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.
