Completing Your Self Assessment Tax Return for Builders
Making the decision to set up your own building firm as a freelancer or a sole trader is quite a major step – so congratulations on having taken the plunge! We know from experience that one of the main concerns which new business owners have is, “How will this life-changing decision affect my tax affairs?”
The extent to which you notice the difference will depend on what you were doing before. If you were employed full time as a builder and did not have any additional sources of income or other complications, then chances are you’ve never had to complete a Self Assessment Tax Return before – in which case, the prospect can seem quite daunting. However, there are many reasons why employed people find themselves completing a Self Assessment Tax Return anyway – in which case, the changes are not quite so extreme!
The Self Assessment system for collecting income tax was introduced in 1997 and shifts the responsibility for declaring income onto the taxpayer's shoulders. There are strict deadlines you must meet to send back your tax return and pay tax owing, and missing them could mean incurring interest and penalties, so it’s vital you get it right. Having said that, with a bit of careful planning and some good advice and support, there is no reason why you should need to be scared or worried about anything tax related. Let’s look at it in some easy-to-understand stages:
The value of good bookkeeping
Your tax bill will be calculated based upon the profit which your building business makes. Simply put, that means everything you earned minus everything you spent. More specifically – everything that was a ‘business expense’. No good trying to claim that the 42” LCD screen with surround sound that you just got for the living room was ‘necessary for the business’ . . . !
We would always recommend that you manage your finances in an organised fashion from Day One - in fact, as a self employed person it’s a legal requirement. That doesn’t necessarily mean investing in expensive accounting software, unless you feel you really need it - but instead, at a most basic level, keeping a record of every payment you receive from a customer and every business expense you have. If you enter everything into a simple spreadsheet (you can download our simple bookkeeping software free of charge here, over 10,000 businesses are already using it and yes it is totally free, no upgrades or annoying sales messages), you’ll always know where you stand.
In addition, you’ll also need to keep copies of every invoice (free invoice template here) or sales receipt and every expense receipt. Keep these somewhere safe, filed either by month or by customer – whichever works best for you – and make sure that you can find any individual piece of paper whenever you need it.
By law, everyone must keep records of their income, and of any ‘capital gains’, for at least 22 months after the end of the tax year - and if you’re in business and are self-employed as a sole trader, you’ll need to keep these records for at least five years and ten months after the end of the tax year.
Don’t forget personal paperwork
Although you are now operating as a business, and your income is based on the profits of that business, you are in effect completing a ‘personal’ tax return. So you’ll also need to make sure that you keep details of all other aspects of your income, if relevant. For example, if you set up the business halfway through a tax year, you’ll need details of your salary and your tax payments to date on PAYE. This should all be contained in the P11D and P45 which you should have received from your employer when you left.
Other personal income could include interest on savings, income from property rental or a part-time job, or any other income sources you might have – maybe, for example, if you were working on a more casual basis in the evenings before you set up the business?
Let’s get started
More than nine million people have to complete a Self Assessment Tax Return every year, so you’re certainly not alone! But according to Her Majesty’s Revenue and Customs (HMRC) though, around 10% of these miss the deadline. Make sure you’re not one of them, as if you fail to get the forms in one time, then there are all sorts of fines and penalties which you could incur. More on that later.
You will save yourself a huge amount of headaches and sleepless nights worrying, if you just keep on top of your bookkeeping and make sure you have all the information you need to hand when the time comes. There’s nothing to be gained by leaving it until the last minute – and it certainly won’t delay the date on which you have to actually pay the tax.
Self Assessment Tax Return forms are issued after the end of the tax year – which is 5th April – and cover the previous 12 months. You will receive one as standard if you have registered as self employed, which you should have done when you set up the business. If you do not receive one for any reason, then don’t think you’ve ‘got away with’ and don’t have to complete one. HMRC will catch up with you eventually, so you might just as well get them to send you one. It’s your responsibility to do so.
What information will I need?
A comprehensive list of required documentation can be found on the HMRC website, but here’s a quick breakdown:
- Your P60 and details of any pay and taxable expenses and benefits received from your last employer, if relevant.
- Bank and building society statements.
- Cheque and paying-in book stubs.
- Your self-employment accounts including details of everyone who has paid you for builders services over the last 12 months.
- Any dividend vouchers you have.
- Documentation about any capital gains that have been realised.
- Information on other income including investments, savings, pensions, property or benefits you receive.
- Paperwork on anything you can claim for, like self-employed expenses or charitable donations.
If there is any paperwork that you need to submit with the Tax Return, send a photocopy and keep the original document in a safe place for future reference.
Making sure you fill it in correctly
Every Self Assessment pack includes the core SA100 Tax Return form, but as well as this, there is a fair chance that you will need to fill in one or more ‘additional pages’. These will depend on your circumstances - for example, self-employed status, capital gains and rental income all require different extra forms to be completed, so fill in those that apply to you and ignore the rest.
HMRC will usually send you the forms that are relevant to you, but if they don’t send you all the right ones (which may well happen, as they won’t know everything about you) then you can find and print missing forms on the HMRC website, or call the Self Assessment order line on 0845 9000 404. You’ll also receive a rather lengthy ‘advice booklet’ which outlines who should be filling in what, and there is a guide to filling in your tax return on the HMRC website as well, which goes through the questions step-by-step.
If any of your personal details have changed, or if you find that you or the Tax Office have made a mistake, then you must let HMRC know soon as possible. You can be penalised if your Tax Return is incorrect through fraud or negligence – for example if you provide incorrect figures on purpose - and you could end up with a criminal conviction if you try to ‘cheat’ the tax system. All in all it’s best to get it right first time if you possibly can!
Even with all of the guides and online help, filling in a Self Assessment Tax Return can be incredibly daunting, as sometimes even the questions don’t make sense if you’re not a tax expert. This is why most self employed people usually look to an accountant for help. And of course, at Easy Accountancy we’re no exception! For just £250 we can complete your tax return for you, or for only £60 plus VAT a month we can provide valuable ongoing year-long support, plus of course completing and submitting your Self Assessment Tax Return when the time comes. This ongoing service is also invaluable for giving you information and advice on a monthly basis – all of which makes the process of completing your Tax Return at the end of the year that much easier. For more information on our simple, clear and easy to understand fixed fee service click the link.
When is the Tax Return deadline?
As we have already mentioned, you will receive your forms just after the end of the tax year on 5th April. If you choose to post your completed forms, then the deadline is October 31st of that year - but if you are completing your Tax Return online, then you have until January 31st of the following year. If you get your paper returns to HMRC by 31st October, then they will calculate your tax for you, but if it’s after that date, then you will have to do it yourself, or ask your accountant to help. If you return your tax form after 31st October, but before 30th December, then HMRC will still work out what you owe, but cannot guarantee to tell you before the 31st January payment deadline, so this is best avoided!
If you send in a paper tax return, it must reach HMRC by midnight on 31st October. The only exceptions to this are a) if you receive the notice to file your tax return after 31st July - in which case you'll have three months from the date you receive the notice if you want to send in a paper return - and b) if you're completing a paper return because there's no software available to file your tax return online or you've been told by HMRC that you're not allowed to file online. In these cases you'll have until 31st January to send in your return
If you send your tax return online, it must reach HMRC by midnight on 31st January. The only exception to this is if you received the notice to file your tax return after 31st October. You'll then have three months from the date you receive the notice to send your return online.
Leaving your tax return until the last minute not only causes more headaches and stress as the deadline approaches, but it also leaves you in a situation where there will also be no time to correct mistakes, or to ask for help if you have any problems. Which is why, at Easy Accountancy, we’ll always encourage you to complete your Tax Return as soon after April 5th as possible. If you miss the final deadline then you could face a £100 fine, and if you don’t pay your tax bill by the correct date, you could face paying further penalties and even interest charges.
Posting your tax return
If you are sending your Tax Return by post, make sure you double-check that you’ve signed and dated everything, and that you have included all of the additional pages you need to. This is essential, whether you have completed the forms or whether an accountant has done so on your behalf. It’s still ultimately your responsibility to make sure you have sent in everything that you need to send.
And finally, remember to take a photocopy of the whole thing in case it gets lost in the post. You accountant should do this as standard, but if you’ve completed it yourself then this is vital. HMRC won’t acknowledge that they have received your forms, but they will let you know when everything has been processed.
Submitting your tax return online
In 2009 over 5.8 million people filed their Tax Returns online, and this was a record total with a 50% increase on 2008. There are many benefits to doing it like this, and accountants will also usually do it this way also if you provide the information on time. In summary, these benefits include:
- No hassle with paperwork.
- No danger of it getting ‘lost in the post’.
- You get an extra three months to complete the Tax Return.
- You receive an immediate acknowledgement, so you know it’s arrived safely.
- You can save the form as you go along, so you don’t have to complete it all in one sitting.
- HMRC software can automatically calculate your tax for you.
- If you are owed any money by HMRC, you’re more likely to get it sooner because your form should be processed more quickly!
To file your return in this way, you’ll need to register online and request an ‘activation PIN’ from the HMRC website. To do this, you’ll need your Unique Taxpayer Reference (UTR), which you’ll find on form SA100 of your tax return, as well as your National Insurance Number or postcode. It can take up to a week to receive your account password and become fully registered, so don’t wait until the last minute! Once you have completed your form, just make sure you print a copy off or save one on your computer, so you can still refer back to it if necessary.
When do I have to pay?
Self employed people pay their tax in three stages, and at first this can seem very confusing. Again, we recommend you ask an accountant to explain it all to you in detail, but as an overview it looks something like this:
- A first ‘payment on account’ must be made by 31 January during the current tax year, and this is normally half your previous year's tax bill.
- A second ‘payment on account’, which is the same amount as the first instalment, has to be made by 31 July after the end of the tax year.
- A final ‘balancing payment’ is due by the 31st January of the following year and this is the bill which is calculated on the actual income returned for the tax year, less the payments you have made on account. In some instances this may mean you actually receive a refund instead of having to make a payment – or that this ‘refund’ reduces the following year’s payment on account, which is due at the same time.
You'll usually receive a ‘Self Assessment Statement’ that shows the amount due. If you don't receive this before the payment is due, you'll need to work out the tax due yourself or ask your accountant to help you work out what the payment figure should be.
As a general rule of thumb, anyone setting up as a self employed person for the first time should expect to reserve around 30% of their total income to set aside for tax and national insurance payments. If you do this you should always have enough money available to pay those bills. Failing to reserve funds for tax bills could leave you in a situation where you do not have enough money to pay HMRC and this could result in the end of your business!
Penalties if you miss the tax return deadline
If HMRC receives your tax return after the filing deadline, you'll be charged an automatic £100 penalty. However, you won't have to pay this penalty if you have what is considered to be a ‘reasonable excuse’ for missing the deadline. There are no fixed rules on this, but usually any delay must be due to an exceptional or major unexpected event that's completely outside your control.
Some examples of what HMRC may consider as a ‘reasonable excuse’ include:
- Documents being lost through theft, fire or flood leaving you unable to replace them in time.
- Life-threatening illness, for example a heart attack or an extended hospital stay which prevents you dealing with your tax affairs on time.
- The death of a partner shortly before the filing date – where possible, you may need to demonstrate that you had taken steps to prepare the return on time before this happened.
- Long term industrial action by Royal Mail.
- Problems with the online filing service, where no alternative option was available – for this, you'll need to provide copies of any error messages you received, so take ‘screen grabs’ using Ctrl/Print Screen wherever possible
If you have a reasonable excuse then you can ask for the penalty to be reconsidered, and HMRC will look at the information you provide, and any other evidence that’s available, in detail. But don’t wait until you receive the penalty notice, instead make any claim as soon as you possibly can.
To make a claim, write to your local Tax Office and give the following details:
- Your name and Unique Taxpayer Reference - you'll find this on documents such as your tax return or Self Assessment Statement.
- The date you sent your return.
- The reason why the return was late.
Of course, you can also ask your accountant to assist with this, should such a situation arise which is outside of their control.
If you don’t file your return on time, then HMRC may decide to estimate the tax due and request a payment. This is called 'a determination', and you can only change the amount estimated by sending in your completed tax return. Also, because your payment will be late, you will be asked to pay interest on the estimated tax due as well.
HMRC will charge interest from the date the tax was due until your payment is received. Also, if you haven't paid your balancing payment (due on 31st January) by 28th February, then you may be charged a 5% surcharge on top of the amount you still owe. This is in addition to any interest you've been asked to pay. If you still haven't paid all of the tax due on 31st January by 31st July, then you may be charged a second 5% surcharge on top of the amount you still owe.
So in summary, completing, sending and paying your taxes on time is quite important, the forms are quite long and the 'helpful' (we use this term very loosely) advisory notes are three times as big as the forms themselves. You can complete all of it yourself or you can ask an accountant to do it for you (of course we would be delighted to help).
Hopefully the above information has helped give some clarity on some of the most common questions asked about self assessment tax returns. For more information or a general chat about your business plans please call us on 0500 234111 / 01442 275767.
You may also find the following pages useful: