Last month, the fountain of knowledge that is our chief accountant Emily Coltman FCA, sat down with Michelle Carvill from MadeSimple to talk accounting for the self-employed.
As part of the MadeSimple StartUp Community’s weekly ‘Tuesday Teach’, Emily put her expertise to good use and answered some of the community’s most frequently asked questions:
"What is Self Assessment and who needs to file it?"
In our accounting glossary, this is how we define it:
“Self Assessment is short for the 'Self Assessment tax return', a form that many business owners need to send to HMRC each year to report how much they have earned and from what sources.”
It is likely that you will need to fill out the Self Assessment tax return if you are:
- the director of a limited company
- receiving income from a property or trust
You have to send this tax return to the government by the end of January, and it will cover all your income information from 6th April one year to 5th April the following year. For example, the upcoming Self Assessment deadline of January 31st 2018 requires information about all your income between 6th April 2016 and 5th April 2017. The government body that monitors the collection of tax returns is HMRC (Her Majesty's Revenue and Customs).
"What happens if you don’t submit your Self Assessment tax return on time?"
If you’re even one day late, you’ll be subject to a £100 fine. After three months the amount you’re charged starts to go up - and you can end up being penalised up to £10 a day. If there are exceptional circumstances, you can sometimes appeal these fines but HMRC is quite strict; in a recent tribunal someone appealed their late payment fine due to having had an operation, and as it was a planned operation HMRC deemed that it was not a reasonable excuse for missing the deadline. So get your affairs in order well in advance, or you could end up paying a lot more than just your tax bill! If you have any concerns about submitting your Self Assessment or paying on time, talk to an accountant.
"What are the biggest mistakes you’ve seen when people file their tax return? Are there common errors?"
There are a few things that people tend to trip over when it comes to Self Assessment:
When filling in your tax return, you have to declare how much interest you’ve accumulated on your bank accounts. If you have a joint account with someone else, make sure you only enter 50% of the accumulated interest on your tax return.
If you have an ISA, you don’t need to record that interest on your tax return as it’s tax free income.
If you’re self-employed, you might prepare your accounts each year to a date that doesn't match the end of the tax year (e.g. January 1st - December 31st). If you do this, be aware that the bank interest that you put on your tax return still needs to be for the tax year , not your business’s accounting year.
You don’t have to worry about year ends with FreeAgent, as the software works out how much interest you’ve accumulated in the tax year, rather than in your accounting year.
Mistakes relating to which expenses you can and can’t claim are quite common. Common mistakes include claiming too much or too little business use of home costs, or trying to claim home to work travel as a business expense. We have a wealth of resources on our website to help freelancers work out their expenses:
"Should I register as a sole trader or a limited company?"
You might have heard that you can save tax by running your business as a limited company instead of a sole trader. This can sometimes be the case, but there are are a few important things to bear in mind before you take the plunge. There are positives and negatives to both options, and it really depends on your own unique situation:
Sole traders are legally one and the same as their business. They only have one form to file to the government each year: a single Self Assessment tax return. Sole traders also have the luxury of being able to withdraw money from their business account as and when they please - as long as they pay their tax, HMRC doesn’t care! Overall, being a sole trader means there are fewer forms to complete, fewer rules to abide by, and it’s a much simpler way of managing your business finances. However, it’s worth bearing in mind that if your business is sued, your personal assets, rather than your business’s assets, will be at risk.
Limited companies are just that: companies. If you choose to operate your business as a limited company, you and it are completely separate legal entities. Limited companies have to file at least four forms each year to HMRC and/or Companies House:
- a set of accounts for the company
- a confirmation statement for the company showing who controls and owns it
- a tax return for the company
- a tax return for the director
Taking money out of your business accounts is not nearly as simple for limited company directors, who can't withdraw money as and when they please. If you want to draw a salary from a limited company you’ll have to set up a payroll system. If the company pays you and/or any employees a monthly wage that will mean 12 extra filings to HMRC - and if the company pays a weekly wage you’ll have to file for each of those!
One of the upsides of operating your business as a limited company, however, is that if your business is sued, you have limited liability protection and your business’s assets - not your own - would be liable.
"What are your top four financial tips for freelancers who are starting out?"
Get yourself a business bank account. Draw a very clear line between your personal and business funds. The sooner you do this the better, so sort yourself out with a business account as early as possible.
Be really organised and have your books in order from the get-go. Keep a record of everything you spend, whether it’s snapping photos of receipts (which HMRC largely accepts) or keeping your paper copies all neatly filed away. Taking some time to set up a filing system now will save you a big headache in the long run.
Remember that if you are running your business through a limited company, you and the company are legally separate. The income belongs to the company, not you. You have to be very careful about getting that income back into your pocket, or you might find yourself liable for tax you haven't bargained for.
Find yourself a good accountant. There is no substitute for an experienced, knowledgeable accountant. Even more important is that they know your industry, and can clearly explain your accounts to you. At the end of the day, it’s your business and you’re responsible for it. If you’re not getting the most out of your current accountant - check out our directory to find one that’s a good fit for you.
Watch the full recording of Emily’s interview over on the MadeSimple startup community.