can then become a permanent part of the expense record, valid for audit purposes.
Better records + less paperwork = more time and more money
Following these 2 steps will make it easier for you to maintain accurate records in less time. You’ll therefore be able to claim the correct amount of VAT and pay tax on the correct income figure – which means more money for the business
Here’s an example. A medical equipment salesman wasn’t maintaining accurate expense records or cataloguing his receipts properly, simply because he had no time. As a result, his VAT returns were incorrect, so he paid more VAT than was due, and he was paying tax on a larger income, because his expenses weren’t offset properly. Because his records weren’t organised he had to pay his accountant extra – some times as much as £500 per hour – to sort his affairs.
When he started photographing his receipts and reducing the volume of paper he generated, he was able to stay on top of his expenses in just 20 minutes each month.
His VAT returns are now correct, because every claimable expense is tracked and charged. He pays the correct income tax because he’s offsetting the correct amount. The savings from VAT claims plus income tax saving totalled £6,500 in the first year.
He was also able to reduce his accountancy bill from £2,500-£3,500 to £1,500 because of better record keeping. Because he has the receipt photographs on his smartphone, he can catalogue his expenses when he’s on the train or waiting for a customer, meaning his accountant doesn’t need to spend as much time on his behalf.
So here’s the question – is it worth a month of experimentation to see if you can save that kind of money for your business? As Henry Ford famously said, ‘If you always do what you’ve always done, you’ll always get what you’ve always got.’
Download Solo Expenses from the App Store or Google Play and see how much time and money you can save.