The bane of many self-employed businesses is the Self-Assessment tax return. Whilst it can be a bit of a beast, at its heart, it is a simple calculation to identify what your have made from your business, so HMRC know how much tax to charge you.
Profit - Expenses = Taxable Profit
Taxable Profit x Tax Rate = Income Tax Payable
The sums above are a very simplistic way of looking at things and don't take account of any reliefs or schemes you may be entitled to claim but give you a sense of what's going on. I will come back to the various schemes and reliefs in a different post.
On a basic level, the idea is that the more expenses you can offset against your profit, the less you will be taxed. You must only, however, claim for expenses reasonably incurred in the running of your business.
Determining whether something is a genuine business expense is a bit of a grey area, and HMRC are cagey about being specific, so there is an element of judgement involved in what you put through.
Rather than keep track of everything you spend, there is an option to claim some simplified expenses through the self-assessment process. There are set rates for the use of:
Vehicles: 45p per mile up to 10,000 miles then 25p per mile.
Working from home: Based on the hours you work, from £10 - £26 per month.
Living at your business premises: For example, if you run a B&B. Based on the number of people living at the premise, from £350 - £650 per month.
Claiming other expenses
If you do not wish to use the flat rates, or have other items you wish to claim - such as accountancy fees, uniform, software licenses or advertising- these must be based on actual transactions, supported by receipts. The dreaded shoe-box full of paperwork!
Receipts can be stored electronically, and accounting software will now often provide a mechanism for doing this. Xero, for example, allows you to photograph and upload receipts directly to the system which is useful if, like me, your receipts tend to accumulate in pockets and at the bottom of your handbag.
Filling in the form
Generally speaking, anyone earning below the VAT threshold of £85,000 can use the short form Self-Assessment which you access via HMRC online services.
Boxes 1-7 are fairly self-explanatory but Box 8 states:
"If you used the cash basis, money actually received and paid out, to calculate your income and expenses, put X in the box".
If you don't have an accountant, an easy way to check whether you are using the cash basis is to think about whether your figures are based on the bank balance as it is NOW, or the bank balance that you would have if all of your outstanding invoices and bills had cleared.
So: If I have completed £3,000 worth of work during the tax of which I have physically received £2,500:
- For the cash basis I recognise £2,500, and;
- On an accruals basis I would recognise the full £3,000.
This also applies to expenditure. So if I owe someone money at the end of the year, I don't include the expenditure on the cash basis. If I am using the accruals basis, this expenditure is included if it relates to the period I am reporting on. Accruals basis accounting is all about tying income and expenditure to specific periods of time. Its one of these accounting concepts that can be a bit finicky for a small business and often its easier to just use the cash basis.
Boxes 11 - 20 on the return detail your business expenses. These are split into categories in line with HMRC's guidance. It is a good idea to categorise your expenditure to mirror these boxes as you go through the year. Then all you need to do is total up your spreadsheet and pop the numbers in! I will post an example spreadsheet here imminently if you want to see how I suggest setting it up. If you use an accounting system, the categories will already be built in.
Some tips for deciding what to claim:
Think about what you are buying the item for. What use will it get? By whom? Is it wholly related to your business?
If it is related to your business but you also get personal use out of it, you can apportion the cost between business and personal. The business portion is an allowable expense.
For example, if you have a printer that is used for both personal and business printing, you can allocate a proportion of the costs associated with this printer against your business. So, if I've spent £200 on paper and ink for the printer over the tax year and I estimate that 60% of its use is business use, I can include 60% of the £200 in my allowable expenses: a £120 deduction from my profits. So long as your basis is reasonable, and you can justify it to HMRC, this is perfectly acceptable.
Professional subscriptions and training that directly benefit the business are allowable expenses - as an accountant I have to pay subscriptions to ICAEW and undertake regular training to ensure my knowledge is up to scratch. This can all be offset against the money I earn from providing advice and support with that knowledge.
Think about what you would say to HMRC if they asked you what a purchase was for.
If you can - in good conscience - clearly explain how the expenditure was related to the running of your business, it is likely (though not guaranteed) to be accepted. Make sure you would be comfortable with HMRC knowing what you've spent the money on and why this is essential to your business.
Be careful about claiming things twice
Don't - for example - claim the flat rate car allowance, and also deduct petrol expenses for the same vehicle. The flat rate rolls up petrol, depreciation and maintenance so this will be double counting if you claim both. If you have a vehicle that genuinely costs you 45p a mile in fuel I suggest you trade it in!
Having a separate bank account is helpful
Though its a bit of a faff having different accounts, logins and cards, it is a good idea to separate your business and personal banking. It is too easy to lose track of what was for what if its all in one place. Separating it out also means there are less transactions to trawl through at the end of the year which makes it easier to fix any problems with your accounts or tax returns.
If you use the accruals basis and have bought something fairly expensive which you will use for a number of years for your business - e.g. a vehicle, computer or machine, you can claim capital allowances. These reduce your tax liability by a proportion of the cost of the item. The rate you are allowed to claim depends on the particular item and can be quite complicated to work out, for example, the CO2 rating of a vehicle is crucial here! If you claim capital allowances for an item, you must not report it as an allowable expense. Get in touch or ask your accountant if you think this might apply to you but you aren't sure what to do.
There's a lot of nuances around this topic, and I'll follow up with some information about limited company expenses and specific tax reliefs, as well as some tools for helping you keep track of your expenses. If you have any questions or need some help getting your return in for 31 January, do give me a call!