Flat-rate expenses

What it means

Flat-rate expenses let a sole trader claim costs as a percentage of income up to a statutory cap instead of documented spending. Keeping expense receipts becomes unnecessary.

Only an individual who is not a VAT payer for the whole period may use them. A company cannot, and always keeps double-entry books.

The percentage covers all business costs at once: rent, phone, car and materials. On the flat rate, individual deductible expenses are therefore not claimed, even when one of them is exceptionally large, such as an expensive machine. If real costs would exceed the flat rate, the answer is to record actual expenses, not to combine the two methods.

How it works in practice

Even on the flat rate, records of income, stock and receivables are required. Contributions paid are added on top of the flat rate, so the real deduction exceeds the percentage itself.

Against actual costs, the business model decides: for services without materials the flat rate usually wins; in goods trading it almost never does.

Before the tax return is filed we work out both options for the sole trader: the flat rate and actual expenses from the receipts collected over the year. The method is chosen in the return for each year, so it makes sense to keep receipts for larger purchases even when the client expects to use the flat rate.

What to watch out for

Registering for VAT during the year removes the flat-rate option for the whole period. Anyone nearing the turnover threshold must know this in advance and start recording real expenses.

Moving from actual expenses to the flat rate is more than a change of percentage. The tax base is adjusted for unpaid receivables, payables and stock carried over from the previous period, and missing this means filing on the wrong base. The adjustment belongs in the first flat-rate year, not in an audit.