Tax and accounting effects of accounting categories for sole traders, partnerships and LLPs

This article explains how the options you select when you add or edit a spending category for a UK sole trader, partnership or limited liability partnership (LLP) business can affect its tax reporting.

When you add or edit either of the spending categories in FreeAgent (i.e. 'Admin Expenses' or 'Cost of Sales'), you're required to choose a tax return box for the category and to identify whether the category is allowable for tax.

Choosing a tax return box for the spending category

From the ‘Tax Return Box’ drop-down menu, choose the option that’s most appropriate for the spending category that you’re adding or editing. 

If you’re a sole trader, the options correspond to the box names on your Self Assessment tax return. If your business is a partnership or an LLP, the options correspond to the box names on your Partnership Tax Return.

The option you choose will determine where FreeAgent posts the tax effect of the transaction in your business’s tax return. 

Marking a spending category as allowable for tax

The 'Allowable For Tax' box is ticked by default, so if the category is not allowable for tax you should untick the box.

If you mark a spending category as allowable for tax, it means that FreeAgent will deduct the expense from the business’s income when it calculates the profit that the company will pay tax on. If you’re unsure whether an expense is allowable, check with HMRC or your accountant.

Please note that if you set up an admin expense with one of the following 'Tax Return Box' categories and untick the ’Allowable for Tax’ box, FreeAgent will prevent you from reclaiming any VAT on the cost, irrespective of the VAT rate selected:

Sole Traders

• Advertising costs (if dated before 1st May 2024)
• Entertainment costs

Partnerships and LLPs

• Advertising, etc. (if dated before 1st May 2024)
• Business entertaining