Record keeping is key
The amount of tax you owe will be based on your business’s profits, which is your earnings minus your company’s outgoings, although you will have to be absolutely clear about what constitutes a business expense. You will not be able to claim that your high end stereo system is a legitimate cost of running your business unless it genuinely is, so don’t be tempted to sneak it through.
In order to keep track of your financial information, you really need to start as you mean to go on by keeping detailed records right from your first day of trading. If you’re self employed, this isn’t just a good idea but also a legal requirement, so definitely an important consideration. There is no need to spend lots of money on accounting software, unless you feel the complexity of your business warrants it, but you should keep track of every time you are paid by a customer and any expenses that you incur on behalf of the business. Even a simple spreadsheet where you enter these details will do (we have some easy to use bookkeeping software free of charge which is already being used by thousands of businesses who appreciate the fact that it’s one less expense and doesn’t involve annoying sales messages or anything), and it makes it easy to keep track of everything.
You should also keep a copy of each invoice (free invoice template) you send as well as all your receipts for both payments coming in and those going out. Filing these by customer, by month or whatever system works for you will mean that it’s easy to lay your hands on them when you need to.
Everyone is legally required to keep the records relating to your income, and of any capital gains, for a minimum of 22 months after the end of the tax year to which they relate. However if you are a self employed sole trader, then you will need to keep all your business records for at least 5 years and ten months after the end of each tax year.
Your personal paperwork is important
You may be operating as a business, and your income will be based on the business’s profits, but your Self Assessment tax return will technically be a personal one. This means that you will also need to include any other relevant information about your income, so if you have PAYE earnings in the same year as you started your business then you will need to provide details of this. You should have everything you need from your P45 and P11D which your previous employer would have given you when you left.
If you have a part time job which gives you an income, a property which you rent out or even interest on savings, you will need to declare all these. This will also include any income that you made from your business before it was registered, perhaps for work undertaken on a casual basis in the run up to making the break and going solo.
There are over 9 million people completing Self Assessment tax returns every year, so you aren’t on your own, although HMRC (Her Majesty’s Revenue and Customs) say that around 10% of these people miss the deadline. Make sure you don’t fall into this group as it can be a costly error with fines and penalties applicable from the first day after your return is due.
Making sure your bookkeeping is up to date is the best way to avoid any worry over your tax return as you will have everything to hand and be able to complete it in plenty of time. There are no benefits to leaving it to the last minute as you will still owe the same amount of tax, so don’t put it off.
HMRC issues Self Assessment tax returns after the tax year ends on April 5th, and these over the previous 12 months. If you have registered as self employed, which you should have done, then you will receive one automatically. If you do not receive one for some reason then this does not mean that you are exempt from paying tax or that failure to complete your tax return will go unnoticed. Ask HMRC to send you one before they will catch up with you, as they inevitably will.
Information you will need
The HMRC website has lists of all the documentation you will need to accurately complete your tax return, but here’s a quick guide:
- If you were employed during the relevant tax period you will need your P60 plus details of any taxable expenses or other benefits you may have received from them
- Statements from your bank or building society
- Stubs from your cheque book and paying in book
- Accounts from your self employed business, including details of your customer transactions for the previous 12 months
- Any vouchers for dividends you might have
- Documentation pertaining to any capital gains that may have been realised during the relevant period
- Details of any other income that you receive, including pensions, properties, savings and any benefits you may receive
- Information about anything else which you might want to claim for including donations to charities or any self employed expenses incurred
If you find that you need to submit any paperwork with your tax return then it is always best to send a photocopy and keep the original somewhere safe in case you need it in the future.
Check your form
Your Self Assessment pack should include all the basic forms you need to fill out, but, depending on your circumstances, you may need to complete one or more ‘additional pages’. These will vary depending on your status, whether or not you have any other sources of income, so you will need to check which ones apply to your circumstances.
If HMRC have omitted to send you any of the forms you think you might need, then you can find printable versions of any missing ones on their website, or you can call the Self Assessment order line on 0845 9000 404. There is also a very comprehensive book of advice which includes information on the forms you need to fill in and a step by step guide to the online form on the HMRC website to help you to complete it correctly.
If the tax office hold incorrect information on you or have made a mistake, then you will need to contact them as soon as you can. It’s not just fraud that they are on the lookout for – although of course that comes with its own penalties – but negligence is also frowned upon so don’t get caught out trying to fudge your figures for any reason. Getting it right is the only way to be sure you won’t come under scrutiny.
Even though there are plenty of guides on how to complete your tax return, some of the language used is a complex and can be confusing for someone who has never done it before. This is why many self employed people choose to use an accountant to help ensure that they have experts on their side.
Don’t miss the deadlines
Although you should receive your forms after the tax year ends on the 5th of April, the deadline for posting your forms back isn’t until the 31st October. However, if you choose to complete your forms on the website then you will have until the 31stJanuary of the following year to submit them. Those who submit paper returns to HMRC by the 31st October will have their tax calculated for them, but if you don’t get them in by that date then you will need to do it for yourself unless you have an accountant to help. For those who submit their forms between the 31st October and 30th of December then HMRC will calculate your tax for you, but they may not be able to provide you with a figure before the payment deadline of the 31st January which can make things difficult.
For paper tax returns, the deadline is midnight on the 31st October. There are only a couple of exceptions, including those who receive their tax return after the 31st July, who will then have three months from the date of receipt to return them. You will also be exempt from the deadline if you are unable to submit your form online, either due to a lack of appropriate software or because HMRC will not allow you, in which case you will have until the 31st January to submit your paper form.
For those completing their tax return online, the deadline is the 31st January. The only exception to this rule is if you received the notice to file after the 31st October in which case you will have three months from the date of receipt to submit your forms.
There is no reason to leave your tax return to the last minute and doing do could cause you unnecessary stress. If you leave it too late, then you won’t have time to correct any mistakes and you could find yourself short of help and support if everyone is panicking about the deadline. At Easy Accountancy we try to avoid these problems by encouraging our clients to complete their tax returns as early as possible. Failure to submit your tax return on time can attract a £100 fine and if you don’t pay your tax bill then you will be slapped with fines and penalty charges which can soon mount up.
Submit by Post
If you have chosen to send your tax return by post, then you will need to ensure that you have completed the form fully before you send it off, including signing and dating everywhere necessary. Even if your accountant has prepared the forms for you, it will still need your signature as it is your ultimate responsibility to ensure that the information you provide is complete and correct.
It is also best to take a photocopy of the form before you send it off, just in case of unforeseen circumstances. You accountant will probably do this for you, but if you don’t have one then it is best to do it yourself as you will not receive any acknowledgement that it has been received, although they will contact you once it has been processed.
Complete your tax return online
5.8 million people submitted their tax returns online in 2009, which was an all-time high and an increase of 50% on the previous year. This can be an ideal way of getting everything done and most accountants will aim to submit tax returns online if they have all the information ready in time. Some of the major benefits are:
- No paperwork to worry about
- You don’t have to rely on the post to ensure it is submitted
- You have three months more to submit your details
- There is instant acknowledgement that your details have been received
- Your form can be saved as you go to store the information you have added
- The software that HMRC use will calculate your tax for you
- If you are due a payment from HMRC, it is likely to be issued more quickly as your tax return will be processed faster
In order to be eligible to submit your tax return online, you will need to have registered on the HMRC website in advance and requested an activation PIN. You will need to have your postcode, your National Insurance number and your Unique Taxpayer Reference which can be found on your SA100 form from your tax return. You will need to do this in good time as you will need your account password to complete the registration process and it can take up to a week to arrive. You can print or save your completed form for future reference.
When you are self employed, you pay your tax in three instalments, which may seem confusing and could be another area where you will benefit from having an accountant who can help explain things. Generally these are the deadlines which apply:
- Your first payment is ‘on account’ and will usually be half of your previous years’ tax bill which should be paid by the 31st January
- Your second payment is also on account and will usually be for the same amount as your first payment, to be made by the 31st July after the end of the relevant tax year
- A balancing payment may be required which will be due by the 31st January of the year following the tax year in question. This will reflect the actual income returned for the tax year with the payments you have already made on account deducted. This may even mean that you are due a refund, which can either be paid to you direct or used against the next year’s payment on account which will be due on the same date.
You will normally receive a Self Assessment statement which will give you details of the amount due, but if you don’t receive this before your payment deadline you will need to either work out the amount owed yourself or ask your accountant for their input.
An easy guideline to follow when you are setting up as self employed is to set aside 30% of your total income to cover your National Insurance and tax payments. This should ensure that you always have enough to cover your bills which will prevent you from missing payment deadlines. Failure to pay could result in your business having to close.
Penalties for missing deadlines
For tax returns which are submitted after the filing deadline there is an automatic £100 penalty applied by HMRC. The only way to avoid this penalty is if you have a ‘reasonable’ excuse and although there are no hard and fast rules about what is included, leniency is usually only granted in cases where there are exceptional and unforeseeable circumstances which have prevented filing.
HMRC limits their definition of ‘reasonable excuses’ to events such as:
- Documents being irretrievable through fire, flood or theft which you are unable to replace before the deadline
- An illness or health crisis such as a heart attack which requires a stay in hospital and prevents you from completing your tax return on time
- If you suffer the death of a partner in the run up to the filing deadline then you may need to demonstrate that you were in the process of completing your tax return before loss occurred
- Industrial action by Royal Mail may be counted if it is long term
- If you have experienced problems with the online service which has prevented you from filing because no other options were suitable. You will need to have evidence that the system was at fault, so taking screen shots using Ctrl and Print Screen wherever you can, will help your case.
If you have got an excuse which is considered a reasonable reason for failing to file on time, then you can appeal to HMRC and ask them to reconsider applying the penalty. They will look at the evidence you have to support your case and make a judgement accordingly. If you know that you are likely to have incurred a penalty then send your claim details as soon as possible rather than waiting for the official notice of your penalty to come through.
In order to make a claim, you will need to send the following details to your local tax office:
- Your full name
- Your Unique Taxpayer Reference number, which will be on your tax return or Self Assessment Statement
- The date on which your return was sent
- The reason that your return was late
Your accountant may be able to assist with this if the situation has been one which is outside their control.
If you do not complete your tax return on time then you may find that HMRC estimate your balance based on the information they do have and request a payment accordingly. This figure is called a ‘determination’ and can only be adjusted if you send in your completed tax return. However, because your payment will be late, the estimated amount of tax due will accrue interest as well.
HMRC will charge interest from the date your tax is due until they receive your payment. In addition, if you haven’t paid the balancing payment due on the 31st of January by the 28th February then you could also end up with a surcharge of 5% on top the interest payments. If you have an outstanding balance by the 31st of July deadline then you may incur another 5% surcharge which will be added to the amount still owed.
To summarise, the process of completing your tax return and paying your tax bill should always be done on time. The process can be quite long and involved and often the ‘help’ provided by HMRC can compound your confusion, so allowing enough time for everything to be done is vital. You can either complete the process by yourself or ask an accountant to do it for you such as the experts at Easy Accounting who are always keen to help.
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