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 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 for tax
purposes 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 expenses 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 costs if you work from home. If part of your
home is identifiable as solely for business purposes then
home 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 home 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 home, such Capital Gains Tax being
subject to tapering relief over time. It may be safer not
to claim mortgage interest as part of the home costs.
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 the partners wages, 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 partners wages 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 40p 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 assessment 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.
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Terry Cartwright provides tax efficient Accounting Software
packages http://www.diyaccounting.co.uk/index.htm with DIY
Accounting Software for Self employed and small companies at
http://www.diyaccounting.co.uk/selfemployed.htm
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