Sole Trader Income Tax Return

Do I have to file a return?

The first question we often receive is whether or not a sole trader is actually obliged to fill in a tax return. There is a mistaken belief out there that if you made a loss you do not have to file a return, this is not the case. So, remember that all sole traders are required to prepare accounts and submit a tax return regardless of whether they made a profit or a loss.

Do I have to produce sole trader accounts?

Over the last few years Revenue have paid more attention to the issue of sole trader accounts extracts.  These extracts are basically important figures pulled from your accounts and inserted into your tax return, things like sales and motor and travel expenses. Revenue analyse these figures across the board and come up with averages. Forms containing extracts that are unusual compared to these averages can be a trigger for audit. So, leaving these fields blank or inserting the wrong figure will lead to problems. 

What expenses can I claim?

As a sole trader you will come to your profit figure by deducting ‘allowable expenses’ from your sales. So the issue of what is and what is not an allowable expense is crucial. The easiest rule to apply is to ask yourself was the expense incurred ‘wholly and exclusively’ for the purposes of your trade. That is to say the expense must apply only to your business and not to your personal expenses. For example you can claim expenses for business travel or for using your personal computer or office for business purposes.

What expenses can I not claim?

One of the most common items sole traders are surprised to find out they can not claim for is client entertainment. You can also not claim for things like lunch while you are at your normal place of business.

What records should I keep?

Sole traders will tend to have a volume of sales and purchase invoices. To accurately prepare the accounts and to be prepared in case of audit it is important that you hold on to all receipts for 6 years. 

Overlooked tax credits

It is amazing how often sole traders fail to claim all of the tax credits they are entitled to. Make sure you are claiming all of the tax credits available to you to pay the right amount of tax. The home carer’s tax credit for example is one that can often go unclaimed.

What else can I do to reduce my tax bill?

Once you have calculated your tax you should consider tax planning strategies such as contributing to pension funds, splitting your income with a spouse or forming a company. The most common of these strategies is still contributing to a pension scheme. Relief may be restricted further in years to come so it is important to avail of the maximum reliefs available while you still can.

Lastly, if your spouse is in PAYE employment and you are self employed you can set any losses against their tax bill. This can often create a tax refund situation. This is optional and you will not be notified by Revenue that you can avail of this. 

Date published 1 Sep 2012

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.