BUSINESS: The 3Rs - A Basic Guide To Keeping The Taxman Happy

When you’re caught up in a wave of enthusiasm, setting up your online store, going to your first craft fairs, busy earning recognition for your handmade work, it can be hard to find the time or, to be honest, the interest to focus on tax.

However, even if you’re still doing the day job, creating in your spare time and not yet making a profit you should follow the 3Rs: REGISTER for tax purposes, keep adequate RECORDS and submit a RETURN – although you may not actually have to pay any tax.

What follows is a brief introduction to the basics. There’s a lot more information and helpful questionnaires to guide you through the requirements as they might apply to you at ‘Business Link’, a free business advice and support service. For advice on specific issues, Business Link has a network of advisers and HM Revenue & Customs (HMRC) offer various support services, including a helpline for the newly self employed 0845 915 4515.

illustration by Askey Illustration

REGISTER
To find out what taxes apply to you complete the quick ‘Business Link’ questionnaire. For example, someone who is a working on their own (a sole trader), with no employees, should:

• Register with HMRC as self employed; and
• Register for Class 2 National Insurance Contributions (NIC). The good news is that if you expect your profits from your self-employment to be less than £5,075 in the tax year, you can also apply for Small Earnings Exception Certificate so you don't have to make Class 2 NIC payments. You do have to register first though (there are potential penalties if you don’t do so promptly) and should apply for the exemption as soon as possible.

Broadly speaking, you do not have to register for VAT unless you’re turning over more than £70,000 a year. People with a lower turnover can choose to register if they wish, so as to reclaim VAT on goods and services that they buy. However, as they also then have to charge VAT on their goods and services and complete a quarterly VAT return, this is not a decision that should be taken lightly.

RECORD

Why keep records?

• They help you tell how your business is doing (and are vital if you wish to seek external funding).
• They’re needed to complete your tax returns.
• If HMRC check your return, they may ask to see the underlying records.
• If you don’t keep records or keep them for long enough (6 years), you may have to pay a penalty.

What sort of records should be kept?
More detail can be found on the ‘Business Link’ and HMRC sites but basically you will need:

• Details of all your income – sales and takings- e.g. in a cashbook
• Details of all your purchases and expenses – again in a cashbook
• Documents that support your own records such as invoices, receipts and bank / building society / Paypal statements that reflect these.
• Separate records of the purchase and sale of any assets used in your business (e.g. a computer, a sewing machine) as you may be able to claim ‘capital allowances’ for these, spreading the cost over time.
• Separate records of any money or goods taken out of the business for your own or your family's personal use as they must be included in your profit calculation at their normal retail price.
• Records of the split of things used for both business and personal use so you can work out which expenditure relates to business use and which is for private use. For example, if you use your private car to carry your things to and from a craft fair you can claim a mileage allowance (40p per mile for the first 10,000 miles). Similarly, if you work from home you may be able to claim for a proportion of the premises costs (rates, light, heat, insurance etc.).

RETURNS

Which return?

• If you're self-employed, have relatively simple tax affairs and your annual business turnover is below £68,000, you may use the SA103S short version of the Self-employment supplementary pages when filing a tax return. It’s only two pages long and basically just requires details of your total income and expenses.
• Self assessment returns can be submitted on paper copies or online. There are several advantages to completing the return online, including the fact that your tax is calculated automatically.

What are the deadlines?
The basic rules for self assessment are that:

• Paper tax returns must be received by HMRC by midnight on 31 October;
• Online returns must be submitted by midnight on 31 January (or 30 December if you owe less than £2,000 in tax and want HMRC to collect it by reducing your PAYE (Pay As You Earn) tax code next year).

So, those are the basic 3Rs of tax - Registration, Records and Returns - and there should perhaps be a 4th, REMEMBER you're not in this alone. Have a look on Business Link and the HMRC site for further guidance; use their local advisers and support staff if it's easier to speak to a real person; and finally perhaps contact a professional adviser for specific issues, in particular as your business grows and you start to think about forming your own company. Corporation tax - now that's a whole new topic!