Accounting and Taxation
A self-employed person has to do bookkeeping and accounting as any other business or company.
Business accountancy is not an abstract and useless activity. On the contrary, it is supposed to assist you in running a business on a daily basis. Professional and up-to-date bookkeeping and accounting serve to:
- Assess your Income Tax and Class 4 NICs after the end of the tax year.
- Control and balance accounts with your suppliers, customers, banks and employees (payroll).
- Communicate financial information and prepare financial reports about a business.
- Prepare financial documentation for investments, bank loans and insurances.
- Deliver reports on inventory and assets.
The self-employed running their businesses as sole traders or partners in a partnerships or members of a Limited Liability Partnership (LLP) have to pay Income Tax and Class 4 National Insurance Contribution (NICs) on their business profits.
Preparing a Self Assessment tax return and paying Income Tax include the following steps:
- To calculate business profit on the basis of accounting records by figuring out the difference between the revenues and expenses of your business.
- To assess a tax base (a total taxable income), because as a self-employed you do not pay a separate income tax on your business profits, but an income tax on all your earnings accumulated – business profits, rental income, dividends, pensions, salaries and wages.
- To assess the tax and Class 4 National Insurance Contributions to be paid and produce an adequate Self Assessment tax return. When calculating the amount of a tax to be paid, you have to take into account:
– Your total taxable income (tax base) in a given tax year.
– The current tax-free Personal Allowance (PA) which is an amount of the taxable income you are entitled to earn without having to pay any tax on it.
– The current Income Tax rates and bands.
– Other allowances and reliefs that can reduce your taxable income, for instance Married Couple’s Allowance or Maintenance Payment relief.
– The amount of your Class 4 National Insurance Contributions (NICs) you pay along with your annual Income Tax.
- To submit a Self Assessment tax return to HMRC in a paper form by 31 October or online by 31 January following the end of the tax year. As self-employed you are obliged to send your tax return to HMRC even if you did not have any income in a given tax year.
- To pay any tax and NICs due by 31 January following the end of the tax year.
- To make payments on account of your next year’s tax if your current tax is over £500. The first payment on account is due on 31 January and the second one on 31 June following the end of the tax year.
VAT (VALUE ADDED TAX)
Value Added Tax (VAT) is a consumption tax on most goods and services provided in the UK or imported from other EU and non-EU countries. The VAT rates are: standard – 20 per cent, reduced – 5 per cent and zero – 0 per cent. Some goods and services are exempt from VAT. It depends on the particular goods or services supplied, which VAT rate should be applied for a business transaction.
Only as a VAT-registered business you are entitled to:
- Charge VAT on goods and services provided.
- Issue VAT invoices.
- Reclaim the VAT paid on goods and services.
The registration with HMRC for VAT is:
- Compulsory: if your business turnover for the previous 12 calendar months has exceeded the VAT threshold which is £83,000 in 2010-11, or you are convinced it will be over this level soon.
- Voluntary regardless of your turnover, if you judge the VAT registration as desirable for your business; for instance because you want to issue VAT invoices or reclaim VAT on your purchases.
As a VAT-registered business, you have to:
- Choose a VAT accounting scheme to account for VAT. HM Revenue & Customs operates various VAT accounting schemes designed for specific trades and business situations. The most popular are:
– Standard Accounting Scheme where you have to submit your VAT tax return to HMRC quarterly.
– Annual Accounting Scheme where you pay VAT on account in nine monthly or three quarterly instalments. You need to complete only one VAT tax return at the end of the tax year and if necessary make balancing payments to HMRC or claim refund.
– Cash Accounting Scheme where you have to account for VAT to HMRC only on the invoices actually settled.
– Flat Rate Scheme where you pay a flat rate percentage of your turnover as VAT without having the right to reclaim VAT paid on purchases.
– VAT scheme for retailers.
- Issue VAT invoices with a correct VAT rate every time you sell goods or services to either another businesses or individuals.
- Complete and submit VAT tax returns to HM Revenue & Customs in accordance with the VAT Accounting Scheme chosen.
- Pay VAT to HMRC in accordance with the VAT Accounting Scheme chosen.
If you want to cancel your VAT registration, you must inform HMRC about the reasons for this decision. To formally cancel your VAT registration you have to use form VAT 7.
Businesses using non-domestic premises have to pay business rates to the local authorities. Business rate is an equivalent of the council tax paid by individuals.
All business premises in England and Wales have their rateable value set by the Valuation Office Agency (VOA), which is an executive agency of HM Revenue and Customs. Local councils use this rateable value and the multipliers for England, Wales, Scotland and Northern Ireland fixed by the government to establish the amount of a business rate for every non-domestic property. As a result, the business rate you pay depends on the localization, size and value of the property used for business purposes.
You pay the business rate similar to council tax. Your Council will send you an adequate invoice to be paid in ten equal instalments.
It may happen that as a self-employed in some businesses you will have to pay specific taxes on particular goods and services such as Tobacco & Alcohol Duty or Betting & Gaming Duty.