Give gift horses a good look in the mouth

Self-employment: you might think you can offset practically anything against tax. Don't believe it

Employees don't know how lucky they are when it comes to financial management. Many don't even have to fill in a tax form and their employer in effect handles their tax affairs.

Self-employment replaces this simplicity with a host of rules, allowances and exceptions. A freelance consultant, for example, will send an invoice for his or her time, and the client should pay that "gross", without deducting tax or National Insurance. Then at the end of the year it is down to the consultant to make peace with the taxman, based on profits after reasonable business expenses.

"The Inland Revenue does give more flexibility to people running their own business, but any expenses claimed or deductions against tax have to stand up to the inspector's scrutiny," says Doug Bullock, head of private business at Coopers and Lybrand, the accountants. In practice the inspectors will allow genuine costs; there is no obligation in tax law to run a business efficiently, just honestly.

If this sounds like an invitation to rush out to buy an expensive suit and charge it against tax, don't. Nor should you treat yourself to a champagne brunch to celebrate starting in business. The Revenue has its own list of allowable expenses.

Unfortunately, a suit is exactly the sort of item that might not be permitted: "Ordinary, everyday clothing" cannot be claimed; the brunch, too, unless it is a meal at a reasonable cost as part of an overnight business trip.

The Inland Revenue's own guides for the self-employed list what can and cannot be claimed in most cases. Standard items, including phone calls, business rent, professional fees, wages and travel, are allowed. Entertainment, travelling from home to work, and a freelance's own wages, National Insurance contributions and pension payments are not.

Nor is any private spending. Inspectors will come down hard on anyone who tries to claim their personal phone calls, non-business travel, or too great a proportion of maintaining a home office, as an expense before profits. According to one consultant, the Revenue is becoming smarter about new technology, too. He reports clients being asked if they play games on their computers. Admitting to blasting aliens can be expensive: the inspectors class games playing as personal use and disallow part of the cost of the PC.

With hardware the tax system complicates matters further still: a computer, or any other asset, is not actually an expense at all. Instead, the self- employed can claim a capital allowance against profits.

In the first year, this is 25 per cent of the purchase cost; the next year, the allowance is 25 per cent on the remaining balance, and so on. A further set of complex rules applies to cars.

The self-employed might actually find that the Inland Revenue's new self-assessment system helps make sense of the rules, not least because the authorities have gone to great lengths to make a complicated tax system easier to follow. An accountant or tax consultant will be able to offer advice - but there are cheaper sources of help. The Revenue's tax offices are becoming better at answering taxpayers' queries either in person or over the phone.

Tax guides such as Tolley's or computer programs such as TaxCalc, published by the Consumers' Association, give hints on how to save tax and guidance on anomalies that can catch out the unwary.