Tax returns: Calculating your business income

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!