When you start working for yourself, you’ll soon find your thoughts turning to how to manage your bookkeeping, accounting and tax. With this in mind, I’ve put together a quick start guide to help get you started.
This guide is aimed at people operating as “sole traders”, which means you’ve not registered your business with Companies House. This is how 3.5m of the UK’s 5m small businesses operate.
As a sole trader, you need to tell HMRC that you’re in business so that they can send you what you need to complete your annual self-assessment tax return when the time comes.When you start your business, you need to register by 5th October following the end of the tax year. You can find out how on the Gov website here.
You’ll need to keep accurate records for your business. This is where Coconut comes in - it keeps your business income and expenses separate from your personal ones by being a separate account, dedicated to your business. You still use your personal account for your personal spending.If you get things set up right when you start, it’ll pay off when it comes to doing your tax return. Coconut gives you somewhere to record all your expenses.
‘Claiming expenses’ means that you can deduct what you’ve spent on running your business from your income to reduce your tax bill. We estimate that 40% of self-employed people under claim on expenses, and are therefore possibly paying too much tax.By following these simple rules though, claiming costs can be straightforward.
Costs which are incurred ‘wholly and exclusively’ for business will be ‘allowable’ for tax, meaning you can claim them.‘Wholly and exclusively’ is a tax expression that refers to costs which are incurred when going about your business. Costs such as advertising, stationery, postage and software fall into this category, and are, therefore; ‘allowable’ costs.
As ever with tax, there are a number of - what I call - ‘funniosity’ rules. For example, you can’t claim for entertaining clients or customers.
Use of your home as your office also has some different rules that require the use of a particular calculation. In this case, your claim will relate directly to the allocated space in your house which you use for business.You’ll also need to be careful with claiming for travel and subsistence costs such as meals, as there are special rules here too.
Try to make sure that you keep all of your receipts too. If you’re a Coconut account holder then you can use the receipt capture functionality to photograph the receipt and attach it to the corresponding expense, completely removing the hassle of having to store paper receipts.
From time-to-time, you may invest in things like a laptop, printer or other items of equipment which help you to operate your business. Sole traders may be allowed to simply claim the cost of larger purchases, or “capital purchases” in full in the year of purchase if they use something call “cash basis” accounting (see below).Alternatively, if you can also claim the full cost of capital purchases using the "Annual Investment Allowance" which states that any capital costs up to £1,000,000 can be claimed against tax (in the year that the cost was incurred). Now, for a quick work of word of caution - have you recently bought a vehicle? Vehicles are treated differently to general items of equipment. Ask your accountant for guidance on how best to file this particular expense.
HMRC introduced the Trading Allowance in April 2017. This is an attempt to make things really simple if you don’t have many expenses.If you’re a sole trader, you can use £1k in the expenses box instead of the exact figure.We recommend keeping track of your expenses regardless, but if the figure works out less than £1k, then you can use this instead to increase your tax savings. Rules do apply and it's worth reading up on this here.
As a sole trader, you can use the “cash basis” to figure out the income and expense figures you include on your tax return. This is instead of the “accruals basis” which is used by larger sole trader business and limited companies.Simply put...
For your Self-Employed Self-Assessment, you can opt to use the cash basis to make life easier for yourself - only paying tax on any income actually received. However, there are instances where you cannot use cash accounting such as if you have stock for resale, have losses, or want to claim back interest or bank charges of more than £500. More details on cash accounting can be found here.
VAT registration is compulsory if your income is above the VAT threshold which is currently set at £85,000 (at the time of writing).If this is you, then you can read more about how it works and how to register on the Gov website here.
At the end of the year, you’ll be required to do a tax return by 31 January following the tax year ending on the 5 April prior. So for the 2017/18 tax year, your tax return is due by 31 January 2019.You can file this online yourself using HMRC online, you can use tax software, or you can use an accountant.
We’ve found, in our surveys, that about 25% of sole traders use accountants to help with their tax return. This can cost anywhere from about £60 to £300 or more, depending on the complexity of your business and other forms of income. Accountants will help to ensure that you don’t overpay on your tax bill, use all the tax allowances available to you, and ultimately; get things right, giving you peace of mind. And remember when you’re deciding whether to use one that their fee is also tax deductible.
Get organised early, and keep things simple. If you have any questions at all, or need assistance with your tax return, don’t hesitate to get in touch with the team at Coconut.
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As part of HMRC’s Making Tax Digital, sole traders will soon be required to complete 4 tax submissions per year instead of 1.
Take a look at the latest sole trader tax rates for the 2021/22 as well as our advice on how to prepare for the new tax year.