As a self employed person you will be paid gross by your customers and will pay tax on your profits through your self assessment tax return.

You will be expected to invoice your customers and it is important that you keep proper records for tax purposes. You do not have to have a separate business bank account but many people find it useful to keep their business affairs apart from their personal finances.

You must keep copies of all your invoices to customers and your receipts for expenses (especially if you are VAT registered). You should keep a record of business income and expenses, either in a simple ledger or a bookkeeping software package.

You must complete a self assessment tax return each year. It is essential to complete your tax return as soon as possible as you will then be able to plan for your tax payments.

Further details relating to tax returns and record keeping are in our section on Self Assessment.

You must tell HMRC that you are trading and you must do so within three months of starting the business. If you do not do this you may be liable for a penalty.

If your turnover exceeds £85,000 in any 12 month period you must register for VAT. You must tell HMRC within 30 days of your turnover reaching this level.

You must complete a self assessment tax return each year. It is essential to complete your tax return as soon as possible as you will then be able to plan for your tax payments.

Your first tax bill will be on January 31st following your first tax year - so if you start the business in March 2021 your first year is 2020/21 and the tax becomes due on January 31st 2022.

Also, your first payment of tax, say January 2022, will probably also include a payment on account for the next year so you will pay one and a half years' tax in one go. This usually only happens in your first year of payment.

Payments on account are made every year and are based on the tax payment for the previous year and fall due on January 31st in the tax year to which they relate and July 31st following.

So, in this example, if your 2020/21 tax payment (due January 31st 2022) is £6,000, you would also make payments on account for 2021/22 of £3,000 on January 31st 2022 and £3,000 on July 31st 2022.

Possibly. HMRC use profiling software to decide which tax returns are worth investigating.

Anyone who is self employed may find themselves on the receiving end of an investigation without knowing why. However, if handled correctly, an investigation may not necessarily be as daunting as it first appears.

There are three key points to a 'painless' tax investigation -

Keep accurate records. These are the backbone of your case and the more accurate and detailed they are - the stronger your case. HMRC may try to show that your records are inadequate.

Deal with HMRC enquiries promptly and efficiently. From your first response to an inspector's query she will be building up a picture not only of your business but how responsibly and seriously you take your tax affairs. This can become very important when it comes to penalty negotiation.

Negotiation - The inspector has the power to negotiate on penalties and will take into account factors such as how you have helped with the enquiry, what course of action you are offering to put matters right and the seriousness of any offence. Through careful negotiation what appears to be an insurmountable worry can become manageable.

Most importantly, remember - the sooner you deal with any problem the sooner it can be resolved.

We offer insurance against the cost of a tax enquiry - so your professional fees will be met by the insurer. But you can’t insure against the additional tax, interest and penalties which may be due at the end of a tax enquiry.

Trading as a limited company will give the directors a measure of protection against commercial creditors.

A sole trader or partner is fully liable for the debts of their business and may be made bankrupt if the business fails. A company director is usually only liable for the company debts to the extent of his share capital in the company, except in cases of fraudulent trading.

The tax implications of forming a limited company are wide ranging and professional advice should be taken before trading as a limited company.

See our Limited Company details elsewhere on this site.

There are no definitive rules to say whether a person is employed or self employed. Usually, the distinction is whether you are working under a contract of service (employment) or a contract for services.

There have been a number of cases in the courts which have attempted to make this distinction. Following those cases HMRC will usually look at the following factors -

If you can answer 'Yes' to the following questions, you are probably employed.

  1. Do you yourself have to do the work rather than hire someone else to do it for you?

  2. Can someone tell you at any time what to do or when and how to do it?

  3. Are you paid by the hour, week, or month? Can you get overtime pay?

  4. Do you work set hours, or a given number of hours a week or month?

  5. Do you work at the premises of the person you work for, or at a place or places he or she decides?

If you can answer 'Yes' to the following questions, it will usually mean you are self-employed.

  1. Do you have the final say in how the business is run?

  2. Do you risk your own money in the business?

  3. Are you responsible for meeting the losses as well as taking the profits?

  4. Do you provide the main items of equipment you need to do your job, not just the small tools many employees provide for themselves?

  5. Are you free to hire other people on your own terms to do the work you have taken on? Do you pay them out of your own pocket?

  6. Do you have to correct unsatisfactory work in your own time and at your own expenses?

HMRC have published guidelines which gives their view of how to decide whether someone is employed or self employed.

It’s a legal requirement to keep proper tax records. HMRC have a detailed web page on the subject here.

Self Employment

How should I administer my business?

What do I have to tell HM Customs & Excise?

How do I pay my tax?

Will I be subject to an investigation?

Should I trade as a limited company?

Am I employed or self employed?

What business records should I keep?

Self AssessmentSelf_Assessment.html
Capital Gains TaxCapital_Gains_Tax.html
UK Rental IncomeRental_Income.html
Limited CompaniesLimited_Companies.html

"The harder I work, the luckier I get."

Sam Goldwyn

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A word about tax enquiries

This article was written by a consultant at Solar Tax to update accountants on HMRC enquiry tactics :

Whilst HMRC can launch an investigation into a business at any time within the statutory time limits enquiry notices are usually timed to be issued at specific times of the year in order to control work flow within the department. Most practitioners will be aware that a favoured time of the year is the end of January – accountants are hoping that their problem clients may have avoided an enquiry only to have those hopes dashed by an enquiry notice dated right at the very end of the month.

The initial letter from HMRC can be quite intimidating as HMRC tend to throw the kitchen sink at it. The letter will often embrace every single aspect of the business and will often be a standard template padded out in parts by reference to the particular client. This can be evidenced by a request for an analysis of debtors in a case where debtors amounted to £6! When this was gently pointed out to HMRC, the reply rather huffily said that HMRC was entitled to ask for the information and it should therefore be provided! Common sense eventually prevailed and no analysis was provided!

Fridays are another favoured time for issuing enquiry notices – what better way to start a weekend than to open the post on Saturday morning and discover that HMRC is about to investigate your business?

The modern way is for HMRC to impose a non-statutory time limit on the taxpayer for the production of the information requested in the opening letter. It will often not be possible to provide this within the time frame specified, and it is advisable to make contact very quickly with HMRC if this is the case and agree an extended deadline. This can be useful in both getting some sort of relationship started with the officer dealing with the enquiry and also gaining maximum penalty mitigation relating to cooperation if the worst happens and there is culpability.

HMRC has a variety of techniques which are employed in deciding whether or not a business should be investigated. This “risk assessment” process can be very informative as it will compare the results of the business to other similar businesses; it will produce statistics such as gross profit margin, mark-up rate and comparisons to earlier years. The problem is that if a case is “risk assessed” the officer cannot decline the invitation to investigate. Officers have quite openly admitted that they had no choice but to open an enquiry, even though they knew that there was nothing in it for them, because the risk assessment process had identified the case as warranting an enquiry.

Accountants do not have access to the risk assessment software used by HMRC, so what are the trigger points to look out for?

The simple answer is patterns!

HMRC loves to see consistency across a business, both within the business itself and also across similar businesses. It will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease. If profit goes down HMRC will raise an eyebrow if proprietors’ drawings/directors remuneration goes up!

If turnover increases substantially it begs the thought that maybe not all of the turnover in the previous year was declared. If it drops significantly then maybe some has been taken by the owner and not declared?

Suspicion is aroused if the claim in respect of power and light increases well beyond what would be expected comparing it with the previous year (and bearing in mind known increases in tariff). The HMRC officer will wonder whether working hours have increased (hence the increase in power/light) and therefore the officer will wonder why turnover has gone down!

Proprietors’ drawings will be similarly scrutinised – a substantial increase could mean that drawings may have been understated in the past, leading HMRC to wonder whether any cash takings have found their way into the proprietors pocket rather than the company’s books. If the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business!

Gross profit margins are a favourite barometer for judging whether or not a businessman is declaring all of his income to HMRC. The GPR of the business will be examined over a period of up to 6 years to see whether or not it is consistent. It will also be compared to similar businesses and fluctuations of more than 3% will arouse suspicion. HMRC has access to a wealth of information to indicate what the GPR of a particular type of business should be and will be well aware of most of the tricks which the less scrupulous businessman may try in order to disguise the true GPR of his business.

Clients will often be amazed at the depth of knowledge which HMRC may have concerning their business. HMRC has access to information concerning for example the amount of wastage which an experienced butcher would expect from preparing a pig for sale, the wastage which a chef would suffer when grilling a 10 ounce steak. In my previous life as a tax inspector I was present in the kitchen of a Greek restaurant weighing each ingredient as a tray of moussaka was prepared. This enabled me to calculate the profit margin on each serving and led to a rather large adjustment in the accounts!

HMRC will scrutinise invoices carefully. I had a client some years ago who had a Chinese takeaway.

HMRC found that when purchasing potatoes the proprietor bought 5 sacks for which he paid by cheque with a further two sacks for which he paid in cash. The two sacks for cash were converted to chips and the sales were not recorded, thus the GPR was unaffected by the unrecorded sale. How did HMRC discover this? – it was written on every invoice “five sacks by cheque plus two by cash”!!

This practice had been going on for years and a significant settlement was agreed with HMRC!

HMRC will often target a particular sector because it has become aware of consistent malpractice across the sector. Security companies have been under the microscope for a while now, mainly because it is known that many of them engage guards as self-employed workers but the reality is that they are employees.

Medical practices, dentists and vets are targeted because they engage locums as self-employed workers whereas in reality it is nigh on impossible for a locum to be self-employed.

Professional footballers and their clubs have been under scrutiny for a few years now mainly because in some cases a player will receive a payment for the exploitation of his “image rights” and HMRC does not approve of this because it reduces or in some cases completely avoids liability to UK tax. HMRC appears to be feeling its way somewhat in this area contending in some cases that there is no such concept in UK law but in other cases seeming to acknowledge that image rights do indeed exist as a concept!

HMRC will be concerned as to whether or not an individual has the means to finance his standard of living. Information will be gained in this regard from a variety of sources, giving HMRC details of property owned, cars, boats, bank accounts, horses etc. There will often be perfectly sound explanations as to how such assets may have been acquired. I had one client who was investigated because HMRC drove past his house and saw half a dozen boats in the client’s drive. The explanation was that he was allowing fellow yacht club members to store their boats there during the winter, but it still took HMRC the best part of 18 months to accept that the enquiry should be closed without any adjustment.

Another client was the subject of a tip-off to HMRC by a neighbour who became somewhat jealous at seeing a new Porsche parked in the drive every other year. The explanation was again quite simple – once the first Porsche was acquired, it only cost around £20k to exchange it after 2 years for a new model, but again it took a full scale enquiry into the client’s company before HMRC would close the case down.

I knew an accountant who returned a net profit of £5k per annum and he was investigated by HMRC who saw a Rolls Royce with the accountant’s personalised number plate attached to the car! HMRC had a point!!

An on-going case concerns a client who HMRC insists has a number of caravans which he rents out. The information is allegedly from a “reliable source” but the client is adamant that he has only one, and the caravan park has confirmed this. There are no unexplained deposits in the client’s bank account and he lives a modest lifestyle with no indication that there is significant undisclosed income. There is also no indication as to how he could have acquired a number of caravans in the first place. We are now at a stage where HMRC either has to give an idea of where this information has come from or close the case down.

Some HMRC officers will scour the weekly adverts in the free local paper to see who is advertising their services and will then check to ensure that they are all registered with HMRC. They may check adverts in newsagents’ windows, in supermarkets and DIY stores with the same purpose in mind. Jealous neighbours, relatives and ex-wives will volunteer information to HMRC some of which may be malicious but some may be true and HMRC will usually investigate to see whether or not there is a case to answer.

I knew of a tax inspector many years ago whose 6 year old daughter returned home from a friend’s birthday party asking why she couldn’t go on holiday to Barbados like her friend. My acquaintance knew that the friend’s father was a taxi driver and the following Monday he checked the records of the girl’s father and opened an investigation because the declared profits did not support a holiday in Barbados and sure enough the business takings were grossly understated for a number of years!

So you can see from the above how HMRC can acquire information and use it to investigate a client. With experience it is possible to risk assess your own clients and at least address possible inconsistencies in advance of submitting self-assessment returns to HMRC. In this way explanations can be provided which may help to avoid an enquiry or the client can be made aware in advance that his figures pose a risk

Tax InvestigationsTax_Investigations.html
VAT Short GuideVAT.html

Planning for Self Assessment

Every year the self-assessment deadline brings a sense of quiet panic for many people. Of course, if you are one of those super-organised people who have their tax return completed months in advance then this doesn't apply to you. For the rest of us, the stress created as the deadline of January 31 ticks nearer is very real indeed.

Is there anything you can do to reduce the burden of last minute tax return filing? Here are some suggestions :

Create a Routine

Throughout the year it will be easier if you can make your bookkeeping and tax filing part of your business routine. Put it in your schedule at least once a month and get up to date. Dealing with tax papers in smaller chunks makes it a lot less daunting.

Organise Your Data

As paperwork arrives - either physical or electronic documents - find a home for them so they are ready to be actioned when you next are working through your tax or accounts. This should include paper or e-statements from your bank. Even if you are only collecting paperwork to pass to your accountant for processing, having a good system will mean you can easily spot if something is missing.

Consider sharing a DropBox folder or similar with your accountants so they have immediate access.

Review Regularly

If you run your own business, particularly if you are VAT registered, don’t leave bookkeeping to the last minute. Having quarterly VAT returns can be a good incentive to ensure that your business records are current.

The added benefit is that you will have a good feel for the current state of your business, you will know what you owe and who owes you money.

Use the Right System for You

It doesn't matter if you use cloud based integrated invoicing and accounting software, desktop bookkeeping software, spreadsheet based records or even manual ledgers. As long as your system works for you, that's the important thing. And don't be led by your accountant into using software which leaves you confused.

If you use a system which works best for you, you will get the most out of it. If you are a spreadsheet whizz kid, using spreadsheets may not give you 'push of a button' management accounts - but maybe you don't need them if your spreadsheet data tells you everything you need to know about your business.

Talk to Your Accountant

Your accountant or tax adviser is there to help. They won't mind if you send data across to them at regular intervals so send it when it's fresh. You could ask your accountant to review the year to date if that would help your business plans.

If you are struggling with your current system, ask your accountant to help you find a better one. They will know of plenty. But beware accountants who are tied too closely to one software product as it could be in their interests to sell it to you, but not necessarily yours.

Plan Your Tax Bill

Getting your tax return completed early means you have plenty of notice of any tax bills falling due in January and you can budget accordingly. If you are due a tax repayment, you will get it back earlier.ß

Do you need help with filing a tax return?

We can complete and file a return for you with all tax calculations taken care of.

We can agree a fixed fee in advance.

Contact us for details

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