As a freelancer in the creative industry you may be under the impression that once you have an impressive portfolio and a strong client base you can kick back and savour success. However, before you get too comfortable remember that as a freelancer you have to take responsibility for your bookkeeping and finances. One of the benefits of being a freelancer is that you are entitled to claim business expenses on any costs that you incur as a direct result of running your business. Whether you are working as a freelance photographer, illustrator or print designer you will incur costs on anything and everything from equipment repairs to the latest cutting-edge materials. This post is designed to make sure that you are aware of what you are eligible to claim as an expense and how to claim your expenses, so you are free to get back to being the next Vivienne Westwood, Cliff Wright or Andy Warhol.
How claiming expenses will affect your tax bill
Through working as a freelancer you will only be taxed on your total profits, which are your total turnover for the year excluding your expenses and any personal allowances (currently £10,000 per year). For example if your total earnings for the year are £30,000, but you spend £10,000 on expenses, your total taxable income will be £20,000 less any personal allowances. It is important to be aware that even though expensing items through the company is less expensive than purchasing the items normally it is still costing you money. Make sure you don’t fall into the trap of getting carried away and making purchases that are not necessary. Ask yourself if you really need the item or if you would prefer to take the cash. If you were to take the cash then you would incur 20% income tax and possibly national insurance, but that extra IPad that you expensed is unlikely to help you pay your mortgage.
How do you claim an expense?
If you are working on a purely freelance basis then claiming expenses is very straightforward. Ensure that you keep the receipts for any expenses that you incur throughout the year and include your total expenses amount on your self-assessment tax return. One other point to note is that you must keep a copy of your receipts for seven years after the expense was incurred in case HM Revenue and Customs ask to see it.
What can and can’t be claimed as an expense?
An expense is any business related cost that is wholly and exclusively for the running of your business. If the item or cost is used for both personal and business use then only the costs that are related to your business can be claimed as an expense. A common example will be your phone bill, and in this case you can only claim the minutes and texts that were used for business purposes.
Here are some examples of what can be claimed as an expense:
- If you are working as a freelance fashion designer then fabric costs, studio rental, stationery (sketching pencils, pens, sketchbook etc.), sewing machine cost and repairs, buttons, zips, fabric dyes, fashion magazine subscriptions are all examples of what you would be able to expense.
- A freelance photographer could claim expenses such as the cost of his or her camera and lenses, equipment repairs, travel to shoot locations, printing costs and image editing software.
Anything that is not exclusively for business use cannot be claimed as an expense. For example parking fines are not directly related to the running of your business and so cannot be claimed as an expense, even if they are incurred on a business trip. Clothing that could be worn for personal and business matters such as a suit cannot be claimed as an expense even if you only wear it for work.
Expenses can seem confusing and so one final piece of advice is to discuss all your expenses with an accountant to make sure that all your claims are valid.
This article was written by Anna Savitsky who works as a Copywriter at Easy Accountancy. They provide a fixed-fee accountancy package to freelancers, sole traders, self-employed and small to medium sized businesses.