Ken Voller Tax Business Salt Mill Barn Old Salisbury Lane Romsey SO51 0GD
Registered with the Association of Taxation Technicians as a member in practice
Self Employed? What do you do now?
TAX BUSINESS Š Copyright Tax Business 2009
1
SELF EMPLOYED
TAX BUSINESS
CONTENTS Page 1 Things to do at the outset
3
2 Record Keeping
7
3 Allowable expenses and Capital Allowances
8
4 Income Tax
10
5 National Insurance Contributions - NIC
13
6 Other Important Issues for the Self Employed
15
APPENDICES 1
Record Keeping
16
2
Employer registration
17
3
Profits Taxable
19
4
Typical Tax Calculation
20
TAX BUSINESS
2
SELF EMPLOYED
TAX BUSINESS
SELF EMPLOYED
1
Things to do at the outset
• Inform H M Revenue and Customs (formerly the Inland Revenue)
• Open a business bank account
• Obtain accounts books etc for record keeping
• Register for VAT (if necessary)
• Apply for PAYE registration if taking on employees
• Engage a business and tax advisor
For some of the items above, the order is determined for you. For example, you will not be able to register for VAT until you have a business bank account. In some respects, the final item (engage an advisor) should come first.
TAX BUSINESS
3
TAX BUSINESS
SELF EMPLOYED
• INFORM H M REVENUE AND CUSTOMS (HMRC) This can be done in two ways:• By Post - Complete registration form CWF1 (attached to the end of HMRC leaflet SE1 – Are You Thinking of Working for Yourself?) and submit it to National Insurance Contributions Office (SelfEmployment Services) in Newcastle upon Tyne. You could also take the completed form to a local Tax Enquiry Centre. • By phone – Call the Self-Employed registration Helpline on 08459 15 45 15. It may be useful to consider the information requested on form CWF1 before calling the helpline. If you delay telling the Revenue about your business for three months or more, you may have to pay a penalty of £100. The leaflet SE1 also includes an application form for paying Class 2 NIC. An annual Self-Assessment Tax Return form will be issued on 6 April each year, asking for declarations of income and expenditure for the year ending 5 April. For example, if a business starts on 1 December 2007, the first year of assessment is for 2007/08 (to 5 April 2008) and will include trading results for the period from 1 December 2007 up to 5 April 2008. Electronic Tax Returns are required to be completed and submitted before 31 January (paper Returns before 30 October) following the year of assessment or, if you would like HMRC to calculate your liability, the Return should be with them before 30 October following the year of assessment. HMRC will review the Return and monitor tax payments, ensuring they are paid on time by having the authority to charge interest, penalties and surcharges. There is some further advice for self-employed people on the Revenue website at http://www.hmrc.gov.uk/startingup
• OPEN A BUSINESS BANK ACCOUNT Operating a business through a separate bank account (or accounts) makes it easier to identify income and expenses related to the business. There is nothing to stop you making transfers of income to a personal account to meet personal expenditure; this is known as “drawings”.
TAX BUSINESS
4
TAX BUSINESS
SELF EMPLOYED
You may wish to transfer a similar amount each month by standing order and make, when required, additional transfers. • OBTAIN ACCOUNTS BOOKS FOR RECORD KEEPING Accounts books can be obtained from any stationery shop and are specially designed to keep the necessary records. You will also need a ring binder for filing invoices/receipts etc. One section should be for expenses and one section for income. (See
Appendix 1 for example) Electronic accounts books (Eg, Sage, TASbooks, etc) can be a good alternative to paper versions. However, commitment of time at the outset is important to ensure that the cost of these is a worthwhile expense.
• REGISTER FOR VAT You will need to register for VAT if your turnover exceeds £67,000 (from 1 April 2008).
• APPLY FOR PAYE REGISTRATION IF TAKING ON EMPLOYEES If you take on employees you, as their employer, are responsible for accounting for the employees' tax and national insurance contributions if they are paid by you. Liabilities generally arise on payments of more than £105 per week (2008/09 rate) but can be on smaller amounts. Registration can be done by either telephoning the New Employers Helpline on 0845 60 70 143 or by e-mail – see types of employer at http://www.hmrc.gov.uk/employers/new-emp-email.htm . A PAYE starter pack can also be obtained from the Revenue, which also provides courses on Payroll, Statutory Sick Pay etc. In either case, you will need to have specific information available when you call or write (See appendix 2)
TAX BUSINESS
5
TAX BUSINESS
SELF EMPLOYED
• ENGAGE A BUSINESS AND TAX ADVISOR An advisor will:• will, if required, draw up a business plan to assist with bank borrowings. • provide administrative assistance and commercial advice to help with the proper running of your business. • complete your Tax Return and prepare your accounts based on the information supplied. • advise on tax planning and the ways of minimising your tax liability.
As you are trying to establish a career for yourself, engaging an advisor will obviously relieve pressures. If you do not know of anybody who may be suitable (personal recommendations are normally best) check in a telephone book, or on the internet (Eg, Yell.com) for local advisors or accountants in your area. It is worth considering two or three different advisors and taking your time in choosing. Most advisors will be prepared to spend some time with you before engagement; usually up to an hour for no charge. This is to enable both you and the prospective advisor to understand what is going to be needed and also to see whether you will be able to work together. Ask for a fixed price for the first year’s service.
TAX BUSINESS
6
TAX BUSINESS 2
SELF EMPLOYED
Record keeping Expenses – Cheque Payments Record Write payments in book in number order - this will ensure that no payments are omitted and all expenses are therefore claimed. Make sure each payment is analysed. Write the cheque number on invoice with red pen to show that it has been paid and file invoices in cheque number order in a binder. Income - Cash Received Record i)
Write receipts into book in date order.
ii)
Lodge all receipts relating to money received directly into your BUSINESS BANK ACCOUNT. Avoid lodging receipts into your personal account. Also avoid, wherever possible, using cash received to pay expenses without passing the money through the business bank account; however, if this is not possible, ensure that the transaction is recorded correctly at the time.
iii)
Keep all receipts relating to money received in a file in date order. You should have documentary evidence for all cash received.
See example at Appendix 1 for layout for records keeping. Keep all receipts, invoices, bank statements, and cheque stubs, as these will be required for the completion of your accounts. Under the Revenue Self Assessment rules, you are required to keep your records for a minimum period of 5 years from 31 January following the year of assessment. REMEMBER: good record keeping can save time and money.
TAX BUSINESS
7
SELF EMPLOYED
TAX BUSINESS 3
Allowable Expenses and Capital Allowances 1.
Motor - there are two methods of claiming for motoring expenses:A.
Actual motoring costs, i.e. tax, insurance, petrol, AA/RAC, repairs, servicing, HP interest, all can be claimed as a business percentage over total mileage. e.g.
B.
Car Tax Insurance Repairs HP Interest
160 500 550 250 1,460 x 2,000 (business miles) 12,000 (total miles) = £243
Mileage Allowance – based on the business mileage travelled in the accounting period. This method is currently only available to individuals in business with a turnover below the VAT Registration threshold. It replaces the requirement to retain receipts etc in respect of the vehicle(s) used for business purposes. It also means that no Capital Allowances (see 9 below) are claimable in respect of that vehicle. The allowances payable are: •
40p per mile for each business mile up to 10,000 business miles in the year, plus,
•
25p per mile for each additional business mile in the same year.
2.
Other travel, i.e. bus, taxi, train, plane.
3.
Subscriptions i.e. in relation to the trade/profession.
4.
Telephone i.e. business proportion only.
5.
Materials.
6.
Stationery/Postage.
7.
Update Courses.
8.
Room at home as an office i.e. heat, light etc divided by number of rooms in your house.
TAX BUSINESS
8
SELF EMPLOYED
TAX BUSINESS 9.
Capital Allowances e.g. car, business equipment. Capital Allowances recognise that equipment used in a business will, commonly, depreciate in value over time; depreciation itself is not an allowable expense. You can claim capital allowances at a rate of 20% on the cost of equipment and cars used in the business. Businesses purchasing new equipment to a maximum value of £50,000 after 6 April 2008 may qualify for an “Annual Investment Allowance” of 100%. Example of Capital Allowances claim
Costs WDA @ 20% AIA @ 100% WDA c/fwd
Car
Equipment
(Does not qualify for AIA)
(Qualifies for AIA)
£ 8,500 1,700 6,800
10.
Insurance.
11.
Accountancy.
12.
Pensions.
13.
Uniforms.
14.
Bank Interest on business borrowings.
15.
Books/Journals.
16.
Wife's wages/adult child's wages.
TAX BUSINESS
£ 1,000 1,000 0
9
SELF EMPLOYED
TAX BUSINESS 4
Self-Employed Income Tax A tax year runs from 6 April one year to 5 April next year. The choice of accounting date is entirely up to you. However, a period of accounts ending to coincide with the tax year end would prove to be the simplest. Nonetheless it should be noted that a 30 April year end will give the greatest gap between profits earned and the first payment date. Once you choose your year end, you should try and stick to it. Try and minimise the first year’s profits as these profits may be taxed more than once. See 4. below.
Submission of Tax Return and Accounts There are two important dates as follows:
30 October after the tax year
Paper Returns or if you would like the Inland Revenue to calculate the tax; OR
31 January following the tax year
Electronic Returns (that will automatically calculate your own liability)
To avoid penalties the tax return must be with the Inland Revenue by 31 January following the tax year, otherwise there will be a penalty of up to £100. There will be a further £100 due if the return is still outstanding 6 months later. Additional penalties can be imposed of up to £60 per day, if delays continue.
TAX BUSINESS
10
SELF EMPLOYED
TAX BUSINESS
Payment Dates for Income Tax 31 January 2009: (i) (ii)
Balancing Payment for 2007/08 1st Payment on Account for 2008/09
(50% of 2007/08 tax)
31 July 2009: (i)
2nd Payment on Account for 2008/09
(50% of 2007/08 tax)
31 January 2010: (i)
Balancing Payment for 2008/09
(ii)
1st Payment on Account for 2009/10
(Actual 2008/09 less already paid) (50% of 2008/09 tax)
If you pay too little tax when making payments on account or balancing payments, interest will be charged. In addition, surcharges are due if the tax is still outstanding after the final payment date of 31 January. The surcharges are: 5% on the balancing payment unpaid at 28 February 5% on balancing payment unpaid by 31 July (i.e. 6 months late)
When are Profits Taxed? Broadly speaking, your tax assessment will be based on the profits of your business for your accounting year that ends in the same tax year. For example, if your year end is 30 September, the 2008/2009 assessment will be based on the accounts to 30 September 2008. Special rules apply on commencement and cessation. The 1st year of assessment is from commencement to the following 5 April, no matter what you choose for your accounting year end. The 2nd year depends on the choice of accounting date. See Examples 2 & 3, Appendix 3. But in most cases, the second year will be the 1st twelve months profits.
TAX BUSINESS
11
TAX BUSINESS
SELF EMPLOYED
Profits Taxed Twice In Example 2 of Appendix 3, you will note profits are taxed twice (i.e. the period from 1 October 2007 to 5 April 2008 = £10,000). To compensate for this, the profits assessed twice, which is known as “overlap relief”, is given as a deduction from the profit assessed for the tax year in which your business ends. See Example 3, Appendix 3.
How Is My Tax Calculated? The profits to be assessed are reduced by personal allowances and pension contributions (if any). A typical assessment is demonstrated in Appendix 4.
TAX BUSINESS
12
TAX BUSINESS 5.
SELF EMPLOYED
NIC for the Self Employed Two classes of NIC are payable by the self employed. These must be paid unless an exemption applies:
Class 2 This is a flat rate of £2.30 per week (2008/09) payable by either of the following methods: (a) (b)
Monthly by Direct Debit (Complete form CF351) Quarterly on receipt of a demand from the DHSS issued automatically by computer every 13 weeks.
Class 4 This is profit related and is paid along with income tax i.e. with the 31 January and 31 July payments of tax. Class 4 is payable on profits between £5,435 - £40,040 (2008/09) at a rate of 8%, plus 1% on all profits over £40,040. No benefits are derived from the payment of Class 4. It may be regarded simply as an additional tax.
Other Issues of NIC for the Self Employed Class 2 You can apply for exemption from Class 2 on the grounds of low earnings. The threshold for low earnings for 2008/09 is £4,825. If your earnings in the preceding year were less than the specified amount for that year and there has been no material change in the circumstances, exemption may be granted for the current year. Class 4 Class 4 NIC is computed on the net profit which is after capital allowances, losses brought forward, plus any balancing charge.
TAX BUSINESS
13
SELF EMPLOYED
TAX BUSINESS
Employed v Self Employed (2008/09) £ Employed Earnings Class 1 NIC Due (upper limit) Less lower limit
40,040 5,435 34,605
Class 1 (45,000 – 40,040)
Self Employed Earnings Class 2 Class 4 (40,040 – 5,435) Class 4 (45,000 – 40,040)
£ 45,000
x 11% x 1%
£
3,806.55 49.60 3,856.15*
45,000 52 x £2.30 x 8% x 1%
119.60 2,768.40 49.60 2,937.60
* Plus Employer’s NIC (45,000 – 5,435) x 12.8% = £ 5,064.32
TAX BUSINESS
14
TAX BUSINESS 6.
SELF EMPLOYED
Other important issues for the Self Employed Permanent Health Insurance In the event that you may be unable to work because of an illness or accident, it would be advisable to have Permanent Health Insurance Cover. This would provide a source of income during the period of incapacity to work. You should seek expert financial advice on this matter, as there are various schemes on the market.
Pensions The Class 2 NIC which you pay counts towards the provisions of a basic retirement pension, payable on attaining pensionable age (from 60 for women and 65 for men). In view of the pension being relatively low it is advisable to start, as early as possible, a personal pension scheme. You will not belong to an employer’s occupational pension scheme, therefore it is important to make your own provisions for retirement years.
Personal Pensions What is best for you depends on your circumstances and the number of years you intend to work before retiring. Like any purchase, it is best to “shop around”. A pension is a long term investment, and expert financial advice should be sought. An independent advisor will offer pensions from a range of companies. You will get tax relief on any payments you make up to a set limit. The limits are calculated as a percentage of your net relevant earnings, and depend on your age. Pension contribution rules changed with effect from 6 April 2006 and advice concerning these changes should be sought from an Independent Financial Advisor.
TAX BUSINESS
15
SELF EMPLOYED
TAX BUSINESS ACCOUNTS RECORDS EXAMPLE LAYOUT
APPENDIX 1 ANALYSIS OF CHEQUE PAYMENTS
Date
Cheque No
01/01/08 18/01/08 21/01/08 25/01/08 25/01/08 26/01/08 29/01/08 29/01/08
1 2 3 4 5 6 7 8
January
Payee
Cost of Sale
£
Maxol Stationery Advertising Materials Telephone Insurance Bank Fees Accountancy
30.52 10.65 200.00 500.00 37.50 150.00 57.29 225.00
Total
985.96
Motor Expenses
Finance Charges
General Admin
Travel & Sub.
Other Direct Costs
Legal & Prof.
Repairs
30.52 10.65 200 500 37.50 150 57.29 225 700
30.52
48.15
150
225
CASH RECEIVED BOOK EXAMPLE BOOK
Date
Received From
10/02/08
ABC & Co
14/02/08
Joe Bloggs
23/02/08
XYZ & Co
February
TAX BUSINESS © Copyright Tax Business 2009
Interest
Lodged Amount
Fee Income
235.50
235.50
General Receipts
65.00
65.00
150.00
150.00
450.50
385.50
65.00
16
Additional Comments
57.29
SELF EMPLOYED
TAX BUSINESS APPENDIX 2 Obtaining a PAYE Scheme Information you will need to provide You must have the following information ready:
1. General Information o
Business Name
o
Trading Address
o
Name and address of employer
o
National Insurance number and Unique Taxpayer Reference of employer
o
Contact telephone number
o
Contact email address if registering using email
o
Nature of business
2. About your employees o
The date you took on (or will be taking on) your first employee(s)
o
How many employees you will have
o
The date you intend to pay them for the first time
o
How often you intend to pay them
3. About your payroll o
The address from which your payroll is run
o
The name, address and telephone number of anybody who looks after your payroll
TAX BUSINESS
17
TAX BUSINESS
SELF EMPLOYED
4. Simplified Deduction Schemes only o
Name, address including postcode of each employee
o
Date of birth and National Insurance number of each employee
o
Nature of employment for each employee
5. Partnerships only o
Names and addresses of any business partners
o
National Insurance number and Unique Taxpayer Reference of any business partners
o
If you are a Limited Liability Partnership (LLP) you must provide your LLP number.
6. Limited companies only o
The company’s Registered Office, Company Registration Number and the date of incorporation.
o
The names, addresses, private telephone numbers, National Insurance number and Unique Taxpayer Reference of the company directors.
TAX BUSINESS
18
SELF EMPLOYED
TAX BUSINESS APPENDIX 3
Example 1 – Commencement – Accounting Year Ended 5 April Mr Gum commenced business on 1 October 2006 and chose to prepare accounts for the 6 months to 5 April 2007 and annually thereafter. His profits were as follows: Period ended 5 April 2007 Year ended 5 April 2008 Year 1 2006/07 Year 2 2007/08
£15,000 £25,000 £15,000 £25,000
(1/10/06 to 5/4/07) (12 months to 5/4/08)
Example 2 – Commencement – Accounting Year Ended other than 5 April Mr Tooth commenced trading on 1 October 2006 and decided to prepare accounts for the first 12 months to 30 September 2007 and annually thereafter. His profits were as follows: 12 months to 30 September 2007 12 months to 30 September 2008
£20,000 £30,000
Year 1 2006/07
1/10/06 to 5/4/07
£10,000
Year 2 2007/08
1/10/06 to 30/9/07 (i.e. first 12 months)
£20,000
Accounts to 30/9/08
£30,000
Year 3 2008/09
Example 3 – Cessation Following on from example 2 the doubly assessed (“overlap”) profit of £10,000 would be relieved as follows: Assume Mr Tooth ceases on 30 September 2011 and the profit per the accounts for the 12 months ended 30 September 2011 were £45,000: Final Year Less overlap relief Profit assessable
TAX BUSINESS
2011/12
£45,000 £10,000 £35,000
19
SELF EMPLOYED
TAX BUSINESS APPENDIX 4
2008/09 ASSESSMENT
£
£
Profits per accounts 31/12/08 22,000 Less personal allowances (5,435) Net assessable 16,565 16,565 @ 20%
3,313.00
Tax
3,313.00
Class 4 NIC*
1,325.20 4,638.20
*Class 4 NIC 22,000 (5,435) 16,565 @ 8% = 1325.20
TAX BUSINESS
20
TAX BUSINESS
SELF EMPLOYED
Ken Voller Tax Business Salt Mill Barn Old Salisbury Lane ROMSEY Hampshire SO51 0GD
Please note that this leaflet is written as a general guide and is not a substitute for professional advice. You are recommended to obtain specific professional advice before you take or refrain from taking any action. Whilst every care and attention has been taken to ensure the accuracy of the contents of this bulletin, the information is intended for general guidance only and reflects the current law and practice. Ken Voller cannot be held responsible for any loss or additional liabilities arising due to the taking or not taking action based on this leaflet.
Ken Voller is registered with the Association of Taxation Technicians as a member in practice Š Copyright Tax Business 2008
TAX BUSINESS
21