Businesses whose turnover has exceeded 15,000 pounds are
required to show greater analysis of the income and
expenditure. From a practical point of view even those
businesses who expect the turnover to be less than 15,000
pounds should also maintain financial accounts which show
the increased analysis to both maintain financial control
and be prepared to enter the increase3d analysis should
turnover exceed the 15,000 turnover threshold.
A self employed business enters the income and expenses on
page SE1 of the self assessment tax return form if the
total sales of the business for the financial year were
less than 15,000 pounds. Only the totals of turnover,
expenses and net profit are required.
When turnover exceeds 15,000 pounds totals are required of
the sales and business income and then deducted from that
total the cost of sales which is split into three
categories of expense. Cost of sales is the direct costs of
purchases which are resold, these purchases usually being
physical materials but should also include any services
which are bought for resale.
In particular reference to taxi drivers and haulage
contractors the vehicle costs would be included in this
cost of sales category as the items being resold are
transportation costs. Other types of business who principal
business is not the resale of transport would enter vehicle
running costs in the motor expenses expense category.
Another example would be an IT consultant who purchased and
installed software for clients and would enter his software
costs as a cost of sale as that is the service they are
reselling while other businesses would enter software costs
in general administration charges.
Subcontractors costs is the second category while other
direct costs makes up the third area of the cost of sales.
Other direct costs is a useful category in which to include
all costs of the business not analysed elsewhere which are
basically the costs of operating the business other than
items being purchased for resale. The difference between
the turnover and the sum of the three costs of sales
categories is the gross profit.
Other income and profits is where the business would enter
such items as rental income or for start ups taxable new
deal payments. Bank interest would not go in this box as
nit can be entered elsewhere on the tax return. Also
business start up grants and enterprise allowances would
not be entered in this box as there is a separate box in
which to enter these receipts.
The remaining and main body of the inland revenue self
assessment tax return form concerns an analysis of the
expenses. The majority of the expense categories are self
explanatory in the title. Additional expense analysis other
than the prescribed headings on the self assessment tax
return is unnecessary for the vast majority of self
employed business.
Employee costs include the wages, salary, pension and
employers national insurance contributions for all
employees. Also include in this section any costs
associated with employees such as recruitment fees and
staff benefits. Excluded are the self employed own wages
and taxes as these are not included in the inland revenue
self assessment tax return form at all being a distribution
of net profit after tax not a tax deductible expense.
Premises costs would include rent, rates, gas, electricity,
power costs and items associated with the business premises
such as property insurance. Also included in this section
would be the portion of home costs being claimed as
business expenses. Household expenses can be claimed as
business expenses to the extent that the costs represent
the proportion of the home that is used exclusively for
business purposes.
Repairs include the repair, maintenance and renewal of
plant and machinery. Vehicle repairs would not be entered
in this category but in the motor vehicle category.
General administrative costs telephone, postage, stationery
and general office expenses. Also in this section would be
included all other general operating costs of the business
not entered elsewhere.
Motor expenses include the running costs of the vehicles
being fuel and oil, repairs and maintenance, tax and
insurance, parking charges and membership of breakdown
services. Parking fines should not be included as these are
legal fines and not deductible expenses.
Travel and subsistence includes all travel costs excluding
those included in motor expenses. Typically these items
would be air and train fares, toll fees, hotel costs and
subsistence costs incurred on business journeys. Receipts
should be presented for all subsistence costs claimed where
possible.
Advertising, promotion and entertainment expenses include
all types of expenditure related to the promotion of the
businesses products. Entertainment of clients to obtain
business is allowed while the entertainment of staff is not
and is a disallowed expense on the self assessment tax
return.
Legal and professional costs include all professional fees
and bills. These would include accountants, solicitors,
surveyors, architects and other professional bodies. Also
included in this section would be indemnity insurance.
Bad debts are sales made and included in turnover where a
decision has been taken that the outstanding unpaid sales
invoice will not be paid. A general percentage of sales is
not acceptable and if included in the accounts is
disallowed on the inland revenue self assessment tax
return. The items entered being specific debts. Normally
any debt that is 6 months overdue would reasonably be
considered as a bad debt.
Interest and finance payments includes bank interest paid
on loans and overdrafts, credit card interest and any
payments made to raise finance to fund the business
operations.
Other finance charges are entered in a separate category.
Other finance charges would include bank and credit card
charges, hire purchase and lease charges other than
property leases.
Depreciation charges include the cost of writing down the
value of the asset in the business accounts. As
depreciation of fixed assets is a management decision and
has no foundation in tax law then the value of depreciation
charged against profits is disallowed for tax purposes and
replaced in the calculation of tax payable by capital
allowances.
The final expense category is other expenses. Enter in this
category any other business expenses not entered in the
other categories. As the other categories are reasonably
comprehensive and sufficiently general for the vast
majority of expenditure to be entered it would be regarded
as unusual if any significant sums of money were to be
shown in this category. A significant level of expenditure
unusual for that category may give rise to an inland
revenue enquiry into the self assessment tax return and
this is particularly the case of significant expenditure
being shown as other expense items.
Tax adjustments to the net profit and loss are where
disallowed expenses are entered. Disallowed expenses being
items such as the business expenses already entered of
which there was personal use, and generally all expenses
which have been included that were not wholly business
expenses. These would include for example meals paid by the
business not classified as client entertainment except
where incurred on overnight trips.
Also disallowed is the depreciation charge on fixed assets
which as stated is replaced in the tax calculation by
capital allowances. Balancing charges being capital
allowances on assets sold where the price obtained exceeded
the written down value of the asset and entered in the
capital allowance section of the self assessment tax return.
Added back to net profit are capital allowances that are
claimed by the business. The capital allowances in effect
being the tax allowance that replaces the depreciation
charge.
A number of potential adjustments can also be entered in
the next section which is the adjustments to arrive at the
net taxable profit or loss. These adjustments are variable
in nature and very much dependent on the adjustments
required when the basis year has been changed or past
losses are claimed to offset the net taxable profit.
The final section of the self assessment tax return is a
list of the business assets and liabilities at the end of
the financial year. Completion of this section is optional
and should only be completed by those businesses that have
produced a balance sheet as part of the accounts. In effect
this section is the totals of assets and liabilities taken
from the balance sheet and should represent the increase or
decrease indicated by the net profit being declared by the
business.
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Terry Cartwright, qualified accountant and CEO at DIY
Accounting, designs accounting software that automates the
Self Assessment Tax Return
http://www.diyaccounting.co.uk/selfemployed.htm producing
an excel copy of the Tax Return at
http://www.diyaccounting.co.uk/Selfemployed/selfassessment.h
tm
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