New Self Employed - Jan 2009

Ken Voller Tax Business Salt Mill Barn Old Salisbury Lane Romsey SO51 0GD

Registered with the Association of Taxation Technicians as a member in practice

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© Copyright Tax Business 2009

Self Employed?

What do you do now?

TAX BUSINESS SELF EMPLOYED

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CONTENTS Page 1 Things to do at the outset

3

2 Record Keeping

7

3 Allowable expenses and Capital Allowances

8

4 Income Tax

10

5 National Insurance Contributions - NIC

13

6 Other Important Issues for the Self Employed

15

APPENDICES

1 Record Keeping

16

2 Employer registration

17

3 Profits Taxable

19

4 Typical Tax Calculation

20


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SELF EMPLOYED

1 Things to do at the outset

• Inform H M Revenue and Customs (formerly the Inland Revenue)

• Open a business bank account

• Obtain accounts books etc for record keeping

• Register for VAT (if necessary)

• Apply for PAYE registration if taking on employees

• Engage a business and tax advisor For some of the items above, the order is determined for you. For example, you will not be able to register for VAT until you have a business bank account. In some respects, the final item (engage an advisor) should come first.


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• INFORM H M REVENUE AND CUSTOMS (HMRC)

This can be done in two ways:-

• By Post - Complete registration form CWF1 (attached to the end of HMRC leaflet SE1 – Are You Thinking of Working for Yourself?) and submit it to National Insurance Contributions Office (Self-Employment Services) in Newcastle upon Tyne. You could also take the completed form to a local Tax Enquiry Centre.

• By phone – Call the Self-Employed registration Helpline on 08459 15 45 15. It may be useful to consider the information requested on form CWF1 before calling the helpline.

If you delay telling the Revenue about your business for three months or more, you may have to pay a penalty of £100. The leaflet SE1 also includes an application form for paying Class 2 NIC. An annual Self-Assessment Tax Return form will be issued on 6 April each year, asking for declarations of income and expenditure for the year ending 5 April. For example, if a business starts on 1 December 2007, the first year of assessment is for 2007/08 (to 5 April 2008) and will include trading results for the period from 1 December 2007 up to 5 April 2008. Electronic Tax Returns are required to be completed and submitted before 31 January (paper Returns before 30 October) following the year of assessment or, if you would like HMRC to calculate your liability, the Return should be with them before 30 October following the year of assessment. HMRC will review the Return and monitor tax payments, ensuring they are paid on time by having the authority to charge interest, penalties and surcharges. There is some further advice for self-employed people on the Revenue website at http://www.hmrc.gov.uk/startingup

• OPEN A BUSINESS BANK ACCOUNT

Operating a business through a separate bank account (or accounts) makes it easier to identify income and expenses related to the business. There is nothing to stop you making transfers of income to a personal account to meet personal expenditure; this is known as “drawings”.


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You may wish to transfer a similar amount each month by standing order and make, when required, additional transfers.

• OBTAIN ACCOUNTS BOOKS FOR RECORD KEEPING

Accounts books can be obtained from any stationery shop and are specially designed to keep the necessary records. You will also need a ring binder for filing invoices/receipts etc. One section should be for expenses and one section for income. (See Appendix 1 for example) Electronic accounts books (Eg, Sage, TASbooks, etc) can be a good alternative to paper versions. However, commitment of time at the outset is important to ensure that the cost of these is a worthwhile expense.

• REGISTER FOR VAT

You will need to register for VAT if your turnover exceeds £67,000 (from 1 April 2008).

• APPLY FOR PAYE REGISTRATION IF TAKING ON EMPLOYEES

If you take on employees you, as their employer, are responsible for accounting for the employees' tax and national insurance contributions if they are paid by you. Liabilities generally arise on payments of more than £105 per week (2008/09 rate) but can be on smaller amounts. Registration can be done by either telephoning the New Employers Helpline on 0845 60 70 143 or by e-mail – see types of employer at http://www.hmrc.gov.uk/employers/new-emp-email.htm . A PAYE starter pack can also be obtained from the Revenue, which also provides courses on Payroll, Statutory Sick Pay etc. In either case, you will need to have specific information available when you call or write (See appendix 2)


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• ENGAGE A BUSINESS AND TAX ADVISOR

An advisor will:-

• will, if required, draw up a business plan to assist with bank borrowings.

• provide administrative assistance and commercial advice to help with the proper running of your business.

• complete your Tax Return and prepare your accounts based on the

information supplied.

• advise on tax planning and the ways of minimising your tax liability. As you are trying to establish a career for yourself, engaging an advisor will obviously relieve pressures. If you do not know of anybody who may be suitable (personal recommendations are normally best) check in a telephone book, or on the internet (Eg, Yell.com) for local advisors or accountants in your area. It is worth considering two or three different advisors and taking your time in choosing. Most advisors will be prepared to spend some time with you before engagement; usually up to an hour for no charge. This is to enable both you and the prospective advisor to understand what is going to be needed and also to see whether you will be able to work together. Ask for a fixed price for the first year’s service.


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2 Record keeping

Expenses – Cheque Payments Record Write payments in book in number order - this will ensure that no payments are omitted and all expenses are therefore claimed. Make sure each payment is analysed. Write the cheque number on invoice with red pen to show that it has been paid and file invoices in cheque number order in a binder. Income - Cash Received Record

i) Write receipts into book in date order. ii) Lodge all receipts relating to money received directly into your

BUSINESS BANK ACCOUNT. Avoid lodging receipts into your personal account. Also avoid, wherever possible, using cash received to pay expenses without passing the money through the business bank account; however, if this is not possible, ensure that the transaction is recorded correctly at the time.

iii) Keep all receipts relating to money received in a file in date order.

You should have documentary evidence for all cash received. See example at Appendix 1 for layout for records keeping. Keep all receipts, invoices, bank statements, and cheque stubs, as these will be required for the completion of your accounts. Under the Revenue Self Assessment rules, you are required to keep your records for a minimum period of 5 years from 31 January following the year of assessment. REMEMBER: good record keeping can save time and money.


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3 Allowable Expenses and Capital Allowances

1. Motor - there are two methods of claiming for motoring expenses:-

A. Actual motoring costs, i.e. tax, insurance, petrol, AA/RAC, repairs, servicing, HP interest, all can be claimed as a business percentage over total mileage.

e.g. Car Tax 160 Insurance 500 Repairs 550 HP Interest 250 1,460 x 2,000 (business miles) 12,000 (total miles) = £243

B. Mileage Allowance – based on the business mileage travelled in

the accounting period. This method is currently only available to individuals in business with a turnover below the VAT Registration threshold. It replaces the requirement to retain receipts etc in respect of the vehicle(s) used for business purposes. It also means that no Capital Allowances (see 9 below) are claimable in respect of that vehicle.

The allowances payable are:

• 40p per mile for each business mile up to 10,000 business miles in the year, plus,

• 25p per mile for each additional business mile in the same year.

2. Other travel, i.e. bus, taxi, train, plane. 3. Subscriptions i.e. in relation to the trade/profession. 4. Telephone i.e. business proportion only. 5. Materials. 6. Stationery/Postage. 7. Update Courses. 8. Room at home as an office i.e. heat, light etc divided by number of

rooms in your house.


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9. Capital Allowances e.g. car, business equipment.

Capital Allowances recognise that equipment used in a business will, commonly, depreciate in value over time; depreciation itself is not an allowable expense. You can claim capital allowances at a rate of 20% on the cost of equipment and cars used in the business. Businesses purchasing new equipment to a maximum value of £50,000 after 6 April 2008 may qualify for an “Annual Investment Allowance” of 100%.

Example of Capital Allowances claim

Car (Does not

qualify for AIA)

Equipment (Qualifies for AIA)

£ £ Costs 8,500 1,000 WDA @ 20% AIA @ 100%

1,700 1,000

WDA c/fwd 6,800 0

10. Insurance. 11. Accountancy. 12. Pensions. 13. Uniforms. 14. Bank Interest on business borrowings. 15. Books/Journals. 16. Wife's wages/adult child's wages.


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4 Self-Employed Income Tax

A tax year runs from 6 April one year to 5 April next year.

The choice of accounting date is entirely up to you. However, a period of accounts ending to coincide with the tax year end would prove to be the simplest. Nonetheless it should be noted that a 30 April year end will give the greatest gap between profits earned and the first payment date.

Once you choose your year end, you should try and stick to it.

Try and minimise the first year’s profits as these profits may be taxed more than once. See 4. below.

Submission of Tax Return and Accounts

There are two important dates as follows:

30 October after the tax year Paper Returns or if you would like the Inland Revenue to calculate the tax; OR

31 January following the tax year Electronic Returns (that will

automatically calculate your own liability)

To avoid penalties the tax return must be with the Inland Revenue by 31 January following the tax year, otherwise there will be a penalty of up to £100.

There will be a further £100 due if the return is still outstanding 6 months later.

Additional penalties can be imposed of up to £60 per day, if delays continue.


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Payment Dates for Income Tax

31 January 2009:

(i) Balancing Payment for 2007/08 (ii) 1st Payment on Account for 2008/09 (50% of 2007/08 tax)

31 July 2009:

(i) 2nd Payment on Account for 2008/09 (50% of 2007/08 tax) 31 January 2010:

(i) Balancing Payment for 2008/09 (Actual 2008/09 less already paid) (ii) 1st Payment on Account for 2009/10 (50% of 2008/09 tax)

If you pay too little tax when making payments on account or balancing payments, interest will be charged.

In addition, surcharges are due if the tax is still outstanding after the final payment date of 31 January. The surcharges are:

5% on the balancing payment unpaid at 28 February

5% on balancing payment unpaid by 31 July (i.e. 6 months late)

When are Profits Taxed?

Broadly speaking, your tax assessment will be based on the profits of your business for your accounting year that ends in the same tax year.

For example, if your year end is 30 September, the 2008/2009 assessment will be based on the accounts to 30 September 2008.

Special rules apply on commencement and cessation.

The 1st year of assessment is from commencement to the following 5 April, no matter what you choose for your accounting year end.

The 2nd year depends on the choice of accounting date. See Examples 2 & 3, Appendix 3. But in most cases, the second year will be the 1st twelve months profits.


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Profits Taxed Twice

In Example 2 of Appendix 3, you will note profits are taxed twice (i.e. the period from 1 October 2007 to 5 April 2008 = £10,000). To compensate for this, the profits assessed twice, which is known as “overlap relief”, is given as a deduction from the profit assessed for the tax year in which your business ends. See Example 3, Appendix 3.

How Is My Tax Calculated?

The profits to be assessed are reduced by personal allowances and pension contributions (if any). A typical assessment is demonstrated in Appendix 4.


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5. NIC for the Self Employed

Two classes of NIC are payable by the self employed. These must be paid unless an exemption applies:

Class 2

This is a flat rate of £2.30 per week (2008/09) payable by either of the following methods:

(a) Monthly by Direct Debit (Complete form CF351) (b) Quarterly on receipt of a demand from the DHSS issued automatically

by computer every 13 weeks.

Class 4

This is profit related and is paid along with income tax i.e. with the 31 January and 31 July payments of tax.

Class 4 is payable on profits between £5,435 - £40,040 (2008/09) at a rate of 8%, plus 1% on all profits over £40,040.

No benefits are derived from the payment of Class 4. It may be regarded simply as an additional tax.

Other Issues of NIC for the Self Employed Class 2 You can apply for exemption from Class 2 on the grounds of low earnings. The threshold for low earnings for 2008/09 is £4,825.

If your earnings in the preceding year were less than the specified amount for that year and there has been no material change in the circumstances, exemption may be granted for the current year.

Class 4 Class 4 NIC is computed on the net profit which is after capital allowances, losses brought forward, plus any balancing charge.


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Employed v Self Employed (2008/09)

£ £ £ Employed Earnings 45,000 Class 1 NIC Due (upper limit) 40,040 Less lower limit 5,435 34,605 x 11% 3,806.55 Class 1 (45,000 – 40,040) x 1% 49.60 3,856.15* Self Employed Earnings 45,000 Class 2 52 x £2.30 119.60 Class 4 (40,040 – 5,435) x 8% 2,768.40 Class 4 (45,000 – 40,040) x 1% 49.60 2,937.60

* Plus Employer’s NIC (45,000 – 5,435) x 12.8% = £ 5,064.32


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6. Other important issues for the Self Employed

Permanent Health Insurance

In the event that you may be unable to work because of an illness or accident, it would be advisable to have Permanent Health Insurance Cover. This would provide a source of income during the period of incapacity to work. You should seek expert financial advice on this matter, as there are various schemes on the market.

Pensions

The Class 2 NIC which you pay counts towards the provisions of a basic retirement pension, payable on attaining pensionable age (from 60 for women and 65 for men). In view of the pension being relatively low it is advisable to start, as early as possible, a personal pension scheme. You will not belong to an employer’s occupational pension scheme, therefore it is important to make your own provisions for retirement years.

Personal Pensions

What is best for you depends on your circumstances and the number of years you intend to work before retiring. Like any purchase, it is best to “shop around”. A pension is a long term investment, and expert financial advice should be sought. An independent advisor will offer pensions from a range of companies.

You will get tax relief on any payments you make up to a set limit. The limits are calculated as a percentage of your net relevant earnings, and depend on your age.

Pension contribution rules changed with effect from 6 April 2006 and advice concerning these changes should be sought from an Independent Financial Advisor.


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ACCOUNTS RECORDS APPENDIX 1

EXAMPLE LAYOUT

ANALYSIS OF CHEQUE PAYMENTS

Date

Cheque

No

Payee

£

Cost of

Sale

Motor

Expenses

Finance

Charges

General

Admin

Travel &

Sub.

Other Direct

Costs

Legal &

Prof.

Repairs

Interest

01/01/08 1 Maxol 30.52 30.52

18/01/08 2 Stationery 10.65 10.65

21/01/08 3 Advertising 200.00 200

25/01/08 4 Materials 500.00 500

25/01/08 5 Telephone 37.50 37.50

26/01/08 6 Insurance 150.00 150

29/01/08 7 Bank Fees 57.29 57.29

29/01/08 8 Accountancy 225.00 225

January Total 985.96 700 30.52 48.15 150 225 57.29

CASH RECEIVED BOOK

EXAMPLE BOOK

Date Received From Lodged Amount Fee Income General Receipts Additional Comments

10/02/08 ABC & Co 235.50 235.50

14/02/08 Joe Bloggs 65.00 65.00

23/02/08 XYZ & Co 150.00 150.00

February 450.50 385.50 65.00


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APPENDIX 2 Obtaining a PAYE Scheme

Information you will need to provide

You must have the following information ready:

1. General Information

o Business Name

o Trading Address

o Name and address of employer

o National Insurance number and Unique Taxpayer Reference of employer

o Contact telephone number

o Contact email address if registering using email

o Nature of business

2. About your employees

o The date you took on (or will be taking on) your first employee(s)

o How many employees you will have

o The date you intend to pay them for the first time

o How often you intend to pay them

3. About your payroll

o The address from which your payroll is run

o The name, address and telephone number of anybody who looks after your payroll


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4. Simplified Deduction Schemes only

o Name, address including postcode of each employee

o Date of birth and National Insurance number of each employee

o Nature of employment for each employee

5. Partnerships only

o Names and addresses of any business partners

o National Insurance number and Unique Taxpayer Reference of any business partners

o If you are a Limited Liability Partnership (LLP) you must provide your LLP number.

6. Limited companies only

o The company’s Registered Office, Company Registration Number and the date of incorporation.

o The names, addresses, private telephone numbers, National Insurance number and Unique Taxpayer Reference of the company directors.


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APPENDIX 3

Example 1 – Commencement – Accounting Year Ended 5 April Mr Gum commenced business on 1 October 2006 and chose to prepare accounts for the 6 months to 5 April 2007 and annually thereafter. His profits were as follows: Period ended 5 April 2007 £15,000 Year ended 5 April 2008 £25,000 Year 1 2006/07 £15,000 (1/10/06 to 5/4/07) Year 2 2007/08 £25,000 (12 months to 5/4/08) Example 2 – Commencement – Accounting Year Ended other than 5 April Mr Tooth commenced trading on 1 October 2006 and decided to prepare accounts for the first 12 months to 30 September 2007 and annually thereafter. His profits were as follows: 12 months to 30 September 2007 £20,000 12 months to 30 September 2008 £30,000 Year 1 2006/07 1/10/06 to 5/4/07 £10,000 Year 2 2007/08 1/10/06 to 30/9/07 (i.e. first 12 months) £20,000 Year 3 2008/09 Accounts to 30/9/08 £30,000 Example 3 – Cessation Following on from example 2 the doubly assessed (“overlap”) profit of £10,000 would be relieved as follows: Assume Mr Tooth ceases on 30 September 2011 and the profit per the accounts for the 12 months ended 30 September 2011 were £45,000: Final Year 2011/12 £45,000 Less overlap relief £10,000 Profit assessable £35,000


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APPENDIX 4

2008/09 ASSESSMENT

£ £ Profits per accounts 31/12/08

22,000 Less personal allowances

(5,435) Net assessable

16,565 16,565 @ 20% 3,313.00 Tax 3,313.00 Class 4 NIC* 1,325.20 4,638.20

*Class 4 NIC 22,000 (5,435) 16,565 @ 8% = 1325.20


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Ken Voller Tax Business Salt Mill Barn

Old Salisbury Lane ROMSEY

Hampshire SO51 0GD

Please note that this leaflet is written as a general guide and is not a substitute for professional advice. You are recommended to obtain specific professional advice before you take or refrain from taking any action. Whilst every care and attention has been taken to ensure the accuracy of the contents of this bulletin,

the information is intended for general guidance only and reflects the current law and practice. Ken Voller cannot be held responsible for any loss or additional liabilities arising due to the taking or not taking action based on this leaflet.

Ken Voller is registered with the Association of Taxation Technicians as a member in practice


Documents

New Self Employed - Jan 2009