Self Employed Tax Return Guide

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STARTING SELF EMPLOYMENT 

Registering with HMRC, record-keeping, claiming your expenses and allowances etc. This guide sets out the basics for getting your tax affairs in order and filling in your self-assessment tax return.

Filing your tax return promptly and getting it right first time is important. There are all sorts of allowable expenses that you incur that can reduce your tax bill and often, in the first year of trading, you may make a loss or small profit resulting in no liability at all. Additionally you may be able to recover tax already paid via a PAYE employment in the same tax year. This is called ‘sideways relief’.

Registering with HM Revenue & Customs

Selecting the right form

If you believe you need to complete a tax return, you must inform HM Revenue & Customs (HMRC). There are mainly two forms to use; selecting the right one will depend on your reasons for needing a return:

• If you’re newly self-employed, you use form CWF1
• For any other reason, such as you have become a Buy to Let Landlord, you’re likely to need form SA1

Please note that if you’re going self-employed, you may also need to begin paying Class 2 National Insurance contributions, subject to your level of profit.

The information required in these forms is fairly straightforward, such as full name, date of birth and address. You will also need your National Insurance number.

If you’re registering as self-employed, you will also need to provide details about your self- employment, such as when you started, your address, the nature of your work, etc.

Please Note: Taxeezy can provide you with details of the correct registration form on request and also help with the completion of your first tax return.

What Next?

HMRC will send you a confirmation of registration and provide you with your unique taxpayer’s reference, or UTR. This is a unique reference for your tax affairs. You should quote this on any payments you make or any correspondence to HMRC. Taxeezy will require this number in oreder to submit your tax return.

The Basics of the Tax Return

A tax return should disclose your taxable income and gains for the relevant tax year. A tax year starts on 6 April and ends on the following 5 April. Also note that all of your taxable income and gains must be declared on a tax return – even if they have been taxed before you received them ( or ‘taxed at source’), such as employment income or bank interest.

If you are self-employed, and the year end of your business is not the same as the tax year, such as 31 December, there are specific rules about which accounting period for your business goes on which tax return. To avoid complications the simple solution is to slot in with the tax year. So if you started on the say 1st January 2013 your first short accounting period will be from 1 January 2013 to 5 April 2013 and then each tax year thereafter.

HMRC will normally send you your tax return soon after the tax year has started. It is a multi-page document and its proper form reference is SA100.

Submitting the Tax Return

Following the end of the tax year, tax returns must be submitted to HMRC. You can submit your return on paper; this must be done by 31 October following the end of the tax year. Alternatively, you may chose to file your return online, such as when you use the Taxeezy service, in which case the deadline is extended to the 31 January, following the end of the tax year.

Failing to file your return on time will result in an automatic £100 fine, with further penalties subject to the length of delay.

Paying any tax due

Any tax you owe must be paid by or on the 31 January following the end of the tax year. There are a number of ways you can pay HMRC, such as Direct Debit, Bank Giro, online banking etc.

As mentioned above, income that has already been taxed must still be declared on your tax return. However, the tax already paid at source will be deducted before arriving at the final tax bill.

Be aware that if your tax liability is over £1,000 or not much of your tax is collected at source, you may be required to make instalments for next year’s tax as well on 31 January and the following 31 July. Again, delaying paying HMRC could cost you interest and late payment penalties.

Record-keeping

You should keep your records and documents for six years.

HMRC is not very precise about the format of records a business should keep. They are indifferent as to whether you should use a manual cashbook or sophisticated bookkeeping programme. Many of our clients simply add up their gross income and receipts to enter their transactions directly on to our online forms which are used by us in preparation of the Tax Return, and some optionally upload their summarised documents in support of the form, which we then check for allowable expense claims and suchlike.

When starting out, you may want to begin with simple spreadsheets, a basic book to record your income and expenses or a cashbook and very quickly you should be able to identify what format your business needs its records in.

Other Income

If you have other sources of income, these are the sort of items you need to keep:

• Bank interest certificates
• Dividend vouchers
• Portfolio statements
• P45s/ P60s from pension providers or employers
• P9Ds/ P11Ds from employers
• Tax code notifications (all pages) sent by HMRC
• Notifications regarding any state aid such as the State Pension or Job Seeker’s Allowance
• Paperwork regarding pension schemes being paid into
• Receipts for donations made under the Gift Aid scheme
• Paperwork for any assets you have sold, such as shares, land etc.
• Income and expense receipts for any land or property you received income from- in the UK or overseas

Again, this list is not exhaustive, but hopefully it gives you a good idea of the type of paperwork it is necessary for you to keep and which will be required for the completion of your tax return.

Claiming Business Expenses

Below is a general list of the most common expenses you can claim.

• Purchases for resale
• Materials
• Consumable equipment
• Insurance
• Protective clothing and Uniforms
• Courses attended
• Computer for work
• Laundry and cleaning
• Professional magazines
• Professional Subscriptions and Licenses
• Telephone Landline – Business use
• Mobile Phone – Business Use
• Internet
• Advertising
• Postage and stationery
• Use of Home as Office (See notes below)
• Computer consumables
• Bank charges on business account
• Accountancy fees
• Wages (see notes below)
• Fares and travelling expenses
• Other sundry items
• Vehicle Running Costs
• Fuel
• Repairs and maintenance
• Road tax, insurance and MOT
• Cleaning
• Parking and Tolls

Please note: If you use your vehicle for your own personal use then you need to factor this in when any expenses are claimed. For example if you calculate that you use your vehicle 20% of the time for personal or family use, then you would need to reduce any relevant vehicle running expenses by 20%.

An alternative to claiming the vehicle running costs is the HMRC simplified Fixed Scale Mileage Rate which is currently 45p per mile for the first 10,000 business miles and 25p thereafter. This includes a depreciation allowance (capital allowance) for the vehicle but does not include interest on any loan to purchases the vehicle, which can be claimed separately. You cannot use this method if you have already claimed capital allowances for a particular vehicle (see below).

When you start self employment it is a good idea to record your business miles as well as keep the running cost receipts for fuel, repairs etc., as it can be established what is going to be the most tax efficient method for you. Often if you have medium to high mileage and a fuel efficient vehicle, the simplified method can be far more tax efficient. Taxeezy can advise on this while preparing your first tax return.

Capital Allowances

Capital Allowances can be claimed on assets used for your business and work, such as a car, van, truck or plant & equipment. You can claim an allowance of up to 100% in the year of purchase on certain items, although cars are restricted to 18% per annum in most cases. Cars with a high carbon footprint can be restricted to just 8% per annum. Assets you owned before you started the business may also be claimed if you use them now for your business.

Notes On Expenses

Use of Home

If you work from home and have an area exclusively set aside for the business, you will be able to put through a portion of the running costs of your home. It could include a portion of household bills such as gas, electricity, telephone, broadband, rent, council tax, mortgage interest, insurance, etc.

Training

There are stringent rules about what training costs can be offset for tax purposes if they are for the proprietor.

Family Wages

There are rules regarding wages paid to family members. You may pay family members wages, however, they must actually be doing some work for the business and their wages be physically paid – i.e. HMRC may want to see a bank payment or receipt of cash paid to them. Furthermore, you should still consider national minimum wage rules, young workers regulations, tax and national insurance implications etc.

Conclusion

Starting out in business and completing your first tax return can be pretty daunting. As you can see, from registration with HMRC through to completing your tax return can be a lengthy and complex area.

A professional service should ensure that you comply with legislation and HMRC guidance. Cutting corners can save you money in the short-term, but could be costly in the long-term if you were to incur penalties for one reason or another.

Furthermore, a good tax professional should be able to save you tax.  They may review your affairs, and identify areas in which changes can be made in order for your affairs to become more tax efficient.

They will also ensure that everything is submitted and paid on time, so that your hard-earned cash is not wasted on interest and penalties.

Ultimately, they should identify your specific needs in order to advise you and take the headache away from you, so that you can carry on doing what you do best – running your business!

Disclaimer

_{This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers’ circumstances do vary and if you feel that the information provided is beneficial it is important that you seek professional advice before implementing.}