As the January deadline looms, this guide sets out the basics for getting your tax affairs in order and filling in your self-assessment tax return. The tax penalties have been increased this year, so filing your tax return promptly and getting it right first time is more important than ever. After all, in these difficult times, everyone should be aiming to avoid wasting their hard-earned cash on hefty penalties.
Selecting the right form
If you believe you need to complete a tax return, you must inform HM Revenue & Customs (HMRC). There are a variety of forms to use; selecting the right one will depend on your reasons for needing a return:
• If you’re newly self-employed, use form CWF1
• If you’re becoming a partner in a partnership, use form SA401
• For any other reason, such as you have become a director, you’re likely to need form SA1
Please note that if you’re going self-employed or becoming a partner, you may also need to begin paying Class 2 National Insurance contributions (currently £2.50 a week). Use form CA5601 if you think this applies to you.
Also, if the partnership is newly formed, it will need to be separately registered with HMRC, using form SA400.
Most HMRC registrations can now be done online on their website www.hmrc.gov.uk.
The information required in these forms is fairly straightforward, such as full name, date of birth and address. You will also need your National Insurance number.
If you’re registering as self-employed or as a partner, you will also need to provide details about the business, such as when it started, its address, what industry the business operates in, etc.
If you’re completing the registration process using paper forms, the address that you need to send them to once complete can be found on the form. You should always keep a copy of the form and note the date that you sent it.
HMRC will send you a confirmation of registration and provide you with your unique taxpayer's reference, or UTR. This is a unique reference for your tax affairs. You should quote this on any payments you make or any correspondence to HMRC. They will also ask you for this or your National Insurance number if you ever phone them with a query.
A tax return should disclose your taxable income and gains for the relevant tax year. A tax year starts on 6 April and ends on the following 5 April. Also note that all of your taxable income and gains must be declared on a tax return – even if they have been taxed before you received them ( or ‘taxed at source’), such as employment income or bank interest.
If you are self-employed, or a partner in a partnership, and the year end of your business is not the same as the tax year, such as 31 December, there are specific rules about which accounting period for your business goes on which tax return.
HMRC will normally send you your tax return soon after the tax year has started. It is a six-page document and its proper form reference is ‘SA100 – which you will see in the bottom left corner of page one.
Following the end of the tax year, tax returns must be submitted to HMRC. You can submit your return on paper; this must be done by 31 October following the end of the tax year. Alternatively, you may chose to file your return online, in which case the deadline is extended to the 31 January, following the end of the tax year.
Failing to file your return on time will result in an automatic £100 fine, with further penalties depending on the length of delay. This year, the penalty rules have changed. Previously, if the tax you had to pay on 31 January was less than £100, then your penalty would be reduced to whatever was owed. But this has been scrapped and the £100 penalty is now fixed and automatic.
Any tax you owe must be paid by or on the 31 January following the end of the tax year. There are a number of ways you can pay HMRC, such as Direct Debit, Bank Giro, online banking etc.
As mentioned above, income that has already been taxed must still be declared on your tax return. However, the tax already paid at source will be deducted before arriving at the final tax bill.
Be aware that if your tax liability is over £1,000 or not much of your tax is collected at source, you may be required to make an instalment for next year’s tax as well on 31 January. Again, delaying paying HMRC could cost you interest and late payment penalties.
The seven golden rules to completing a tax return:
If filing a paper return:
1. Only use black ink
2. Only write in capital letters
3. If you make a mistake, put one line through the error and write the correct information just below the relevant box. You do not need to use correction fluid
For paper or online returns:
4. Always round income down to the nearest pound
5. Always round expenses up to the nearest pound
6. Always round tax paid to the nearest pound
7. If a box does not apply to you, leave it empty. You do not need to strike it through.
HMRC dictates a long and comprehensive list of documents a VAT-registered business should keep, which is very comprehensive and it makes good sense for all businesses to follow the list. Clearly, it lists all invoices raised and received, any documents relating to trading overseas, such as certificates or paperwork regarding the transportation/ despatch of goods, self billing invoices etc. Businesses should also keep all their bank, credit card, loan statements, etc. Any paperwork regarding new finance, such as a hire purchase or loan agreement, should also be kept.
There are varying lengths that a business should keep its documents for, for different areas of tax. However, six years is the longest of them all, so it would be best practice to stick to this time frame.
Traders often find that they do not destroy any of their records, and over time, they can occupy quite a large amount of storage space. Therefore, it might be a good idea to write on the box or bag of records the date the records can be destroyed. This way, you can easily identify which records can be disposed of if you start to run out of space.
You may also find it useful to use folders to keep documents in, splitting them into categories such as sales, purchases, bank etc and then sorting them chronologically or alphabetically. When you’re deciding on your filing system, bear in mind the question, “could someone else find something if I wasn’t around?” This should help you think about how easy to understand and user-friendly your system is.
Perhaps unfortunately, HMRC is not very prescriptive about the format of records a business should keep. They are indifferent as to whether a trader should use a manual cashbook or sophisticated bookkeeping programme.
When deciding whether to use a cashbook, spreadsheets or a bookkeeping programme, consider these questions:
• Am I inexperienced with using computer programmes? Will I need training and ongoing support? Will it be expensive?
• Do I need detailed reports? And do I want to be able to tailor these reports?
• Will the business be making a high volume of transactions?
• Do I want to be able to know the bank and cash position of this business at any given point?
• Do I want to know how profitable the business is at any given point?
• Do I need departmental accounts, to show the reports split into different projects/ locations etc?
• Is the business likely to trade outside of the UK?
• Do I want to be able to know the balance on my customers/ suppliers accounts at any given point?
When starting out, you may want to begin with simple spreadsheets or a cashbook and very quickly you should be able to identify what format your business needs its records in. The above list is not exhaustive, but if you’ve answered “yes” to any of them, you probably ought to consider a bookkeeping programme.
If you have other sources of income, these are the sort of items you need to keep:
• Bank interest certificates
• Dividend vouchers
• Portfolio statements
• P45s/ P60s from pension providers or employers
• P9Ds/ P11Ds from employers
• Notifications regarding any state aid such as the State Pension or Job Seeker’s Allowance
• Paperwork regarding pension schemes being paid into
• Receipts for donations made under the Gift Aid scheme
• Paperwork for any assets you have sold, such as shares, land etc.
• Income and expense receipts for any land or property you received income from- in the UK or overseas
Again, this list is not exhaustive, but hopefully it gives you a good idea of the type of paperwork it is necessary for you to keep and which will be required for the completion of your tax return.
It is simply not possible to cover all of the expenses a business can claim, but below is a selection of expenses that are either not maximised by traders or can be tricky to deal with:
Use of home
If you work from home, you will be able to put through a portion of the running costs of your home. It could include household bills such as gas, electricity, telephone, broadband, rent, council tax, mortgage interest, insurance, etc.
Effective structuring of the ownership of vehicles can lead to significant tax savings. Furthermore, you should consider the type of vehicles you’re buying- vans, double-cab pick-ups, gas-guzzlers etc- because they have different tax treatments for capital allowances and benefit in kind purposes.
There are a variety of ways that motor expenses and the VAT on them can be recovered. Furthermore, what records you need to keep will be dictated by what expenses you’re reclaiming.
There are harsh rules about what training costs can be offset for tax purposes if they are for the proprietor (sole trade or partnership).
If you transfer a personal, pre-owned asset to the business, you may be able to obtain tax relief for it.
Family wages has long been an area of abuse by traders, so the rules regarding wages paid to family members have tightened. You may still pay family members wages, but they must actually be doing some work for the business and their wages be physically paid - ie HMRC will want to see a bank payment or receipt of cash paid to them. Furthermore, you should still consider national minimum wage rules, young workers regulations, and tax and national insurance implications etc.
Business entertainment and gifts
It must firstly be stressed, that there is a raft of rules regarding entertainment and gifts. But generally speaking, if you are entertaining anyone other than staff, then the VAT can probably not be recovered and neither is the expense allowable for tax purposes.
Starting out in business and completing your first tax return can be pretty daunting. As you can see, from registration with HMRC through to completing your tax return can be a lengthy and complex area.
A tax advisor or accountant could deal with all of this process for you, and although you do not need to be either of these to deal with your own affairs, there can be real benefits in using a professional.
Firstly, a professional should ensure that you comply with legislation and HMRC guidance. Cutting corners can save you money in the short-term, but if you were to be subject to an HMRC inquiry in the future, any errors discovered may cost you in underpaid tax, interest and penalties.
Furthermore, a good advisor should be able to save you tax. They should review your affairs, and identify areas in which changes can be made in order for your affairs to become more tax efficient, such as the type of entity the business is operating through or the ownership of the vehicles.
They should also ensure than everything is submitted and paid on time, so that your hard-earned cash is not wasted on interest and penalties.
Ultimately, they should identify your needs in order to advise you and take the headache away from you, so that you can carry on doing what you do best and running your business.
Jo Nockels is training and communications manager at TaxAssist Accountants, the UK’s largest network providing tax and accountancy advice and services specifically for small businesses, including help with completing a tax return.
This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers' circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
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