The Christmas holidays are fast approaching, which means that for many small business owners it’s time to start thinking about their self-assessment tax return in preparation for the January rush.
Here Emily Coltman FCA, chief accountant to FreeAgent – provider of award-winning cloud accounting software for freelancers, micro-businesses and their accountants – offers her top tips to help make your first year of self-assessment as painless as possible.
More than ten million people in the UK are required to file a self-assessment tax return – including the country’s five million or so freelancers and micro-business owners – and they have until the end of January to do so, or risk being fined by HMRC.
If you’re one of the many self-employed people who started a business in the past tax year (from 6 April 2015 to 5 April 2016) and are facing your first year of self-assessment, you may be a little daunted by the process and worried that you might make mistakes with your tax return.
Don’t forget to register with HMRC
Before you can start your self-assessment, you have to make sure that HMRC is actually expecting a tax return from you – which means you have to register your business with HMRC first.
Remember that HMRC has to send you an activation code by post and if you don’t have this code, you can’t file your return. Therefore, it’s a good idea to register as soon as possible so that you’re guaranteed of getting your code well before the submission deadline.
Decide what your year-end date will be
All business owners have to prepare their accounts to a particular date every year, which is called your “year end date” or “accounting year end date”.
The simplest year end date to have in the UK is one that matches the tax year, which runs to 5 April each year. By concession, HMRC treats accounts that end on 31 March as matching the tax year.
You can choose whatever year end date you like, but be cautious when doing this. Having a year-end date that doesn’t match the tax year could potentially result in you paying tax twice on the same profits in the early years of your business (though in later years it means you may pay tax later than otherwise).
Remember that in your first year of business, you would have to report on your tax return your profit figure for when you started your business to 5 April 2016 – even if 5 April 2016 was not your year end.
If you want to keep things simple, it’s a good idea to stick to the tax year end – it’s much easier.
Don’t miss anything out in your accounts
When drawing up your first year of accounts you need to take into account all the transactions your business has had in that year. So if you started your business on 5 May 2015 and you choose the tax year end for your business’s accounting year end, you will need to include in your accounts all the transactions that happened between 5 May 2015 and 5 April 2016.
Remember to include all of the following information in your accounts:
- All business costs, including those you paid for yourself rather than from the business’s bank account. Remember this can include any costs that you incurred before your business actually started to trade – provided you spent the money no more than seven years before the start of your business and the cost could have been included if you had incurred it after the start of your business.
- Unless you are using the cash basis of accounting, you will need to include income that you invoiced – or which you’d done the work for – before 5 April 2016, but which your customers didn’t pay you for until after that date.
- Any large pieces of equipment (referred to as “capital assets”) that you bought for your business. These don’t go in as day-to-day running costs but you may be able to claim capital allowances on them.
Don’t forget other sources of income
If you have income from other sources as well as your business – for example if you have a job as well as being self-employed, if you earn interest on a bank account or if you rent out a property – then you will need to include these on your tax return too.
Collect all of the paperwork for this income, such as your forms P60 and P11D from your employer, or bank interest certificates. Remember, you need the paperwork that relates to the tax year 2015/16 – i.e. the tax year which ended on 5 April 2016.
Remember to file on time
Your tax return will need to be filed online to HMRC by 31 January 2017. If you file after that date – even by so much as a day – then you’ll be fined £100, and the fines increase if your return is more than three months late.
These fines apply even if you don’t have any extra tax to pay or if you have paid all your tax.
You can file your tax return via HMRC’s online portal, but you may also be able to file directly to HMRC through external software. For example, FreeAgent gives sole traders and limited company directors the option to submit their self-assessment tax return directly from their accounting data.
Look for help if you’re unsure about your numbers
If you’re not 100 per cent confident about your tax calculations or how you’ve been managing your financial data through the year, it’s a good idea to enlist the help of a professional accountant to help you through the process by preparing or checking your tax return for you.
However, be warned that December and January tend to be the busiest months of the year for accountants and some of them may charge an extra premium to new clients who join them during this season.
Emily Coltman FCA is chief accountant to FreeAgent.
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