Sole Trader Holiday cost in COGS

Hi all,

Hope all well with everyone.

Sole Trader holiday cost inclusion as taxable expense seemingly passes the 'whole and exclusively' for business purposes where the Sole Trader takes time off work to mitigate against burnout and mental health in a similar way as an employee is paid holiday pay. Were he/she not to take holiday (time off), he/she may suffer burnout or mental strain which will affect his/her business performance. Of course it has to be reasonable i.e. just one holiday per year (to match employee benefit), only the sole trader is entitled and where sole trader is not on company's payroll. Does this makes sense or is there a blanket HMRC regulation against Sole Trader holiday under any circumstances?

HMRC website is not clear and seems to imply that the test to be passed is the 'wholly and exclusive' one. Anyone have any conclusive guidance on this?

Thanks.

Farouk

  • Hi Farouk, thanks for your question. Hopefully someone within our community will be able to give guidance on this for you.     is this something one of you could help with. 

    Thanks

    Natalie 

  • Hi Farouk,
    I would say that a holiday is not an expense of business.
    I understand your comparison to employees, however they are paid statutory holiday pay to maintain their earnings when they have a break from work, the company does not pay for their holiday.
    The likeness there is if you can still generate income whilst being on holiday, and take drawings as such, but that would be more akin to paid leave rather than your holiday being paid for.

    I don't think you could justify paying for your holiday as a business expense, sorry.

  • Hi Farouk

    I agree with Shaun. The expense is not incurred in the process of transacting in the business. The equivalent of holiday pay would be to still pay/drawings from the business while you are not conducting business activities.

  • Thanks for getting in touch  really appreciate it. 

  • Thanks Barry for your response 

  • Hi Farouk

    I am well thank you and hope you are well too.  

    I agree with Shaun and Barry that it is not a business expense .

    I have just broken the answer down for you and hopefully it helps.

    1. Wholly and Exclusively Rule:

      • HMRC requires that expenses must be incurred "wholly and exclusively" for the purposes of the business. Personal expenses, even if you think ,they have a benefit to the business,  do not meet this criterion.
    2. Personal vs. Business Expenses:

      • Taking a holiday, even to prevent burnout and maintain mental health, is seen as a personal expense. While one thinks, the intent is to improve business performance indirectly, it is not considered an expense that is "wholly and exclusively" for business purposes.
    3. Employee Comparison:

      • Comparing a sole trader to an employee in terms of holiday pay is not applicable because employees' holiday pay is a contractual entitlement for personal rest, which is not deductible from their employer's tax as an allowable business expense.
    4. No Conclusive Guidance Allowing Holidays:

      • There is no specific guidance from HMRC that allows sole traders to deduct the cost of holidays as business expenses. On the contrary, guidance suggests that such costs are personal and not allowable for tax purposes.
  • Hi Natalie 

    I am well thank you and hopefully you are too.

  • Hi all. Thank you so much for your responses. Clearly holiday is deemed to be 100% personal even though it can be argued (albeit unsuccessfully at the moment) that it has benefits to business via the 'burn out and mental health argument'. I take the point that employees are paid statutory holiday pay to maintain their pay when away on a break from work. However Self employed people are not able to maintain their pay when on holiday (away on a break from work). Take for example 2 computer programmers. One employed, other is a contractor (sole trader). Both have potential to earn £40k a year. The employed programmer is guaranteed the £40k as per contract that includes holiday pay and so can plan and pay for a holiday to 're-charge batteries' within the pay. The contractor can only earn the same if he/she works without a break for the entire year and still won't be able to make the £40k because of bank holidays and sick off days not being payable. So it can be argued that the employed programmer's holiday is paid to an extent by the statutory entitlement. There is a tax expert who adds on to the 'wholly and exclusive' test that, 'if there is a genuine and substantial business incentive behind the reason for the trip and expenses incurred, it can be possible to make a claim for these'. If maintaining pay while on holiday is business incentive (recharge batteries) for employment and contributes to holiday cost, then why not for the self employed?. The drawing by the sole trader that has been likened to holiday pay is not wholly realistic because funds would have had to be earned to be drawn. Given the setbacks of not being able to maintain earnings when on break and on bank holidays, Sole trader/contractors struggle to earn and therefore 'draw' funds to go on holiday. It is generally assumed that Sole traders earn a lot more money than employed people, but a lot of them are simply doing the same work with the same earning potential as employed people and taking a break should not be considered a 'jolly' or a personal choice. Again I am aware it is not allowable for them, but I feel there are grounds to petition HMRC for it to be made allowable for incomes up to £60k at least (or the threshold for lower rate of 20% paye tax), on basis of a reasonable limit of say £500 a year. I'm inclined to ask HMRC the question and see how they respond. Thank you so much for your time and assistance.