As we approach the end of the year there are lots of things to think about with the Christmas holidays and festive period. Another thing that you may also be thinking about is submitting the 2022/23 tax return and tax payment that is due 31 January 2024.
If your earnings are below £1000 during the tax year you may not have to submit a tax return as you will receive full relief from the trading allowance, but remember that you won’t be able to obtain tax relief on expenses if you use this. This means that you may miss out on tax relief if you use the allowance and have expenses or start-up costs that exceed £1,000. You may also miss out on the potential for a tax repayment if you are employed and claiming the trade allowance for your new side hustle.
In recent years, HMRC reported over 2000 tax returns were submitted on Christmas day, this number increased to 3,270 on Christmas Day last year !
Rushing a tax return can leave you missing out on valuable tax relief which means you end up paying more tax.
You will receive an instant £100 late filing penalty charge if you don’t file on time but do take care to avoid mistakes that could also cost you. Read on for guidance on one of the most popular questions that I get asked this time of year.
What is an allowable expense?
Allowable expenditure is offset against the sales revenue and reduces the amount of taxable profits, so it is important to get this right. The amount of tax you pay to HMRC is calculated on your taxable profits at the relevant rates.
The first £12,570 is tax-free, this is the personal allowance
Income up to £37,700 is taxed at the basic rate of 20% increasing to 40% and 45% as income increases above this level.
The test to determine if a purchase is an allowable expense is if the expense is incurred ‘wholly and exclusively’ for the purpose of the business then it is allowable.
Below are some tips for those in the beauty industry, this list is not exhaustive but just some of the most common expenses that I am asked about.
Working from home
HMRC offer a flat rate as part of the simplified expenses for sole traders working from home for more than 25 hours a week that starts at £10 a month.
The rent charge or commission that you pay in return for a beauty space is an allowable expense. Ensure that you include this as a separate line on the profit and loss as an expense and the total amount of sales received [before rent charge or commission is deducted] in the profit and loss when working out your figures. This is where I often see mistakes in the industry with net sales being recorded and this can create mistakes with VAT threshold tracking. Get in touch if you need more guidance on this.
A flat rate is available of 45pence per mile for the first 10,000 miles as part of the simplified expenses from HMRC, super important for mobile therapists. You must keep a log of all business travel. The normal commute to a regular place of work is not an allowable expense. If you work between more than one location get in touch to see if your business travel will qualify.
This includes things such as gel polish, acetone, nail files, couch rolls, glitter, brushes etc. Fixtures and fittings are also allowable, as are consumables, postage, advertising and stationery.
Professional Subscriptions and Memberships
Professional subscriptions or memberships may be allowable.
Business insurance is always allowable.
Interest, bank charges and fees – don’t forget to include these especially if you use a business credit card.
Another important sales point here is to make sure you are tracking your sales before any merchant fees are taken. It is very important to cash out on your booking software or diary systems as these form part of your accounting records. Often in industry business owners are not cashing out to save fees or for other reasons, if doing this you should be reconciling any differences from the sales booking system to your bank or bookkeeping software.
Online booking systems are allowable expenses, ensure that yours is set up and being used correctly.
Subscriptions such as CANVA, Mailchimp are allowable expenses.
Telephone And Internet
A percentage for business use is allowable. My advice would be to get a business phone contract for the business and then the whole cost is allowable, providing you have another line for personal use.
The cost of tax return preparation/submission is not actually an allowable expense. Preparing the business profit and loss and bookkeeping is an allowable expense for a sole trader. The reason is that tax submission is a personal responsibility and the rules are that an expense should not have a duality of purpose.
These may seem obvious, but some business owners still include the below in their tax returns which is incorrect and not allowable.
Childcare – not allowable.
Petrol and travel to work – not allowable when the place of work is the same place each day e.g. a salon.
Personal beauty treatments as research.. just NO please do not put this through, unless you have a clear market research strategy and results record.
Clothing - everyday workwear is not allowable. Uniforms and protective clothing are allowable, so beauty tunics will be allowable but plain black tops and plain black trousers won’t be allowable. HMRC say fixing a permanent and conspicuous badge to what would otherwise be ordinary clothing may be enough to make it a uniform, but each case must be considered on its merits. A detachable badge is not sufficient to make the clothing to which it is attached part of a uniform.
Meals – everyday meals are not allowable, but the cost of food may be allowable in special circumstances or if incurred outside of the normal work routine, for example when travelling to a business event/meeting. Check this with your accountant if you are unsure.
Parking charges and HMRC penalties are not allowable.
If you are learning a new skill/trade this is NOT allowable revenue expenditure.
The list above is not exhaustive, and each individual will have their own bespoke personal tax needs or plan.
If you are looking to do one thing today to make tax return season easier check out some of the recommendations below:
- Sign up for accountancy software to keep all your business records. We have subscriptions and training available at The Beauty Accountant® so reach out if you need support with this.
- Open up a business bank account to keep business transactions separate from personal transactions.
- Use receipt capture tools to capture all of your receipts on the go and say goodbye to paper copies. A lost receipt is a loss of tax relief.
- Use the csv download feature within your booking software, as this will give you your income figure for the tax year at the click of a button. Don’t forget to cash out and use your sales system correctly. We have experience with a wide range of salon booking software so reach out if you need help.
- Last but not least, consider enlisting the services of an accountant who can take care of all of the above for you, the cost starts from as little as one set of nails each month and you get peace of mind and your Sunday afternoons and evenings back whilst receiving tax relief on the expense too!
If you need help with the submission of your tax return get in touch today or book a free discovery call https://calendly.com/riajaine/book-a-discovery-call-thebeautyaccountant
Get in touch at: riajaineaccounts.co.uk/contact
Friendly disclaimer: The information contained in this article is for guidance and information purposes only. It should not be relied upon as full and complete accounting, tax or legal advice. For specific advice relevant to your own situation please speak to Ria-Jaine MAAT or another professional direct.