Practical Self Employed Tax Tips to Save you Money
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.
A regular source of receipts would be regarded as self employment income. Everyone considering themselves self employed should register with the Inland Revenue within 3 months of starting trading or risk a penalty fine of 100 pounds.
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.
Excel spreadsheets make a good solution to record the sales income and bank receipts as part of the small business accounting software. 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 pounds of petrol get a receipt. The tax saved by including that receipt in your accounts is 11 pounds at basic tax rates and 20 pounds at higher tax rates.
If your business turnover is over the vat threshold of 64,000 pounds p.a. for 2007-08 the receipt is worth even more. 16.81 pounds vat and income tax at basic tax rate and 24.47 pounds 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 the wages of a partner against profits.
Partner 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 partner wages, deducting income tax and national insurance, and 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 partner 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 and automatically claimed whatever the small business accounting software.
Avoid fines and penalties by submitting tax returns on time.
Accounting records and Self assessment tax returns should be prepared well in before 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.
About the Author
Terry Cartwright, qualified accountant, designs Accounting Software that automates the self assessment tax return for self employed as an essential part of Small Business Accounting Software and Payroll Software that automates the revenue payroll tax returns