Question 1

Do I need an accountant?

Accepted Answer

Using an accountant will ensure that you do not put yourself at risk to the various HMRC penalties and end up having to pay interest that is charged for late registration, late submission of tax returns and late payments of tax.

Question 2

How do I make sure I put enough aside to pay my tax bill?

Accepted Answer

If you are operating as a limited company, then there are very specific limited company tax rules. However, if you are operating as a sole trader then it’s all rather more flexible. You will need to pay tax twice a year, on 31st January and 31st July via what is known as ‘payments on account’, and your accountant will be able to advise you on this.

At the end of the tax year (5th April) you will need to provide your accountant with a full set of income and expenditure figures. From these, they will be able to work out your tax liability and will tell you what your payments on account will be for the following year. You will still need to fill in a normal personal tax return. The timescales for completion of your tax return are the same as for an individual – but the sooner you do it after 5th April, the sooner you will have an exact tax liability figure for the following year.
As a general rule of thumb, if you put 30% of everything you earn to one side, this should cover you for tax and national insurance, but you will be able to adjust this over time as you get a feel for your likely tax bills. Don’t however make the mistake of not putting anything aside, as you will be in for a nasty shock when the bill comes in!

Question 3

What are the advantages of being VAT registered?

Accepted Answer

Even if below the threshold, many people choose to register for VAT to give their business more ‘kudos’ with customers, or simply to make it appear larger than it really is – and this is entirely up to you.

If you do choose to register for VAT then there is the advantage of being able to claim the VAT back on everything you purchase for the business, but the ultimate benefit of this will depend on the type of business you have. If you buy things in and sell them on as part of your business function then it will be an advantage, but if you just charge for your services and only buy things like stationery which are required to run the business, it will be less beneficial.

Question 4

Will I need a business bank account?

Accepted Answer

Technically no – but most people who set up a business of any type do generally choose to open a business bank account, to keep their business and personal finances separate. If you have never had one before, bear in mind that there may be charges for various things, like paying in cheques, so ask about these very carefully when choosing a bank. Some offer the first year free, but it’s worth shopping around to find the best long-term banking partner.

Question 5

Do I have to register my business name with Companies House?

Accepted Answer

If you are operating your freelance business as a sole trader then no. As a sole trader you can choose pretty much any name you like, but once you register the name as a formal business entity there will be some restrictions – so even if you are only setting up as a sole trader now, you might want to register your name straight away, to protect it in the future if you do choose to go limited at a later date. Also, by registering your name you will make your details present at Companies House, which provides credibility and helps to build client confidence.

Question 6

How do I reclaim VAT on my purchases?

Accepted Answer

Every quarter (every 3 months) you would fill in your VAT return form (online only) and submit this to HMRC. This must show all your output tax-this is the total VAT your company has charged your customers on products and services which you have provided. You also include the VAT charges you have incurred on purchases for your company such as supplies, equipment, stock etc, this is known as input tax.

HMRC will then review your VAT form and should your outputs exceed inputs, you must then pay the difference to the government, however if your inputs exceed the outputs your company is then entitled to a refund.

If on the Flat Rate Scheme you cannot reclaim on VAT unless you have done a bulk purchase, on one invoice/receipt which at a cost of £2,000 or more.

Question 7

What is a P35?

Accepted Answer

A P35 is a yearend return completed by all employers. The P35 is a summary of the deductions made from the employees’ salaries reconciled to the payments made to HMRC during the tax year. Any difference in the reconciliation between the PAYE payments due and actually paid can then be identified. The P35 is completed for each individual tax year and is submitted to HMRC together with the employees P14 (The P14 is similar forms to that of the more well known P60).

The P35 must be submitted to HMRC no later than 19th May after the previous tax year. The P35 can be submitted using the HMRC website, direct from the payroll software or by paper if allowed.

Question 8

Construction Worker Tax Returns

Accepted Answer

As a self-employed construction worker or mechanic, it’s likely you’re busy enough doing the day to day, never mind spending your time completing your tax return.

Question 9

I’m a CIS worker, can I claim expenses?

Accepted Answer

As a builder working under the CIS (Construction Industry Scheme), you certainly can claim any expenses incurred as a result of your work.

Question 10

How do I record business expenses?

Accepted Answer

For any business expense, you need proof of purchase, usually in the form of a receipt. These receipts are then added up at the end of the year and the value put on your self-assessment tax form. HMRC recommends that you keep your receipts for six years, so make sure you invest in some box files!

Question 11

What records do I have to keep?

Accepted Answer

By law, everyone must keep records of their income, and of any ‘capital gains’, for at least 22 months after the end of the tax year – and if you are self-employed as a sole trader, you’ll need to keep these records for at least five years and ten months after the end of the tax year.

We’d always recommend that you manage your finances in an organised fashion from Day One – in fact, as a self employed person it’s a legal requirement. That doesn’t necessarily mean investing in expensive accounting software, unless you feel you really need it – but instead, at a most basic level, keeping a record of every payment you receive from a customer and every business expense you have. If you enter everything into a simple spreadsheet in Microsoft Excel, you’ll always know where you stand.

You’ll need to keep copies of every invoice or sales receipt and every expense receipt. Keep these somewhere safe, filed either by month or by customer – whichever works best for you – and make sure that you can find any individual piece of paper whenever you need it.

FAQs

Frequently asked questions