Being Self Employed in the UK carries with it responsibility to sort out your own tax affairs which requires good records of the business income and expenses to minimise tax liability. With tax rates of up to 40% of net profit, tax is an essential area in which anyone self employed should aspire to achieve a degree of competence. DIY Accounting produces both Accounting Software templates and Payroll Software templates that ease the record keeping and produce the self assessment tax returns
What is self employment?
Directors of companies are not self employed but employees of that company. In essence anyone who is in business either as a sole trader or part of a partnership and receives income that is not taxed under the PAYE system is effectively self employed. Occasional miscellaneous receipts would not be regarded as self employment and should be entered on the tax return as “All Other Income” however a regular source of receipts would probably be regarded as self employment income and anyone self employed should register with the Inland Revenue within 3 months of starting trading or risk being fined £100.
Keep a record of all transactions.
Sales turnover is the amount the business earns before deducting business expenses including receipts of any kind for goods sold or work done such as commission, tips, payments in kind, fees and insurance proceeds. Sales of fixed assets are excluded from sales turnover as are Business Start up grants which are entered in a different section of the self assessment tax return. DIY Accounting produce excel spreadsheets to record the sales income and bank receipts. Check the amounts deposited do not exceed the declared turnover which would indicate that you have understated your sales and your tax liability would at the least be increased unless you could provide a solid reason for the anomaly.
Ensure financial, purchase and sales records are compatible.
Compatibility will vary from business to business. Examples if you post 100 EBay items your records should show 100 items of income and 100 items of postage. Buy food for a restaurant for resale at four times cost, some wastage is inevitable but the underlying compatibility between sales generated and purchases should be reasonable. The average number of meals sold from a take-away shop should be compatible with the number of take-away cartons purchased. A taxi driver should not claim fuel receipts during his holiday period and the fuel bills should be compatible with the fares obtained. Unusual and incompatible expenditure declared on the self assessment tax return can and do trigger Inland Revenue enquiries. Many Inland Revenue enquiries result in a higher tax liability due to the scrupulous professional way in which compliance investigations are carried out.
Obtain receipts for everything.
Tax payers lose millions each year by not obtaining or retaining receipts for expenses. If you are claiming fuel costs for a business trip and fill up with £50 of petrol get a receipt. The tax saved by including that receipt in your accounts is £11 at basic tax rates and £20 at higher tax rates. If your business turnover is over the vat threshold of £64,000 p.a. for 2007-08 the receipt is worth even more. £16.81 vat and income tax at basic tax rate and £24.47 at the higher income tax rate. The same is true for all other business receipts. Obtain a receipt for everything. If you lose a receipt then still include that expenditure in your accounting records but if your tax return is enquired into by the Inland Revenue that expenditure may be disallowed unless you can argue and sometimes prove the expense was in fact incurred. May help to note in your records - receipt lost.
Do not mix business and personal.
The general rule is that items solely for business use can be claimed and the business proportion of personal expenditure may be allowed although the rules are applied quite strictly. If you purchase both business and personal items from a supplier the business items only can be claimed but if you obtained all the items on a single receipt you would be disallowed the cost of that journey as it was not solely for business purposes.
Claim business expenses incurred prior to trading.
Business expenses incurred up to seven years prior to trading actually commencing can be deducted from business turnover if these expenses were solely for the future business purposes. Enter such expenses in your accounting records as if they had been incurred on the first day of trading but show the actual purchase date.
Claim home running costs if you work from home.
If part of your home is identifiable as solely for business purposes then running costs can be claimed. The cost allowed is the proportion of the total area of the home the business area occupies. For example, excluding shared facilities of kitchen and toilet if the home has three bedrooms, living and dining room and one bedroom is used solely as an office then 1/5 of home costs could be claimed. The costs to claim would be heat and light, insurance, general and water rates and mortgage interest excluding repayment amounts. Where mortgage interest is claimed the revenue might also claim as a capital gain the increase in value of that proportion of the property, such Capital Gains Tax being subject to tapering relief over time. Usually safer not to claim mortgage interest
Take care if claiming a partner’s wages against profits.
Partner’s wages can be deducted as a business expense although there are rules which would be applied in such circumstances to ensure the amount paid is both real and reasonable. The business would need to operate a PAYE scheme for that employee, deducting income tax and national insurance, perhaps using a package such as DIY Accounting have available using Payroll Software to produce all the statutory requirements. The work carried out must be real not invented and the rate paid reasonable for the nature of the work and the time spent. Evidence may also be required that the amounts were actually physically paid to that partner, for example in the form of a cheque.
Claim vehicle costs or mileage allowances.
Vehicle running costs and expenses such as fuel, excise duty, insurance, repairs and breakdown membership may be claimed as business expenses if the vehicle is used solely for business purposes. Travel from home to work is not business use and disallowed. The proportion of vehicle running costs and capital allowances which are claimable are dependent upon the proportion the vehicle is used for business and personal use. Parking fees for business purposes may be claimed. Parking fines and penalties for motoring expenses are not claimable as business expenses for tax purposes.
An alternative to claiming vehicle running costs and vehicle capital allowances would be to claim mileage allowances which at the time of writing are 45p for the first 10,000 miles and 25p per mile thereafter.
Write off expenditure against taxable profit unless the item is a fixed asset.
Depreciation is not allowed and replaced by Capital Allowances for the purposes of calculating the tax payable. Capital allowances are designed to write off the cost of purchasing a fixed asset over the life of the asset rather than in the financial year in which it was purchased thereby spreading the tax relief on the asset over those years. Many assets purchased by small businesses fall into a grey area as whether they are fixed assets or normal business expenses. Generally a fixed asset would be defined as an item that would be used by the business over several years and usually of significant value. 100% tax relief is obtained on items purchased which are not fixed assets.
Avoid fines and penalties by submitting tax returns on time.
Accounting records and Self employment tax returns should be prepared well in advance of the first submission date of 30th September to enable the information to be checked and verified before submission to ensure all possible claimable expenses have been included. The final deadline for submission is 31st January with late returns and payments being subject to penalty fines and interest payments which should be avoided.