Don’t get taxed by tax

Today marks the last day of the tax year. In an exclusive three-part post AAT member in practice, Lucy Cohen of Mazuma, guides you through the tax hurdles that you face when starting your own business. First up: how to get started

How to get started

When you decide to work for yourself you need to choose which form your business will take. The most common forms of business are:

• Sole-trader – you run the business on your own, usually under your own name
• Partnership – you and one or more other people jointly run the business
• Limited liability partnership – a special type of partnership that gives you and the other business owners more protection from creditors
• Limited company – an organisation that you own and control, which carries out the business on your behalf.

If you run your business as a sole-trader or as a partnership you are legally self-employed and you’ll need to let the taxman know so that you can be sent a tax return to complete each year. The good news is that it is very easy to register and being a sole trader is the easiest form of business to operate through.

When you start your own business you must register as a self-employed person with the taxman (HMRC). It is best to do this as soon as possible after you start to charge your customers for the goods you sell or for the services you provide. You can register:

• on the HMRC website
• by telephoning the tax office on: 0845 915 4515
• by completing the leaflet CWF1: Becoming self-employed and registering for national insurance contributions and tax.

You must register as self-employed even if you make a loss from your business. Every partner in a partnership business must register separately as a self-employed person. If you do not register with the taxman by 31 January following the end of the tax year in which you started your business, you may be charged a penalty of up to 100% of the tax and national insurance you owe, so it’s best to get registered as soon as possible.

How to record income and expenses

Keeping proper records is important just in case you have a tax investigation.  There are many ways that you can keep records: some people choose a sophisticated software package, some use a spreadsheet and some just use a book in which they list all of their income and expenditure.

It’s important that you have proof of all of the expenditure you incur for your business so keep those receipts safe. If you want to be sure that an expense is verifiable, keep the receipt/invoice. However, getting a receipt from a parking meter when you are visiting a customer can prove difficult. So speak to us at the year-end and make sure you keep a list of all those items that are not recorded in your books, because you couldn’t obtain a formal receipt, i.e. car parking, car washing, laundry and cleaning of overalls and so on.

As long as the expense is commercially justifiable there should be no problem incorporating the estimated items.  One of the best ways to have proof of all of your income and expenses is to have a business bank account and use it only for income and expenditure that relates to the business.  Many banks offer free banking for a time when you first open the account and some banks even have free business bank accounts for life so it’s worth shopping around.

What happens if I get it wrong?

It’s important that you get your record keeping right for a number of reasons.  One good reason is so that you declare the right figures on your tax return, but a very good reason is because of HMRC’s recent initiative which they have called a ‘Business Records Check’.  The Taxman believes that a lot of businesses do not pay the right amount of tax because they don’t accurately record their business income and expenditure. In other words their business records are not of a high enough standard to produce accurate accounts.

So HMRC is now sending out 120 tax officers to examine the un-sorted raw records held at thousands of businesses. If the tax officer (who is not a trained accountant), judges the business records to be inadequate the business owner could receive a penalty of up to £3,000. Although the Business Records Check programme was suspended following a review earlier this year, it is still good practice to keep proper records of everything and to get an accountant who will be able to help you if you’re not so hot with the admin side of your business.

If you discover that you have made a mistake when filling out your tax return then you can submit an amended one – you have one year from the date of filing (31 January) in which to make any changes.  Contrary to popular belief, HMRC can be pretty helpful if you are honest and open with them; even its penalties system is based on how cooperative you’ve been during investigation.

Genuine mistakes are usually not punished with a heavy penalty, and you may just have to pay a bit of interest on any tax that was due to them that has resulted from the correction of any errors.

In her next post, which goes live on 12 April, Lucy offers advice on registering for VAT.

You can also follow Lucy on Twitter.

Lucy Cohen is the co-founder of Mazuma Accountants.