I’ve updated this post on 15 April 2020
Using the HMRC simplified expenses method, if you’re self-employed, is the easy way for you to claim tax back without keeping receipts.
Not only that, it makes filling out your much tax return easier.
This guide is for the self-employed or sole traders and is updated for the 2020/2021 tax year. Different rules apply for Limited Company owners.
What are HMRC Simplified Expenses?
Simplified expenses is a scheme set up by HMRC to help self employed people and sole traders claim for certain expenses using a flat rate (rather than the actual amounts), without needing receipts.
Only 3 types of business expenses that are included in the scheme:
- Business mileage when you use your personal vehicle;
- Home office if you work from home;
- Living in your business premises.
Who is Eligible?
The scheme is only available to people who are:
- self-employed, sole traders and freelancers;
- part of a business partnership where none of the partners
area Limited Company.
Simplified Expenses for Claiming Business Mileage
If you use your personal vehicle for work reasons, then you can use simplified expenses to make it easy to claim for the cost of travel.
By using HMRC simplified expenses you can claim a flat mileage rate whether you use a car, van or motorcycle.
The flat mileage rate reflects fuel as well as the additional costs of running your vehicle like:
- Road tax;
- General wear and tear on the vehicle.
For that reason, choosing simplified expenses is much easier than calculating the exact cost of fuel and running costs.
You cannot claim for simplified expenses if you have chosen to claim the cost of buying your vehicle and are claiming capital allowances on your tax return. This guide covers handling expenses for business vehicles if you have bought a car through your business.
The simplified expenses mileage rates for the 2020/21 tax year are:
- 45 pence per mile for cars and goods vehicles on the first 10,000 miles travelled (25 pence over 10,000 miles)
- 24 pence per mile for motorcycles
- 20 pence per mile for bicycles
You can read more about how to claim the business mileage simplified expenses and tax-deductible journeys in my Guide to the Self-Employed Mileage Allowance.
Simplified Expenses When You Are Working From Home
If you are self-employed and work from home, then your household bills are likely to be higher because you are running a business out of your home.
Calculating your working from home expenses could be complicated because you have to work out a portion of your utility bills, mortgage or rent based on the space you are using.
The HMRC simplified expenses scheme helps make claiming for working from home easier because you can claim a flat rate amount, provided you work from home at least 25 hours per month.
The working from home flat rates for the 2020/21 tax year are:
- £10 per month if you work between 25 and 50 hours per month;
- £18 per month if you work between 51 and 100 hours per month;
- £26 per month if you work 101 or more hours per month.
Simplified expenses do not cover internet and mobile phone, so make sure you claim separately along with other business expenses if appropriate.
In the tax year 2020/2021, you have worked 30 hours per month from home, but 70 hours during January.
You can claim £128 against your taxes for working from home.
This is worked out as:
- 11 months x £10 = £110
- 1 month x £18 = £18
- Total £128
The flat rate doesn’t include telephone or internet expenses. So make sure you claim for the business portion of those costs against your tax bill to reduce your tax bill even further.
Again, you are not obligated to use the flat rate if you work from home. You can also calculate a percentage of your actual household bills.
You can read my guide to Claiming for Your Home Office to help you more with your claim.
Simplified Expenses When You Live In Your Business Premises
Some people live and work in the same place for example pubs, bed and breakfasts and hotels.
When it comes to self employed business expenses, you cannot claim for anything you use personally. So if you live and work in the same place, there will be an element of private use from living in the premises.
You can use simplified expenses to work out a flat rate amount you can deduct from your business costs to reflect the private use element.
The flat rate is based on the number of people living in the business premises. For the 2020/21 tax year they are:
- If one person lives in the business premises £350 per month
- If two people live in the business premises £500 per month
- If three or more people live in the business premises £650 per month
You run a bed and breakfast and live there for the 2020/2021 tax year. Your business premises costs are £13,000.
You must deduct £4,200 from your business running costs.
- £350 per month x 12 months = £4,200
You can claim £13,000 – £4,200 = £8,800 as an allowable expense against your tax bill.
Is the HMRC Simplified Expenses Method Right for You?
Simplified expenses make things easier, especially if you are a sole trader with really simple tax affairs. But you are not obligated to use simplified expenses and for some it may not be beneficial.
Depending on your personal situation it may make sense to claim for actual business expenses rather than the flat rate to generate a bigger tax saving.
If you are using my bookkeeping spreadsheet, I’ve included reminders and automated calculations for business milage and your home office so you can easily record your claim ready for your tax return.
How to Calculate If Simplified Expenses Are Worthwhile
You’ll need to have an understanding of your actual expenses to figure out if the flat rates are beneficial for you.
The HMRC simplified expenses checker can help you with this.
You need to enter all your actual costs into the online form and then the checker automatically calculates how much you could claim under the flat rate method.
How to Claim Simplified Expenses On Your Tax Return
You’ll need to include the value of any simplified expenses you wish to claim along with your other business expenses in the self employment section of your tax return.
There is no need to show you claim separately, but you should keep a note of what you are claiming for and how you worked it out as part of your records, in case HMRC ever ask for evidence of what you are claiming for.