Self Assessment: A short guide for small businesses
January is a time to think about the goals and challenges you want to tackle for the coming year. For many SME’s this means getting ahead of the regular admin tasks that are part and parcel of running a business.
As the New Year gets under way, it’s once again time to think about your self-assessment tax return. The deadline for paper returns has already passed (October 31st 2019) and the deadline for online submissions is looming (31st January 2020).
Who needs to submit a self-assessment tax return?
You’ll need to submit a self-assessment return if you were self-employed as a sole trader and earned more than £1000 in the period from 6th April 2018 – 5th April 2019, or if you were a business partner or director of limited company and your income was not taxed at source. You may also need to file a self-assessment if you received income from; renting out property, tips & commissions, savings investments & dividends, or foreign income. Not sure if you need to submit a self-assessment tax return? Use HMRC’s tool here https://www.gov.uk/check-if-you-need-tax-return.
Whether its your first time submitting a self-assessment, or even if you have many years’ experience, there are some important points to bare in mind. We’ve listed some of the crucial things to consider here, but the one thing we cannot stress enough is the importance of keeping good records, both before and after you submit each return.
HMRC requires you to keep records of your accounts and the information used to submit your tax return (such as receipts and invoices) for five years after submission. Failure to do so can result in a penalty of up to £3000 for each failure to keep or preserve adequate records.
Good account keeping
Keeping accounts essentially means tracking your income and expenditure, along with any business-owned assets should you have them. You must be consistent with how you track your transactions and apply the same accounting practice across the board.
HMRC states that all businesses and sole traders must keep records of:
- All sales and takings income.
- Business expenses, such as purchases and travel.
- VAT records (if you are VAT registered)
- PAYE records if you have employees.
- Personal income records.
The duration for which you are required to store this information is as follows;
- Personal income records: 22 months after the 31st January submission date.
- Self-employed business records: 5 years after the 31st January submission date.
- VAT records: 6 years after filing for general VAT.
Allowable expenses – what can you claim for?
There are a number of expenses you can claim against your tax bill, also known as ‘allowable expenses’. These expenses are deducted from the amount of profit that you pay tax on, reducing your final tax bill. Before you get to work on submitting your self-assessment its important to know what you can and can’t claim for.
Some of the most common expense claims are;
- Business Premises: Like many sole traders, if you operate from your home you can claim a portion of your expenses back against your tax bill. However, you’ll need to find a suitable way to work out the percentage you can claim back, for example by dividing your bills against the number of rooms that you use for your business or by the amount of time you spend working from home. You can also claim a portion of your phone, mobile and internet bills if you use these for businesses purposes.
- Clothing: If you require a uniform, protective clothing, or even a costume to carry out your work this can be included within your allowable expenses. You can’t however, claim for clothes that are part of an everyday wardrobe such as suits and shoes.
- Stationary: The cost of paper, pens, envelopes and other stationary can be set against your tax bill, as well as postage and printing costs.
- Professional services: If you seek advice or services from an accountant, lawyer, or other professional within a business context, you can add their fees to your allowable expenses. Likewise, if you have a business bank account you can claim tax relief on bank charges, overdraft and credit card charges.
- Travel costs: If you are required to travel for work you can claim this expense against your tax return. For example, any journey made for business via bus, rail, plane or taxi can be classed as an allowable expense. Additionally, if you use a vehicle for your business you can claim the running expenses such as insurance, repairs and services, fuel, parking, breakdown cover, and hire charges. If you use a personal vehicle for business use, you will need to work out a suitable equation to figure out how what percentage is deductible for tax purposes.
- Materials & stock: The cost any items that you stock and resell, along with the cost of raw materials if you produce goods yourself and any costs incurred during this production is an allowable expense.
- Marketing & Advertising: The costs of marketing and advertising your business can be claimed as a tax reduction, including: website development and maintenance costs, advertising costs and any membership fees to professional trade bodies or organisations.
If you’re still unsure about what qualifies as an allowable expense contact HMRC for advice and support.
To simplify your self-assessment, save time and reduce the risk of making mistakes -it’s time to scrap the spreadsheets. HMRC has already indicated that it wants to move all businesses to dedicated accounting software in the near future. We’ve already seen the first stage of this digital transformation with 2019’s Making Tax Digital changes.
A digital accounting solution such as Sage 50cloud Accounts is a cost effective alternative to complicated spreadsheet accounting. Using certified software like Sage will ensure that you are always up to date with the latest legislation changes (such as MTD), as well as giving you peace of mind that you are following the correct accounting practices.
Already working with an accountant, or are considering engaging one for future self-assessment returns? Using cloud-based accounting software will make the process easier for all parties. With cloud software, your accountant can keep track of your books in real-time, cutting down on time spent chasing for information on both sides of the relationship.
Get started with Sage 50cloud Accounts software from as little as £18 per month and make your yearly self-assessment a stress-free experience.