The self-assessment tax deadline is looming for the self-employed. Christina Jordan reveals her top tips - and what expenses you can claim for.
The number of people in the UK who are self-employed is increasing. Almost 4 million new workers registered as self-employed every quarter last year as the economic downturn – and the redundancies that followed – inspired many to walk a new career path, set up their own businesses and work for themselves.
The bad news is, the day of reckoning for Britain’s self-employed millions is about to arrive, as it does every year, at the end of this month.
To most people in a full-time job, the tax return deadline is completely meaningless (though higher-rate taxpayers, those with dual incomes and anyone unlucky enough to be asked, do need to fill in a return).
But if you are newly self-employed and a sole trader (like me), it can be a big worry -- especially in these tough economic times.
What you have to do and when
Fill in your tax return online by 31st of January (for the tax year 2009/2010). The paper version deadline was October 2010, so it’s online only now.
In its simplest form your tax return lists all of your income for the period, and all of your allowable business expenses and capital allowances. Deduct the latter from the former and you get your taxable income. The online system automatically tells you exactly what you owe and then you pay it. Easy-peasy.
HM Revenue and Customs (HMRC) try to make it as straightforward as possible, with shorter versions of the form for sole traders and plenty of ‘downloadable PDFs’ to explain the nitty-gritty. But try as they might, tax is taxing, and it is complicated. It involves numbers and percentages and worst of all you need proof of everything.
Record keeping
As long as you keep good records your tax return should be pretty straightforward. Unfortunately this was my first mistake.
I didn’t keep a good record of expenses, and here I have really shot myself in the foot, because now I can’t claim for things I actually spent money on.
If I had been keeping records of my expenses I could have claimed the following.
Business travel - including petrol, train and bus fares and best of all, taxis! You can claim for pretty much all business travel, although not straightforward commuting to a place of work.
Office expenses – if you rent an office or a space somewhere you can claim this cost. So far, so simple.
Find out how to cut your tax bill without the effort of complex tax planning.
But what if you work from home? Well you can claim some of your home running costs as long as you only claim for business usage. As a rule of thumb you will spend a third of your time working in your home if you do an eight hour day. So work out a third of your bills such as electricity and gas.
But then you have to account for the fact that your work space is not your entire home, and you can only claim for the space you use – for example one third. So a third of a third might be the amount you could claim as an expense (or whatever your proportions are). If I spend £90 a month on gas and electric for example, I can claim £10 a month on my expenses.
Phone costs – Again you need to work out what is spent on work and personal use if you don’t have separate lines. Broadband costs can also be claimed.
Other expenses – paper, postage, repairs, uniforms are all tax deductable, provided they are needed for business purposes and you have receipts.
Business Link has more information on valid Business Expenses.
Capital Allowances
There is a difference between your running costs and fixed assets, like computers, a car or a photocopier, which you can claim under capital allowances.
HMRC has a comprehensive section explaining Capital Allowances which I highly recommend you read.
Tips for this year
- If you haven’t started thinking about your tax return, start right now, you only have a few days left to file it online – and pay what you owe.
- If your accounts are at all complicated, you don’t have time to go through them or your affairs are complex, I would suggest you contact an accountant immediately. Charges vary massively and frankly, you are likely to find it hard to find a cheap, good accountant so close to the deadline.
- If you are comfortable doing your return yourself, get cracking, and remember to provide receipts and evidence of all expenses.
- Most importantly if you think you will have problems paying your tax by the end of the month, speak to HMRC. HMRC has in the past been more lenient with those who come to them with payment concerns and agree a schedule for meeting their obligations. But if you don’t tell them there is a problem, you will definitely face fines and interest.
Lessons learnt
Next year I intend to do the following:
- Enter every job into my spreadsheet at the time I send the invoice. Or at least do a weekly sweep.
- Buy everything that could constitute a business expense on plastic and ensure every household bill is in my name. Our free online banking tool comes into its own when trying to work out your expenses – far better that sorting through old electric bills or train tickets, you can see all your different accounts at a glance and categorise your spending accordingly.
- Write the details of taxis journeys on the back of the receipt immediately. This year I have forgotten what many of my taxi receipts are for, as well as having lost several.
- Make sure that as soon as this tax year ends (in April) I tackle my tax return --and do not leave it to the last minute like this year!
Visit HMRC for help and information about your tax return.
Good luck!
More: Get a tax-free savings account | Read The tax refund scam in your inbox | Learn How-to » Cut your tax bill by thousands