Self Employment Accounting and Taxation
As any other business or company, a self-employed person has to do accounting and book keeping.
Business accountancy is very useful and is supposed to assist you in running your business on a daily basis. Properly done and up-to-date accounting and bookkeeping bookkeeping help you to:
- Balance and control accounts with your suppliers, customers, employees and banks.
- After the end of the tax year assess your Income Tax and NICs.
- Prepare financial reports about a business.
- Deliver reports on inventory and assets.
- Prepare financial documentation for bank loans, investments and insurances.
Taxation – INCOME TAX
Self-employed persons who are running their businesses as sole traders or partners in partnerships have to pay Income Tax and Class 4 National Insurance Contribution on profits from their business.
Steps included in preparation of a self Assessment tax return and payment of Income Tax:
- Calculation of business profit on the basis of accounting records
- Assessment of a tax base (a total taxable income). As a self-employed you do not pay a separate income tax on your business profits, but an income tax on all your earnings together – profits from the business, rental income, dividends, pensions, salaries etc.
- Assessment of the tax and Class 4 National Insurance Contributions to be paid and produce an adequate Self Assessment tax return.
- Submission a Self Assessment tax return to HMRC by 31 October in a paper form or electronically online by 31 January following the end of the tax year. Even if you did not have any income in a given tax year, as a self-employed person you are still obliged to send your tax return to HMRC
- Payment of any tax and NICs due by 31 January following the end of the tax year.
- If your current tax is over £500, payments on account of your next year’s tax . The first payment on account is due on 31 January and the second one on 31 June following the end of the tax year.
Taxation – VAT (VALUE ADDED TAX)
Value Added Tax (VAT) is a consumption tax on most goods and services provided in the UK and other EU countries.
In the UK VAT rates are:
standard – 20 per cent
reduced – 5 per cent
zero – 0 per cent
Some goods and services are exempt from VAT.
If you are a VAT-registered business you are entitled charge VAT on goods and services, issue VAT invoices and reclaim VAT paid by your business on goods and services.
The registration with HMRC for VAT is compulsory if your business turnover for the previous 12 months has exceeded the VAT registration threshold which is £85,000 in 2017-18 or if you are certain it will be over the registration threshold soon. You can also register your business for VAT voluntarily regardless of your turnover, if the VAT registration is desirable for your business so that you can issue VAT invoices or reclaim VAT on your purchases.
If your business is registered for VAT then you have to:
- Choose an appropriate VAT accounting scheme to account for VAT. There are various VAT accounting schemes operated by HMRC and designed for specific trades and business situations.
- Issue VAT invoices with a correct VAT rate every time you sell goods or services.
- Submit VAT tax returns to HMRC in accordance with the VAT Accounting Scheme chosen.
- Make VAT payments to HMRC in accordance with the VAT Accounting Scheme chosen.
If you need to deregister from VAT, you must inform HMRC about the reasons for this decision. To formally deregister your business from VAT you have to use form VAT 7.
Taxation – BUSINESS RATES
Businesses which use non-domestic premises for business have to pay business rates to the local authorities. Business rate is an equivalent of the council tax which is paid by individuals.
In England and Wales, all business premises have their rateable value set by the Valuation Office Agency (VOA). Local councils use this value and the multipliers for England, Wales, Scotland and also Northern Ireland fixed by the government in order to establish the amount of a business rate for every business (non-domestic) property. Business rate which your business pay depends on the localization, size and value of the property used for business purposes.
Taxation – OTHER TAXES
It is possible that as a self-employed in some businesses you will have to pay specific taxes on particular goods and services such as for instance Tobacco & Alcohol Duty or Betting & Gaming Duty.