Anyone in business in the UK who is not incorporated into a
limited company must complete a tax return of their
financial affairs each year. For a number of years the
specific tax return to be completed by everyone self
employed was the self assessment tax return.
The new self employed tax returns were introduced quite
late in the reporting process being published at around the
end of the financial year, to which they relate, 2006 07.
This should not be a problem to those familiar with the
previous small business tax return as the format is similar
and presented in a simpler way to facilitate better
understanding and accurate completion.
Self employed businesses are not required to keep formal
accounts of the years financial transactions but must keep
sufficient financial records to justify and support the
financial entries made on the tax returns. While formal
financial accounts may not be essential requirements an
organised system of record keeping using bookkeeping or
accounting software is highly desirable to maintain
financial control.
The accounting system employed can be simple lists of
financial records supported by sales invoices, purchase
invoices and where applicable cash or bank records. The
essential support to all bookkeeping procedures are third
party documents received or issued to provide a full and
fair financial account of the business.
There are a number of rules to be taken account of as to
whether the full version of the tax return should be
completed or whether the short version applicable.
Generally most small businesses with an annual turnover
under 64,000 pounds would complete the short tax return
however there are specific exclusions where the full return
must be completed. The self employment (full) tax return
is required to be completed when the following conditions
apply and the self employment (short) tax return is
required where the conditions do not apply.
1. Sales turnover exceeds 64,000 pounds during the
financial year or exceeds an average of 5,333 pounds per
month if trading for less than a full financial year.
2. The accounting date to which accounts are made up has
changed in the last financial year.
3. The financial accounts have been declared in a previous
tax return.
4. The basis on which the accounts have been prepared has
changed from a cash accounts basis an accruals basis.
5. The self employment includes the provision of contracts
that continue into the following financial year.
6. Business is conducted outside the UK.
7. Agricultural or Industrial Buildings capital allowances
are being claimed.
8. The self employed basis period is different to the
accounting period.
9. Overlap tax relief is being claimed.
10. Averaging profit is being claimed by a farmer, market
gardener or creator of literary or art works.
11. Practising barrister or advocate in Scotland.
If none of the above conditions are applicable to the self
employed business then the self employment short tax return
may be completed.
The short tax return is a simplified version of the full
tax return. The main decision point being the 64,000 pounds
limit at which a full return is required which is also the
vat threshold for the financial year 2006 07. While a
future policy announcement has not yet been formally made
it could be the cut off point may be changed each year in
line with movements in the vat threshold.
For the financial year commencing April 2008 the vat
threshold was increased sales turnover of 64,000 to 67,000
pounds.
The short tax return also has an option to declare total
expenses as opposed to listing expenses under expenditure
type categories where the business income is less than
30,000 in the financial year.
Finally if the self employed person has more than one small
business a separate tax return must be completed for each
business. This rule applies even if a single set of
accounting records has been kept for all the businesses. It
is therefore appropriate for separate accounting records to
be maintained for each small business to simplify the
completion of the tax returns each year.
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Terry Cartwright, produces Small Business Accounting
Software at http://www.diyaccounting.co.uk/ and Payroll
Software at http://www.diyasccounting.co.uk/payroll.htm for
self employed business that automatically complete an both
the short and full versions of the Self employment tax
returns.
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