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Sole Trader and Self Employed Tax Return Preparation and Advice

Do I need an accountant if I am self employed?

Although some people feel comfortable submitting their own self-assessment tax return there are more tax rules, reliefs and allowances to think about when you are in business. Unless your business is very small and simple you will benefit by using an accountant to prepare your accounts and tax return. You will be sure that you are paying the right amount of tax and we will be able to advise you on possible tax savings and ways to manage your tax liabilities.

If you are just setting up in business an accountant can help you decide if you should operate as a sole trader or consider setting up a limited company. If you do decide to operate as a sole trader an accountant will help you with the initial steps to set up your business such as registering with HMRC and deciding if you need to register for VAT.

Using an accountant may not be as expensive as you think. It will give you peace of mind, save your time and could save you costly mistakes with your tax affairs.

You can read about operating as a sole trader, including the need to keep records and prepare accounts on our Sole Trader Accounts page. You can also read about preparing and submitting Self-Assessment Tax Returns in general on our Self-Assessment Tax Return page.

If you would like a free no obligation meeting to discuss how we can help with your self-employed accounts and self-assessment tax return just get in touch.

To find out more about registering as a sole trader, and the preparation of self assessment tax returns for sole traders – read on.

Self assessment if you are Self employed or a Sole Trader

If you are self employed (sometimes referred to as a sole trader) you will usually need to register with HMRC and complete a self- assessment tax return.

You will need to register with HMRC (H. M. Revenue and Customs) if any of the following apply:

  • you earned more than £1,000 from self-employment in a tax year (6 April – 5 April).
  • you need to prove you’re self-employed, for example to claim Tax-Free Childcare
  • you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

You need to register by the 5 October in your second year of trading. Registration can be done online at

https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

Self assessment tax returns for the Self employed or Sole Trader

Your self-assessment tax return will contain an additional section containing details of your income and expenses from self-employment, as well as any claims that you want to make for trading losses or capital allowances.

If your business turnover is less than the VAT threshold and your accounts run to 31st March or 5th April, you can complete the short Self Employment pages (SA103S) pages of the tax return. Otherwise you will need to complete the full pages (SA103F).

Most – but not all the information for your tax return will come from your accounts. For small businesses these may be figures summarised on Excel.

Some examples of the adjustments and allowances that may be required and that we can help you with follow. Please note – this is not a complete list. There are too many tax rules to mention here but this will give you a flavour of the things you will need to deal with if you complete your own return.

Private Use Adjustments – You may use your own phone or mobile for your business – but how much can you claim as business expense? We can help you work out a reasonable figure that HMRC will accept.

Non-tax-deductible expenses – Some expenses incurred by your business may be non-tax deductible. You cannot deduct them when calculating your business profit. Examples include entertaining clients and certain legal expenses.

Use of home as office If you run your business from home you can claim an allowance called ‘use of home as office’. If your business use is minimal this will be a flat daily rate. If your use of home is more substantial we can calculate a figure each year using your actual household bills and council tax and using an appropriate percentage of these costs.

Motoring expenses – If you use your own car or van for business purposes there are two different ways you can claim this is an expense. The first is to put all your motoring expenses through your accounts and then make a private use adjustment. The second, which is simpler and usually as beneficial is to claim a mileage allowance for the business miles that you travel in your vehicle.

Capital allowances

The assets of your business are items you buy to keep and use in your business, such as computer equipment, machinery and office furniture and cars. The general term for such items is ‘plant and machinery’.

The cost of these items is not deducted as an expense through your Income and Expenditure Account. Instead you need to keep a record of them – the date of purchase and cost and claim ‘capital allowances’ – which are an adjustment (deduction) to your taxable profits.

In most cases you can deduct the full cost of these items from your profits before tax using the Annual Investment Allowance which is currently £200,000. That means that if you have profits of £200,000 and have spent £80,000 on qualifying assets your taxable profits are reduced to £120,000.

You can’t use the annual investment allowance for most cars and if your expenditure on capital assets exceeds the annual allowance.

In these cases, capital allowances are claimed as a ‘writing down allowances’. Assets are placed into pools of expenditure and a percentage of the pool value is allowed as a deduction against profit. The percentage depends on the type of asset.

It’s worth noting that you don’t have to claim capital allowances immediately. If your taxable profits are less than the personal allowance a capital allowances claim would be a waste as you a reducing a non-taxable profit to a smaller non-taxable profit. If you defer claiming capital allowances on an asset you purchase, you cannot claim the Annual Investment Allowance and must claim Writing Down Allowances. These terms are explained below. Waiting and claiming a Writing Down Allowance when the business is more profitable is more tax efficient than ‘wasting’ an Annual Investment Allowance.

Capital allowances are a complex area and further guidance can be found on the HMRC website at

https://www.gov.uk/capital-allowances

Trading Losses

Trading losses may be expected when a business is starting up and even established business can experience difficult years or periods when investing for growth results in losses. Trading losses can often result in a valuable refund of tax.

If you would like a free no obligation meeting to discuss how we can help with the most tax efficient use of your trading losses just get in touch.

Trade losses may be used in several ways against:

  • income or possibly against capital gains of the same year or an earlier year
  • profits of the same trade from the previous year of future year

Not all losses may be claimed in all these ways and sometimes the amount of loss you claim is restricted or limited. There may also be more than one way to utilise a loss and it’s important that you choose the right relief for your circumstances

There are particularly flexible ways of using losses that occur in the first four years and final twelve months of trading.

If you would like a free no obligation meeting to discuss how we can help with your self-employed accounts and tax return just get in touch.