The FreeAgent Blog

Today is February 2nd but that probably has little significance to most people in the UK - aside from a chance to relax after the stress of filing your self assessment tax return to HMRC by the January 31st deadline.

But across the Atlantic, today’s date represents a long-standing, annual tradition that supposedly predicts when the year’s Springtime weather will arrive: the Groundhog Day holiday.

The legend goes like this: if the skies are cloudy on February 2nd then a groundhog will leave its burrow and herald the start of the Springtime. But if the sun is shining, the creature will see its shadow and retreat back to its burrow, signalling six more weeks of winter.

Of course, many people will also associate the Groundhog Day holiday with the famous Bill Murray film about a man stuck in a time loop, where he has to live the same day - and make the same mistakes - over and over again.

For small businesses and freelancers, staying on top of their accounts can represent a similar scenario. It’s sometimes unclear how long the bad weather will last before things start to get easier - and you’re scared of making the same mistakes over and over again.

So here are a few tips to help make your accounting a little easier over the next year, and ensure you avoid a Groundhog Day scenario for your business.

Keep your books in good order

It’s easy for small business owners to quickly fall behind on their accounts. They have a hundred other things to consider in order to keep their business moving forward, and often these take priority over what appears to be the boring task of bookkeeping.

But you shouldn’t just wait until you have a tax or VAT return due before considering how much money you owe. Some forward thinking at the start of the year will help you stay on top of your finances, ensure you know how much your business is making, and may even make your bookkeeping a manageable - if not enjoyable - experience.

Make sure you’re keeping proper records and know exactly what you can claim in expenses. Have a robust, simple system like FreeAgent in place, so you can easily manage all of your payments and keep on top of your earnings, invoicing and tax throughout the year.

Remember by keeping your books accurate and up to date, you’re not just keeping the tax man and your accountant happy - you’re ensuring that you always know how your business is performing. You’ll have a constant overview of your cashflow, profitability, expenses and tax, so that you’re in full control of your business every step of the way.

Be prepared for your taxes (and avoid penalties)

You may have heard of HM Revenue’s “Time to Pay” scheme, which can give you more time to pay your tax - but anecdotal evidence suggests that this isn’t always very helpful.

Instead, try to put money aside each month to pay your taxes on time. You can even use a different bank account to keep this money safe if that would help you remember not to spend it.

If you file your returns and pay your taxes on time, this will not only avoid interest and penalties from HM Revenue, but will improve your relationship with them. It’s always best to work with HM Revenue rather than against them when you can.

And it’s better to prepare for your tax return rather than running around frantically at the last minute trying to complete it before the deadline.

Get an expert opinion

It’s easy to think you can do everything yourself, but there could well be times when you’re tearing your hair out trying to stay on top of your company finances. Whether it’s calculating your VAT, claiming the right expenses, preparing your tax return or simply maintaining your records, you may find you need some guidance from an expert, rather than trying to muddle through on your own

Don’t be afraid to call in the help of an accountant to advise you about your bookkeeping and make sure you’re on the right track. Getting help at an early stage could help you avoid making the same mistakes time and time again.

Happy Groundhog Day!

HMRC have announced that, because of a planned strike by call centre workers, they won’t fine anyone who files their self assessment tax return online on 1st or 2nd February.

Normally they would fine anyone who files after the 31st January deadline.

They have also announced that they won’t charge interest to anyone who pays their tax by 2nd February.

But what they haven’t said is that this represents a change in the actual deadline itself - and their own website still gives the deadline for tax returns as 31st January.

Why does that matter if I won’t be fined for filing late?

HMRC normally have a year from the date that your tax return was filed to open any enquiry they may wish to make into your return.

But if your return is filed late - and filing on 1st or 2nd February still counts as filing late, because HMRC haven’t changed the official deadline, they’ve only said they will not impose fines and interest - then HMRC have longer to open an enquiry.

So if you file on 1st or 2nd February, HMRC could potentially open an enquiry into your return any time until 30th April 2013.

For that reason, and for your own peace of mind, we would still recommend filing your return online by 31st January.

Use FreeAgent to help you add up your figures for your self-employment.

Are you, like an estimated two million people across the UK, still preparing your tax return to file by the 31st January 2012 deadline? 

HMRC has announced, due to pre-planned strike action, that a two day extension has been granted for late return submissions - meaning that anyone who submits their return and pays their tax up to 2nd February will not receive an automatic fine. But despite this respite, it’s still important to get your tax return submitted as soon as possible.

If you’re a business owner or freelancer who carries out work from your own home, you are entitled to include part of the running costs of your home in your accounts, which will save you some tax.

So if you’re still unsure about what you can and can’t claim for your home expenses, here are some tips to consider when completing your tax return:

Apportioning the costs

How much of the running costs of your home you can claim, depends on the type of business you have and what you actually do at home.

For example, if you’re a jobbing gardener you might spend an hour or two a week writing up your books at home, but spend the rest of your working life at your customers’ premises.

But if you’re a web designer, you may well do 90% of your work at home and only occasionally visit clients.

HMRC say that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost - the part that relates to your actually living there - and the business element.

One method that’s often used is to work out how many rooms you have in your home, and how many of those rooms you use for business - and how much you actually use that room for business.

It’s not a good idea to use any part of your home solely for business activities all the time and never use it for any private activities, because capital gains tax will then be due on the part you use just for business if and when you sell your home.

For example, my own office at home is also my music room, and I could easily prove that to a visiting HM Revenue inspector because there’s a piano in there.

But the room must be used for business only for part of the time.

There are 10 rooms in my home. I only use one for business, and 90% of the use of that room is for business. So I would add up all the costs I can claim, and multiply that by 1/10 and then by 90%, to get my accounts figure for business use of home.

But what running costs of the home can I actually include in my accounts?

Costs you can claim

Here are some of the costs you might incur to run a home, which you may then be able to claim part of in your business accounts:

Rent

You can’t charge your business rent when you’re self-employed, because legally you are the business. But if you are renting your home from a landlord, then you can claim a proportion of the rent for your business.

Mortgage

If you’re buying your home through a mortgage, you can claim a proportion of the interest only, not the capital repayment.

Council tax

You can claim a proportion of your council tax cost.

However, depending on how much you use your home for business, you might have to pay business rates rather than council tax.

Repairs to the property

If the repair relates solely to the part of the property that’s used for business, you would include this cost in your accounts in full, subject to the business use of that room.

So for example, if the ceiling in my office-cum-music-room was repaired and that cost £200, I wouldn’t need to divide that by 10 because the repair was only for that room – I would just multiply by 90%, and include £180 in my accounts.

If the repair is to the whole house, for example a repair to the roof, you can include that in the same proportion as you would the rent or council tax – so in my case, the repair cost x 1/10 x 90%.

But if the repair is just for a part of the house that’s not used for business, such as replastering of a bedroom, then you couldn’t claim any part of that repair in your business accounts. 

Telephone and broadband

Remember that what you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.

You can claim the full cost of all your business use of the line, and a percentage of the line rental, based on how much you use the line for business purposes and how much is for personal use.

Water

If your home water supply is used a lot for business, for example if you run a car valeting service, then you would need to apply to the water company for this to be separately charged, and you could claim the full cost. 

But if your business use of water is only minor, you can’t claim any of the cost for your business.

Claiming costs of working at home is not as simple as it initially sounds. If you’re in any doubt as to what you can claim, you should seek further advice from an accountant.

Are you self-employed and preparing your tax return? Do you keep accounts to 5th April each year, to coincide with the end of the tax year?

Are you unsure about what figure should you be putting in the box for “business income” in the self-employment pages of your tax return, which must be filed by 31st January? (This is box 8 of the short self-employed pages, and box 14 of the full self-employed pages.)

If so, here are some useful tips to help you make sure you include the right amount of income on your tax return:

1) Check the dates

Most self-employed businesses prepare accounts each year to match the date of the tax year.

That means that, for this tax year, you need to include all your business’s income that was earned between 6th April 2010 and 5th April 2011. 

2) Earned income, not received

You must include income in the tax year it was earned – not when your customers paid you.

So, if you issued an invoice for work done in March 2011 and your customer paid you on 30th April 2011, that invoice has to be included in your income for the tax year to 5th April 2011 – because that was the tax year in which you did the work.

3) Earned income, not invoiced

This one’s a bit harder.

If you’re selling services rather than goods, you need to work out your income on the basis of when you did the work.

So, if you completed a piece of work in March 2011 but you didn’t invoice your customer for it until 30th April 2011, you have to include that income in the tax year to 5th April 2011 - because the work was done before the end of the tax year.

If you had partly finished a project before the tax year ended but there was still some work to do in April, then you need to include the income that would have been due on the work completed before 5th April.

This is a bit complicated so if you are in any doubt, you should seek further advice from an accountant.

4) Business income only

When you’re filling in the self-employed pages of your tax return, make sure you only include trading income from your business.

That means you should leave out income from the following sources:

• Employment (from any job you have in addition to running your business. Remember your own business does not count as employment)
• Rent of a personal property
• Transfers into the business bank account from a personal account
• Bank interest (even if it’s earned on a business account)
• Money that you put into the business
• Inheritance

This list is not exhaustive, so do seek advice from an accountant if you are still unsure about what qualifies as business income.

5) Exclude VAT

If your business is registered for VAT, remember that the figure for trading income will be your sales exclusive of VAT.

If your business is on the flat rate scheme, however, then this figure would be your sales net of flat rate VAT.

Even something that sounds as straightforward as “add up all your income for the tax year” has hidden pitfalls. Therefore make use of a tool such as FreeAgent to keep your books and it will add this figure up for you ready to go into your tax return!