Doing your own thing
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Which costs can self-employed hauliers claim against tax? Would you be better off as a limited company? Why are overalls claimable but not jeans— and why is it better to eat at night rather than midday? We take you inside the tax allowance maze...
Aself-employed haulier has been told by the Inland Revenue that he cannot claim an overnight subsistence allowance when he sleeps in his lorry.
I Iowever, if he were to trade through a limited company he could. The haulier pays himself the same nightly subsistence allowance he pays his staff. This raises the age-old question of whether it is better to be self-employed or trade through a limited company It should be said that, contrary to what the haulier has been told, the Revenue does allow self-employed lorry drivers tax relief for overnight subsistence. Anyone else being denied this should refer their tax inspector to an Inland Revenue Publication, Tax Bulletin, of August 1993 which states: "We have long accepted reasonable claims for the cost of evening meals and breakfast taken in conjunction with overnight accommodation, if the cost of the accommodation would otherwise be allowable as an expense in carrying on the trade . We have been asked whether this treatment can be extended to drivers who spend the night in their cabs . We have confirmed that it can."
Reasonable
The bulletin emphasises that the amount must be reasonable, and must be supported by adequate existing records. This means that if an estimated figure is used, it must be supported by some evidence of prices paid for meals. It is safer, though, to reclaim the actual cost of the meals rather than using an estimate.
So what expenses can the selfemployed claim? They can claim all expenses wholly and exclusively incurred for the purpose of the trade, subject to obvious exclusions for such things as capital expenditure and money spent for domestic or private purposes.
The key word is "exclusively". If there are two motives for incurring an expense, one business and one domestic, no part of the expense is, strictly speak. ing, deductible. In practice, the Revenue is fairly reasonable and does not always enforce this. However, it is increasingly doing so with certain types of expense.
The problem is a decision by the House of Lords in 1983, Mallalieu vs Drummond. Miss Maltalieu, a barrister, claimed to deduct the cost of dark clothing which she bought solely to wear in court. The House of Lords said that, while they accepted that she thought that was her sole purpose, she must have also had an unconscious motive of meeting her personal needs of decency and warmth as she could not go around naked. There was therefore a dual motive for the expenditure, both business and personal, so it was not incurred exclusively for business purposes. The court drew a distinction, which is virtually impossible to follow, between ordinary clothing and costumes.
Following this case the Revenue will normally accept a deduction for overalls, but not for shirts and jeans— indeed it generally resists a deduction for any clothing that can be worn for everyday use.
It also often resists a deduction for meals because to eat is a basic human need. However, there is a 1985 case in which the judge ruled that meals at business meetings held when the participants would have eaten in any case were caught by the Mallalieu decision, but where someone is away overnight, the cost of the accotnmodation is not to meet their human needs—as they already have a home elsewhere—and any meals taken during that overnight stay are deductible. Hence the distinction between allowable overnight meals and non-allowable midday ones. Another area in which the Revenue is increasingly challenging is travelling expenses. If a self-employed driver parks his lorry in a depot and claims to be carrying on his business from home, the Revenue is likely to resist the claim for car expenses from home to depot on the grounds that the real base of the business is the depot, not the owner's home. This is a very grey area. If the driver has office facilities at the depot, the Revenue is normally likely to win the argument. lf he does not, he might be able to establish that the real base of the business is Ins home, but this very much depends on the facts.
Deduction
Where a business is based at the owner's home, a deduction can also be claimed for business use of the facilities—lighting and heating for example—based on the extent of such usage. Part of the rent or council tax can also normally be deducted if the owner has a room set aside exclusively as an office. If he does not, the Revenue normally resists such a deduction, but this is negotiable, and many tax inspectors will allow a small round sum for use of home as office" in such cases.
Are there expenses that an employee can claim but a self-employed person cannot? In general, no. Indeed, the rules for deduction of expenses are, if anything, more generous for the self-employed than for employees. There are some specific Inland Revenue Concessions that apply only to employees, but these are usually fairly trivial, such as 15p a day luncheon vouchers, and are unlikely to be of significance to the self-employed small haulier.
So if you are self-employed should you became a limited company? If you want the protection of limited liability and you can avoid having to give a personal guarantee to the bank, which is very difficult if you need an overdraft—yes. But do not become a company solely for tax reasons. You will pay your tax earlier, have a harder time over most expenses, and can often end up paying more tax overall.
If you have one main customer he may try to force you to use a limited company "for tax reasons". But this is not to help you. It is to reduce his own risk that the Revenue may say that you are not self employed but are an employee of his.
F. by Robert Maas
Robert Maas is tax partner of Chartered Accountants Blackstone Franks & Co..