Self employed business in the UK is required to produce a
set of financial accounts for a 12 month trading period.
The format of the accounts is the personal decision of the
proprietor and can be a full set of annual accounts
including profit and loss account and balance sheet
including using control accounts and cash and bank records
and the self assessment tax return.
An appropriate accounting system for many self employed
business would not be to prepare a full set of annual
accounts but instead to prepare a simple income and
expenditure account. Preparing an income and expenditure
account allows a much simpler accounting or bookkeeping
system where simple accounting software can be used.
The objective of any bookkeeping software being to maintain
accurate financial records and produce the accounting
records and totals required to complete the inland revenue
self assessment tax return each year. Financial control is
very important and the bookkeeping software should also
produce regular financial statements showing the profit and
loss of the business throughout the accounting trading
periods.
The financial tax year varies depending upon which country
business is conducted. In the US accounts are prepared
during an accounting period from 1 January to 31 December
each year. In the UK the standard financial year adopted by
the inland revenue is from 6 April each year to the 5 April
the following year.
In the UK tax rules are set for each financial year and by
adopting the standard tax year a small business can benefit
by preparing the financial accounts under a single set of
tax rules and preparing the self assessment tax return
accordingly. Adopting a different financial period involves
straddling the official tax year and more than one set of
tax rules might be applicable to the tax calculation
resulting from the net profit being declared.
After choosing the April to April financial tax year
accounts are required to be submitted by the submission
deadline of 31 January the following year. Earlier
submission is recommended as by submitting the final
accounts and tax returns online by 31 October each year the
inland revenue will calculate the income tax and national
insurance payable.
When a self employed business has been in business for two
or three years and has chosen a different 12 month
accounting period to the financial tax year the 12 month
tax is calculated according to a basis period. Up until
that point the accounts may be subject to apportionment to
calculate the tax due.
The basis period under which the business tax is calculated
is the 12 month accounting period ending in the specific
tax year. A business which has a 12 month trading period
ending 31 December 2007 would be taxed under the basis
period 2007 to 2008 being the basis period 6 April 2007 to
5 April 2008. The same rules apply if the accounting
periods are shorter or longer than the standard 12 month
period.
If the accounting date is changed by a sole trader the
inland revenue are informed of the change on the self
assessment tax return and the re3asons for the change. If
as a result the self assessment tax return arrives late the
tax will be assessed on the previous basis period.
Changing an accounting date that overlaps two basis years
results in the business being taxed twice for the same
accounting profit as the business would be taxed under both
basis years. The extra tax paid can be highly unwelcome but
can be reclaimed at a later date through the self
assessment tax return.
The penalty for late submission of the self assessment tax
return in the UK is 100 pounds and interest is also charged
on any outstanding income tax and national insurance from
the first day after submission was due.
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Terry Cartwright at DIY Accounting designs accounting
software that automates the Self Assessment Tax Return
http://www.diyaccounting.co.uk/selfemployed.htm using excel
spreadsheets at
http://www.diyaccounting.co.uk/Selfemployed/selfassessment.h
tm
