Taxing Times 4
 

Tax is, well, taxing!  As it's a very specialised field, a year ago I brought in some help.  Tax Accountant Tony Tesciuba (who also happens to be my Uncle) offered to answer personal and small business tax queries.  

This has been hugely popular, so much so, that this is now the fourth instalment of the Tax Tony saga - just in time for the 30 September deadline (after that point the Inland Revenue no longer guarantees to do the self-assessment tax calculations for you).  The process itself is simple, MoneySavers are invited to ask their question in the Chat Forum (see original link) and then they're collated and answered here in one big article.

Oh and I nearly forgot, it's important to remember the answers below are Tony's not mine, and in return for his hard work I agreed to tell people about his website www.tesciuba.com.

Here again folks and pleased to be so.  Answering these questions impresses on me each time just how complicated our tax system is so that ordinary people have little chance of following it without professional help.  That cannot be right and increased complexity will be Gordon Brown's unfortunate legacy.

There is an accelerating trend for returns and forms to be filed online, for tax and VAT.  Yes, there have been teething troubles, but overall, greater automation has improved the system and reduced processing errors and delays.  On-line VAT registration is a recent innovation and seems to have speeded up the process enormously.  I would strongly encourage all VAT registered traders to file their quarterly returns on-line and pay by direct debit.  You get immediate confirmation of the filing and know that the money will get to the right place.  In return, HMRC allows 7 days extra for the filing and payment.

Quite a few questions are again about making the first contact with HMRC, perhaps a little later than the rules require.  I think, quite deliberately, the Revenue has a policy of encouraging potential recruits to the taxpayers' club and those front line staff that I have dealt with have invariably been courteous and helpful.  Putting off registration only makes things worse.  Possibly much worse if they catch you before you tell them.  The general rule is that the deadline for notifying HMRC of new sources of income if no tax return has been received for the previous year is 5 October.  There is a special rule for notifying commencement to trade as self-employed: you must register within three months of the last day of the month in which self-employment commenced, whenever that was in the year.

I have had to debunk a couple of urban myths this time.  The boom in buy-to-let has made some decent capital profits for those fortunate enough to have got in early.  It is not true that such profits are always subject to CGT.  Property trading, like any other form of trading, is subject to income tax, not CGT.  Once you are talking about income tax, the private residence exemption cannot apply, even if you have lived in the property for a while.  There is a widespread belief that if you run a business from home, you can claim a proportion of the total domestic expenditure as an expense.  That has never been correct and HMRC is clamping down on this.  You can only claim the additional costs that the business causes.  These are likely in most cases to be very small.  Sorry.

The answers to these questions are based on tax law at 20 September 2006.  They are general in nature and are no substitute for taking professional advice specific to your own circumstances.  While the answers are given in good faith, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the author or by MoneySavingExpert.com.

Back to the top

 
Full time employment and self employed

MoneySaver's Question:

I am in full time employment earning £22,000 and paying tax and NI through PAYE. I have also over the last year earned around £5,000 in self-employed work (have also been paying the extra NI).  Do I need to include my main income and the tax I have already paid on my tax return?

Does the £4,000-odd tax-free limit apply to the £5,000 I have earned in my self-employed work or would this have been eaten up on my salary for main employment?  Also, I was wondering what expenses I can claim? It is computer-based work that I do from home, so had to buy a laptop which I hoped I would be able to claim back on and also broadband costs?

Tax Tony's Answer:

You put both sources of income on your return.  The personal allowance is set against your total income and will have included in your PAYE code.  So you will in effect pay 22% tax and a bit of National Insurance on your self-employment income.

You can claim capital allowances on your computer and the business proportion of your broadband costs.

Employed or self employed? 

MoneySaver's Question:

I am recently divorced after 37 yrs. During my marriage I only ever did occasional cleaning jobs & was paid cash in hand.  When my husband left I was forced to take on more regular work in order to fend for myself.  I have two part-time jobs.

1) Pays me monthly by Direct Debit. Hours vary but payment stays the same.
2) Pays me weekly by Direct Debit. I work 7hrs per week.

I have never paid tax or National Insurance on either of these.

I also receive a monthly maintenance payment from my ex husband. This is for the next 18 months only.  I am about to add to this by advertising myself as available to visit pets in their own homes when owners are away.

Am I classed as employed or self employed? Will the pet visiting be classed as a business? How do I stand legally on tax & NI?

Tax Tony's Answer:

You probably stand illegally I'm afraid.  Either your part-time employers are failing to operate PAYE (which is not your fault) or you have failed to register as self employed.  The pet visiting sounds like a self-employment.

Small earnings exception

MoneySaver's Question:

I have been a registered childminder for about a year and notified Inland Revenue and NI office at the time. I completed a small earnings exception for my NI and received acknowledgment. I have not received a self-assessment form from the IR though. Am I right in saying that the NI office will have notified the self-assessment people that I don't earn enough to pay tax?

Tax Tony's Answer:

Your registration as self employed was made to HMRC and so is all you need to do.  Just to avoid any problem building up, it probably would be wise to telephone your local tax office and make sure your tax return has not gone to the wrong address.

Implications of ex gratia payment in lieu of redundancy

MoneySaver's Question:

2 weeks before I was due back from maternity leave after my baby died, my employer told me they'd reorganised and my job had gone so offered a new job that they'd created. However it was unsuitable for my circumstances (breaching the Sex Discrimination Act) so they offered me my old job title back but with a different role.

So I mentioned voluntary redundancy... They agreed but then got scared (because of the maternity complication) so suggested I quit and, after I've left, they make me an ex gratia payment by cheque. Annual leave and salary were settled under PAYE as normal.

Also, they told me by email that I wouldn't be liable for tax/NI as I wasn't an employee when the cheque was sent (2 days after the "my last day will be" date in my resignation letter) but... I was still on their payroll to receive my Statutory Maternity Pay and received my P45 weeks after the cheque (when my SMP finished) and it gave my leaving date as after the cheque.

The covering letter said it was "in recognition of the valuable contribution you have made to the development of the business over many years". I know an ex gratia payment is tax/NI free if (1) it's not due under your contract (wasn't), (2) wasn't an accepted custom (wasn't) and (3) not related to your work - so this bit worries me! So do you think...

1. It WAS related to my work?
2. I was still an employee?
3. tax/NI is due on it?
4. The taxman would chase me or my ex-employer?
5. It would be classed as payment in lieu of redundancy/compensation, even though my ex-employers don't say as much (they know I'd have taken them to court for constructive dismissal/SDA otherwise)?

I'm not trying to dodge paying tax/NI but if that's the case, I'd have been better off being made redundant properly!

Tax Tony's Answer:

As you suspect, I also think your former employer has made a mess of this.  They have walked into the most basic trap by writing "in recognition of the valuable contribution you have made to the development of the business over many years".  That makes it pay for work that you did and so taxable.

You have had enough to worry about and need not be concerned about this.  It is your employer's problem, not yours.  They should have deducted basic rate tax, even though the payment was made after you left.  PAYE is their responsibility, not yours, so HMRC will chase them, not you.  You would remain liable for higher rate tax (on the grossed up amount) but I assume that does not apply in your case.

Higher rate tax payer

MoneySaver's Question:

 I am a higher rate tax payer.

1. Do I need to complete a tax return?
2. What happens about the tax on my savings?
3. My wife does not pay tax. What happens about tax on interest earned in our joint account?
4. How does paying tax at the higher rate affect my personal pension payments and should I be doing something about this?

Tax Tony's Answer:

You should inform HMRC that you have savings income due to be taxed at the higher rate and complete a return if they send one to you.  That would be the place to claim the higher rate relief on your pension contributions.

Interest already earned on your joint account is split 50:50 between you and your wife for tax purposes.  Assuming your marriage is strong enough (!) you should transfer all your savings to accounts in your wife's sole name to avoid the higher rate tax.

How can I pay less tax?

MoneySaver's Question:

I am a salesperson, with a basic and bonuses based on how much I sell.  My basic is not very high so I don't pay much tax on it but the commissions are pretty high and I usually get taxed around 40 - 50%

How could I be less taxed on them? Would making a limited company invoicing my employer for my services (commissions) be more profitable for me? While still being an employee of my actual company to get my basic.

Tax Tony's Answer:

Sorry, this is a non-starter.  Your limited company would be caught by IR35, putting you in pretty much the same position as if the commissions had been paid through the payroll, but with much more paperwork.

Higher rate tax band raised

MoneySaver's Question:

I am a higher rate tax payer. Last year I had gift-aided £1,200 to a charity and I wrote to the taxman to get 18% back. They did give out a refund but I think it wasn't calculated correctly. What they did was to simply raise my high rate tax band by £1,200. I think they should have raised it by £1,200 * 100 / 78 = £1,538

Tax Tony's Answer:

I agree with you.  A simple mistake has been made: mixing up gross and net.  Call them and point out the error.

Returning to the UK from working abroad

MoneySaver's Question:

I have just returned to the UK from working abroad for four years, in various countries which have tax agreements with the UK. Now I realise my salary cannot be taxed for what I earned abroad, but what happens when I start my new job in a few days? Will I be hit hard by the tax man? Do I have to pay a year of tax for the seven months I am back in the UK working?

On top of this, I do some freelance work. How do I go about paying tax on this? With my salary from my normal job standing at £32,000, when do I go over the threshold and on what will I have to pay 40%?

Tax Tony's Answer:

The split year treatment will apply so that you will be taxed on your UK earnings only from your return.  You should get a full year's personal allowances, so you will be hit somewhat less hard than the rest of us.

You have to register as self-employed.  Call the Helpline for the Newly Self-Employed on 08459 15 45 15.  For 2006/07, higher rate tax starts once total annual income exceeds £38,335.  40% tax applies to the balance.  Watch you do not pay too much National Insurance.  The helpline will explain what you need to do.

Income tax and tax credits

MoneySaver's Question:

I have entered my details for my full-time job, and the system has calculated I owe HMRC some money. This figure is exactly what my daughter receives for Tax Credits - have I missed a figure out on my form?

Tax Tony's Answer:

One of Gordon's many unnecessary complications of our tax system has been the separate reporting for income tax and tax credits, so that the same information has to be provided twice to the same government department.  Brilliant.  To answer your question:  No.  This is merely coincidence.

Umbrella companies

MoneySaver's Question:

I currently work through an agency but get paid through an umbrella company. As best as I understand it, I'm not PAYE. Although I often earn around £450 - 500 a week before deductions, I get a tax allowance on my mileage to work and back of 40p a mile, which mounts up to £160 a week. By the time I get paid, I can bring home between £350 - 440 a week, although the umbrella company recently completed a form for me which shows my basic wage as being anywhere between £60 and £260 a week depending on how many hours I've done. Does this sound right? They say it's because they claim lots of different tax allowances for me, but I'm not sure which ones.

Do I need to fill in a self-employed tax return or not? Will the umbrella company do it for me? I hardly seem to pay any tax or NI, so I'm confused by the whole thing. In one week, I put in 37 hours, earning £555 before deductions. I only had £4.79 tax deducted and no NI. The following three weeks in a row, I had tax refunds and NI credits showing on my payslip - only for small amounts but credits all the same. Am I likely to get hit with a massive tax bill at some point?

Tax Tony's Answer:

I cannot make head or tail of this.  You need to sit down with whoever is responsible for this and not go away until you fully understand what is going on.  HMRC is having a go at umbrella companies, which it sees as responsible for widespread abuse.  Be careful.

Gross interest or not?

MoneySaver's Question:

My wife has just been paid her state pension for the first time. £86-80 pw (£4,513 pa).  Her only other income is dividends from Company Shares which amounted to £2,388 gross (tax credit £237) last year and she has bank interest paid gross (£242 last year).

Can she still have her bank interest paid gross in future bearing in mind that tax is deducted from her dividends as she will be over the tax threshold next year? I expect a small increase in divs and bank interest in future.

Tax Tony's Answer:

I make it that your wife's total gross income is just below the age related personal allowance of £7,280.  As soon as her income passes this, she must tell her bank to stop paying gross interest. 

Back to the top

Stamp Duty on house purchases

MoneySaver's Question:

Bearing in mind the £250,000 stamp duty limit, if I was to buy a house for, say, £300,000, could I buy half of the house in my name and half in my wife's name to avoid paying the ridiculous stealth tax of 3% of the whole price?  There are people advertising ways to escape this, but you have to buy their book.....

Tax Tony's Answer:

If only it were that simple.  Do not buy the book and put the price instead towards the Stamp Duty that you will certainly have to pay.

Buy-to-let mortgages

MoneySaver's Question: 

We bought a buy-to-let property last year and this is our first year of filling in a SA on rentals so sorry if this seems naive.

Question 1: I know we can class the broker's fee as an expense - but what about the mortgage lender's arrangement fee? It was added to the mortgage - does that matter? It was quite a sizeable chunk (£499).

Question 2: My husband is taking a day off work to fit a new bathroom - can his loss of earnings be classed as an expense? (He's employed by a temping agency and will lose a day's salary, as he's paid by the hour according to a timesheet completed by his customer).

Question 3: Can all losses (we've made a loss in this first year) be carried forward to next year?

Tax Tony's Answer:

1. Yes, both are deductible expenses in the “finance charges, including interest” box on the land and property page.

2. No.

3. Yes and offset against the first profit that you make.

Property to Let (not a buy to let mortgage)

MoneySaver's Question:

I bought a flat with a 90% mortgage and lived in it for 2 years. I then moved into my now husband's house and rented out my old flat.  I am not on my husband's mortgage so my flat is my only mortgage.  The difference between rental income and mortgage payments is approx £100 per month.  I assume that I should be declaring this.  Can I increase my mortgage payments to the same amount of rental income so that my profit is nil and therefore not have to pay tax? 

Tax Tony's Answer:

It is the mortgage interest that you deduct in arriving at your rental profit, not the full mortgage payment.

You certainly have to tell the Revenue if you are making a profit.  I think it would be safest to tell them even if you are only breaking even or making a loss.  Better that than them finding out some other way.  When you come to sell the flat, you might be subject to CGT.  There is a special relief for homes that are subsequently let, so reporting the rental now avoids awkward questions later.

You can re mortgage the property up to 100% of its value when you first put it up for rent.  Probably you would only want to re mortgage up to the point at which you are not making a profit beyond that the interest would go unrelieved.  You can then use the money raised to pay off your domestic mortgage.

 
Non resident landlord scheme

MoneySaver's Question:

I am going to start my career break Jan 2007 and will be renting out my home to cover my mortgage. I will be abroad for over 6 months so I think I qualify as a non-resident landlord so can receive my rent gross and pay any tax due later, presumably I will receive a tax return.

I have spoken to the tax office and they don't see very clear on it.

As it's 3/4 into the tax year, will I have to wait until the New Year to start?  How much tax might I pay?  I am told my property will rent for around £425 pm and I am a standard rate tax payer.  Can things like agents' fees and other costs be taken off before paying tax?

Tax Tony's Answer:

MoneySaver's Question:

My wife has been self-employed as a music teacher for a number of years, and does a proportion of her teaching from home. I do her accounts for her. Having had a quiet year last year because of time off to have a baby, this year's payment due in January has come as a bit of a shock as she did not need to make payments on account last year, so I'm trying to reduce the £1,300 liability for this year (and another £650 for the first payment on account) by making sure I'm claiming all the expenses we can.

Previously we've claimed some capital allowances for new instruments purchased (reducing by a % for personal use), and expenses for music and stationery purchased and miles driven to a couple of schools she teaches at, as well as 10% of phone, utility and council tax.

I read somewhere else that I could be claiming the home running costs based on number of rooms (she uses the study - though it's not exclusively for teaching, one of 6 rooms in the house, therefore 17% - and there is some overspill into other rooms). I also read that mortgage interest can be included. As turnover is under £15,000 I'm only doing the short return, so really the numbers are academic until HMRC ask to look at them, but would this sound like a reasonable amount to claim (i.e. is it sufficiently 'normal' that they're unlikely to question it)?

I know she could also pay me a salary as I do her accounting and some accompanying for her, although since I pay higher rate tax that would be counterproductive, but are there any other normal 'working from home' amounts I'm missing?

Tax Tony's Answer:

First thing's first.  If you expect your final tax bill for 2006/07 to be less than it was for 2005/06, you can apply to reduce your payments on account by ticking box 18.6 and putting the reduced figure in box 18.7.  Be careful.  If it works out that you have reduced the payment incorrectly, you will be charged interest on the difference from the date you should have paid the full amount based on last year.

Now I am going to disappoint you.  HMRC has a real downer on people claiming home running costs.  The general principle is that you can only claim expenses actually incurred wholly and exclusively for the purposes of the business.  They say (quite rightly) that you cam only claim the additional costs caused by working at home, such as the extra heating for occupying the house when it would otherwise have been empty.  You would be paying water rates, council tax and mortgage rates anyway, so you cannot claim these as business expenses.  It is simply wrong to claim a proportion of the total household bills, whatever you may have read.  HMRC has said that they will not ask for additional evidence if an employee working from home claims £2 a week (£104 a year).  There is no corresponding guidance for the self employed, but that is the best guideline we have.

It is a different story if part of the house is occupied exclusively by the business, such as a dentist's surgery or a garage.  But then you are into business rates and restricted CGT exemptions on your private residence, so you do not want to go there.

Mile allowance

MoneySaver's Question:

I am self-employed and have a van that I use exclusively for business. When it broke down I had to use my wife's car for a few days. Can I charge the miles I did in the car at 40p/mile, or could it only be at the lower rate as I do more than 10,000 miles a year in the van? I charge all the actual expenses of the van against the business - I don't use the 40p/mile scheme.

Tax Tony's Answer:

You cannot chop and change, but if the use of the car is only on rare occasions, claiming 25p a mile would probably be an acceptable compromise.

Home working PC

MoneySaver's Question:

I bought a PC in Nov 2004 for doing necessary evening work for my employer at home, and still use it for such (about 75% work/25% personal use).

Can I retrospectively claim any allowance? And can I claim some sort of allowance each year (presumably diminishing?)

Tax Tony's Answer:

No, I think not.  The general rule for employees' expenses is very restrictive.  Employees expense claims are limited to those “wholly, necessarily and exclusively incurred in the performance of the duties”.  HMRC would say that if you need a computer, your employer should provide one.

 Utility bills

MoneySaver's Question:

I have never completed any tax return forms and consequently never received any tax rebates (sigh!!) ever in my working career - started 16, now 36 (ish).
Since May 2005 I have been employed full time (basic rate payer) with a company and classed as 'home based', I claim business mileage from home to wherever I travel to for meetings etc but what I wanted to know is; am I able to claim anything for lighting, heating etc?

I have increased my salary by £12,000 since May 2005, but being home based really boosts those bills up especially the winter ones so wondered if there was any tax relief for home workers.

Tax Tony's Answer:

HMRC will accept that you have incurred costs of £2 a week without further evidence.  To claim more, you would have to provide evidence of additional costs that you would not have incurred otherwise.  This will be very difficult to do.  Even the £2 is given grudgingly.  Go on the HMRC website and search for Tax Bulletin 79 October 2005.

Personal use allowance

MoneySaver's Question:

I am a party planner and run home parties.  I purchase products at a whole sale price from the head office and sell them at a higher retail price.  If I also use products myself and so not sell them on do I have to pay tax on the ones I use as if I have sold them on?  Or is there a personal use allowance?

Tax Tony's Answer:

If you buy from the wholesaler for your own personal use, there would be no tax implications and you are welcome to keep the discount.  If however you buy for your business and then withdraw the goods from stock (for example leftovers from a party) you have to pay the full retail price, or be taxed on the difference.  There is no personal use allowance.

Married Couples Allowance

MoneySaver's Question:

My Mother died earlier this year (21 March) and my father (age 93) has received a tax assessment for 2005/06 that has removed any reference to married couple's allowance. He has already lost his higher personal allowance as his income is about £24,000. The loss of married couples allowance for 2005/06 seems unfair as my mother's death only occurred about 3 weeks before the end of tax year. Is it correct?

Tax Tony's Answer:

Personal allowances are given for whole tax years and so your father is entitled to the married couple's allowance for 2005/06.  He should call his tax office and point out the mistake.

The Low Incomes Tax Reform Group sponsors a scheme to help older taxpayers.

How much stock can I claim as an expense?

MoneySaver's Question:

I have a part time eBay business, and this is the first year I've completed a tax return, so sorry if this is a silly question! I started my business in May 2005, and bought quite a lot of stock over the next few months. By April 2006 I'd sold about 50% of it.

My question is, how much of the cost of that stock can I claim as an expense? Can I claim it all, or just the cost of the items that I've actually sold during the year?

Also, can I claim the cost of educational materials (books, classes etc) related to my area of business as an expense?

Tax Tony's Answer:

Just the stock you have sold or written off.  The rest can be deducted in the later year when it is sold or written off.

Probably not – they are just putting you in the position to trade, rather than an expense wholly and exclusively for the business.

Can I claim against old equipment?

MoneySaver's Question:

Hi, I have been preparing to be self employed for some years now. As a result I have bought equipment over 8 or 9 years, most is second hand. I do not have receipts for the goods, can I put a value to these items and claim them against my tax now that I am self employed?

Tax Tony's Answer:

Any personal assets that you bring into the business come in at their market value on the day they are introduced, whenever they were bought.  I suppose that receipts are somewhat irrelevant, as it is the market value now, not the original cost that matters.  You will have to be realistic about the market value of 8 or 9 year old kit.

Items bought specifically for the business come in as expenditure (capital or revenue as appropriate) at their full price on the first day of trading.  You will need receipts to support the cost, in the normal way.  I think in theory you can go back seven years, but I would wonder if anything more than say six months old was really pre-trading expenditure.

Mystery shopping

MoneySaver's Question:

I do mystery shopping and need a fax machine to send/receive some assignments. My old one went kaput and I bought a new one. Am I allowed to claim its cost against tax?

Tax Tony's Answer:

If you are self-employed, claim capital allowances.  If employed, I fear not.  This cost should be met by your employer.  

Back to the top
 

 
Should I pay myself through dividends?

MoneySaver's Question:

I'm a registered self employed sole trader. I'm expecting to make roughly £17,000 for this tax year. I'm a computer programmer so I don't buy or sell stock and have no need to make large investments in my work.

I was wondering whether it is still worthwhile to incorporate a limited liability company? Since I believe dividend tax is only 10% above £2,100 and corporation tax is currently nil, would I save money buy paying myself through dividends?

Tax Tony's Answer:

Incorporation was a great wheeze a few years ago, but the advantages are gradually being whittled away.  For example, the nil rate band of Corporation Tax has gone and the rate is now 19% on all profits up to £300,000.  At £17,000 profit, there would be perhaps £1,000 to save in tax overall, but at the cost of much greater formality.  Because limited companies are so much more complicated than sole traders, you would struggle without paying an accountant to explain how to get the tax advantage and to do all the paperwork for you.

One thing to watch out for: as things stand now, the person you are working for has to decide whether or not you are an employee and so if PAYE should be applied.  If you incorporate, that responsibility (and the risk of getting it wrong) passes to you under the notorious IR35.

By the way, dividends are completely free of tax and NI for anyone below the higher rate tax threshold, but that might well change in the coming years.
 

Is it worth creating a company?

MoneySaver's Question:

I earn around £37,000 from my regular day job and have recently registered as self employed and become a sole trader for some work on the side. I expect to earn around £10,000 profit from this in the first year and more in the subsequent years.

Some advice I got (not from a pro.) was that it probably wasn't worth creating a company because of the extra paper work, but I'm going to be paying 40% on all of that extra income...so how can I reduce that tax burden?

Tax Tony's Answer:

Incorporation will not save any tax for you, because you have already used up your allowance and lower rate bands.  And, yes the paperwork would be an unnecessary burden – unless you have some non-tax reason to incorporate.

There is no magic wand to make your tax bill go away.  You could look at using some of the extra money to fund a pension or to make Gift Allowance donations.  Check that you are not paying more than the maximum National Insurance on the HMRC website.

 
Personal and business account mix up

MoneySaver's Question:

I am sole trader. I do mainly consulting work, so no stock there. However, I have been developing small solar power systems and have bought and sold some stock but mainly it has been for research and development purposes. So firstly, (1) can I include this in my calculation?

When I started up 18 months ago, I used my personal account for business use and things got a bit muddled. Now I have a business account, so I have two sources of records of income and expenditure. (2) Can I just mark business expenditure on my personal bank statements as evidence?

Finally, I have inputted as much information on income/expenditure into 'Personal Accounts' by Accountz.com but I can't see any way in which it can produce a sensible report for tax purposes. (3) Any ideas?

Tax Tony's Answer:

1. If you have used this kit in your business, yes, you can claim its cost as an expense.

2. You did the right thing setting up a separate account for your business.  It makes things much easier and should avoid having to show HM Revenue & Customs your personal bank statements, if you are ever the subject of an enquiry.  Even so, there is absolutely no reason why you should not include the expenditure (and income) that went through your personal account in the early days.  You should have proper receipts for your expenditure rather than just rely on the bank statement entries.

3. I do not know this software, so can't suggest anything beyond reading the manual more carefully or speaking to their support people.  The preparation of accounts for tax purposes is your responsibility, so you do need to get your records in order.  Remember that  you only have to complete the boxes on the self employment pages of your return.  HMRC is not expecting anything fancier than that. 
 

Being a new sole trader

MoneySaver's Question:

I have started my photography business in July this year.  Because I tend to work on projects, and I'm starting out I don't know how much I'm going to earn from the tax year Apr 2006-Apr 2007.  I have also recently done a temporary accountancy position, which I paid tax on.

I'm not sure what figure I would fill in on income and I don't know what things I can offset against this.  For example, I do a fair amount of travelling, eating away from home, paying out for equipment etc.

Tax Tony's Answer:

On the 2007 tax return you will have to include your income and expenditure from the date you started to 5 April 2007.

By the time you come to fill in your return, you will have actual income and expenditure figures.

The cost of travelling to assignments will be a valid expense, together with modest food bills if you are travelling regularly or staying away over night.  Your equipment will qualify for capital allowances. 
 

What records form part of my ‘accounts'?

MoneySaver's Question:

I am a self-employed sole trader. I currently have two main records for my income, one accounting for every payment that went into my bank account (who paid me the money, deposit no. etc) and one record which lists income by the payee's name.

Does this sound acceptable? Are there any other records which should form part of my "accounts" (apart from original documents such as bank statements, receipts etc)?

Tax Tony's Answer:

Assuming this system records all your income, however paid, yes that sounds fine.  You need to keep receipts to justify all expenditure except occasionally for small amounts where obtaining a receipt is impractical.  There is a helpful leaflet about record keeping for the self employed on the HMRC website.

There are additional record keeping requirements if you are registered for VAT or have any employees or sub-contractors. 

Accepting cheque payments in US Dollars 

MoneySaver's Question:

I am a sole trader who builds websites. A very small amount of my income comes to me as cheques in American dollars, which are then paid into my bank account. My bank takes £5 from each cheque for commission.

Do I need to include each of these £5 commissions as income on my tax return, even though they never actually appear in my bank account and I never receive the cash?

Tax Tony's Answer:

Strictly speaking, your income is the amount before the charge and the £5 is an expense.
 

Retirement implications

MoneySaver's Question:

I am a sole trader and my accounting year end is 30 April. I wish to retire on 30 Oct 2009. I understand that any profit earned between 1/5/09 and 30/10/09 is added to my 09/10 liability. Is my overlap relief able to be offset against the whole liability or just that part earned between 1/5/09 and30/10/09?

What happens to any unused capital allowances? Can I leave it to my tax return for the year to 5/4/10 to let the revenue know of the cessation or am I required to inform them earlier and if so would the tax due fall sooner? 

Tax Tony's Answer:

You plan to cease trading in tax year 2009/10 and so your 2010 return will be the last to include business income.  You will put the date of cessation in what is currently box 3.8 and that is the only notification needed.

You will have included your profits for the year ended 30 April 2008 in your 2009 return.  So the profits to be assessed in your final 210 return will be those from 1 May 2008 to cessation on 30 October 2009.  Your overlap relief brought forward will be offset against the profit for the whole of this period.

The business assets will be transferred to you at their market value.  Any diffence between that and the remaining capital allowance balance will be a balancing allowance or charge in the final period.

Any unused overlap relief can be used to increase a terminal loss carry back claim.  

Off shore declarations 

MoneySaver's Question:

I'm a sole trader, and I've done some work off shore (Guernsey) – and am paid by sterling cheque. How much (if any) do I have to declare?

Tax Tony's Answer:

Assuming you are a UK resident – all of it.

Back to the top

Should I register as self employed?

MoneySaver's Question:

My main income is from examination marking for which I am taxed at the standard rate and have to claim back overpaid tax at the end of April each year. I also receive some income from supply teaching and this is counted as my main employment so I am not taxed unless I reach the threshold (which I don't). Would I be better to register as self-employed? Also how do I find out whether I owe money for N.I.? I tried to contact DWP last year and they said they would be sending out details but they never did.

Tax Tony's Answer:

Although your question is not clear, it sounds as if you are employed by both the examination board and the supply teaching agency.  There is no option to register as self-employed.  If you are employed, you are employed and that's it.  National Insurance should be taken care of through PAYE.  Persist with DWP if you are waiting for a reply from them.

How do I register?

MoneySaver's Question:

I have a full time job as a college lecturer earning £30,000 and have also been gradually building up freelance planning application and building regulation application jobs into local authorities for a local company.

At first I did a few jobs as favours for family and friends but now I am being paid a fee for doing these jobs. I realise I will have to inform the tax people but how do you advise I go about this.

I have also had to buy large items such as a large format printer as well as other surveying items and advised to buy an indemnity to be able to carry out this work. Can you advise please?

Tax Tony's Answer:

Call the Helpline for the Newly Self-Employed on 08459 15 45 15.

Claim capital allowances on the printer and deduct the other items as expenses.  The self-employment pages and notes in your tax return will explain how to go about this.

Class 4 contributions

MoneySaver's Question:

As self employed when do Class 4 contributions cease to be payable. Is it in the accounting year in which you reach 65 or is it the first full year after ones 65th birthday.

Tax Tony's Answer:

It took me a while to find this one!  Class 4 contributions cease to be payable at the beginning of the tax year following your 65^th birthday (60 for women).  Class 2 is weekly based and stops on your 65^th/60^th birthday.  Note that exception is not automatic and must be applied for. 

What hurdles might I encounter? 

MoneySaver's Question:

I am 66 and retired but have the opportunity of a part-time self-employed job paying around £200 per week on submitting an invoice. What bureaucratic hurdles am I likely to encounter, do I have to register with somebody, how much tax am I likely to pay (I draw a Government pension of under £90 a week) and can I offset any expenses against my tax liability?

Tax Tony's Answer:

You are obviously a resourceful person if someone is paying £10,000 a year for a part-time job.  If your business is simple, self assessment should not give you too many headaches.  Step 1 is to register as self-employed by calling the Helpline for the Newly Self-Employed on 08459 15 45 15.  Make sure to tell them your age so that they will excempt you from National Insurance.

You can deduct the expenses that you incur wholly and exclusively in earning the profits of your business.  It is hard to be more precise without more details.

£7,280 of your total income (pension plus self employment) will be tax free.  The next £2,150 will be taxed at 10% and the balance (at your level) at 22%. 

Do I need to complete a self assessment?

MoneySaver's Question:

I set up and registered as self employed a couple of years ago as I was doing some freelance telemarketing work for a couple of companies. This work dried up. I submitted my first self-assessment return in January 2006 and all was OK, my calculations accepted etc.

However I have not done any self employed work for over a year now (not since any that was included in my first SA). I have been an employee of a University since. However I have continued to pay my NI contributions as hoped to get more work self employed. Do I need to do a SA this year as it will be a nil return in that part and surely my other earnings will have been taxed at source?

Tax Tony's Answer:

You are wasting your money on the Class 2 National Insurance.  As it is very simple to set up again, I suggest you call the helpline on 0845 9154655 and stop it.  You could have applied to be excepted from class 2 when your self-employment income fell below the threshold (currently £4,465), let alone when you stopped working.  So you can at least ask for a refund of the over payment: I do not know if it will work.

You will have to do a tax return if they send you one.  Put the date of cessation of your business in box 3.8 of the self employment page.  That should stop you getting returns in future.