All about keeping track of your growing finances.
Tax For The Self-Employed
Keeping RecordsSurely nothing could be worse than arriving home after a hard day’s work and then having to plough through lots of paperwork, especially work involving figures?
Keeping a close eye on expenditure is only possible if you maintain a regular record.
If you’re still not convinced here are some powerful reasons for making sure that you keep accurate records of your business income and expenditure:
- You are legally required to keep a record of all your business income and expenditure.
- You must be able to substantiate your accounts, or in your case, your annual tax return. This means not only must you record all your business income and expenditure, but also keep receipts. Without accurate, up-to-date records you cannot really be sure how well your business is doing, or accurately determine what you need to do to improve your performance.
Legal Trading Identity
In Chapter 2 we looked at the various legal entities that you could use for your business:
- sole trader
- partnership
- limited company.
Whatever trading entity you choose will be determined by a number of factors such as if you’re planning to work alone or with another person.
Most businesses will be operated as either a sole trader or partnership. In my opinion there is no benefit in forming a limited company from which to operate, however this will depend on your own personal circumstances and aspirations.
If you are planning to form a limited company for your business you will no longer be operating as a self-employed person but as an employee of the company that you formed. Directors of limited companies are still PAYE workers. In addition your company will be liable to pay corporation tax and you will have to have a number of additional legal obligations in relation to the preparation and auditing of your year-end accounts.
Sole Trader/Partnerships
These are by far the most appropriate trading entities for this type of business. For the purpose of calculating tax, you are classified as self-employed.
Your legal responsibilities as a self-employed person:
- You must register as self-employed within three months of starting your business.
- You must pay Class 2 National Insurance contributions. These are normally paid monthly by direct debit. These contributions count towards incapacity benefit, state retirement pension and bereavement benefit.
- By registering as a self-employed person you are responsible for paying your own tax. Every April your tax office will send you a self-assessment tax return, which you must complete and return. You have the option of either calculating your own tax, or if you wish filling out the form and requesting your tax office to calculate your tax for you. If you wish to do the latter, you must have your return to your tax office no later than 30 September.
- You must keep a record of all your business expenditure and business income, and keep these records for at least five years from the latest date for sending back your tax return.
When registering as a self-employed person you will need to:
Value Added Tax
What Is Vat?VAT is a tax levied on most goods and services that you buy. Certain goods are VAT exempt, for example education and training. There are three rates of VAT:
- 17.5%, which is the standard rate. As the name implies this is the most common rate
- 5% – reduced rate
- 0% – zero rate.
How Does Vat Affect Your Business?
When you purchase goods and services for your business, the price you pay will normally include an element of VAT, usually 17.5%.
Example:
But, and there is a but:
If you are VAT registered you can normally reclaim the VAT on business purchases that you have made. These can include goods and services. However, you must also charge VAT on your goods and services.
This means that you will have to charge VAT on your services. This is called output tax.
The VAT that you pay on goods and services that you pay is known as input tax.
Initially it may appear to be an attractive prospect to be able to claim back the VAT on all you buy. However, every sale that you make in your business is now subject to VAT, which may mean that you lose your competitive advantage.