If you’re either a contractor or self-employed, you’ll be no stranger to the annual battle that is a tax return.
Tax season is upon us once again and it’s right about now that you’ll be attempting to piece together a wealth of complex financial information to present to the HMRC in time for the January 31st deadline.
Self-assessment of areas including income and capital gains taxes isn’t something that can be taken lightly, done quickly or ignored, as there are severe penalties in place for those who declare incorrectly or pay late.
Anyone whose income is not taxed automatically via the Pay as You Earn (PAYE) system needs to declare their taxable income by carrying out a self-assessment. This is where Exchequer Solutions’ essential guide to a stress-free tax year can help:
Prepare all necessary data, including your Unique Taxpayer Reference (UTR) number
The key to any successful tax return is to ensure you have a 10-digit UTR number, as they aren’t issued automatically and must be requested directly from HMRC.
This number will never change, as long as you file a self-assessment tax return each year. In the event that you revert to permanent employment, it’s vital you re-register with HMRC to receive a new UTR.
Make sure your record keeping is up to scratch
The next step is to gather all relevant financial records from 2012/13 in date order, including accurate and up-to-date details of any self-employed income, invoices, payment slips, dividend payments, interest, bank and credit card statements, travel and subsistence receipts, expenses claims and capital gains.
This can seem an arduous task, but when it comes to self-assessment, these documents can help to reduce your administrative duties.
In some instances, HMRC may ask to review your financial records to ensure all the information is correct. For you, as a self-employed person or contractor, this means maintaining records for the past five financial years. It’s important to note that HMRC imposes a maximum penalty of £3,000 for each tax year in which records haven’t been held.
Know how to claim a rebate from the HMRC for Construction Industry Scheme (CIS) deductions
A CIS rebate is a refund of tax to sub-contractors who are members of the scheme. Unlike sole traders, CIS workers pay tax at source, just like PAYE employees. This tax is deducted and paid to HMRC by their contractors, normally every month. So at the end of the year, the tax paid could be too much and sub-contractors should therefore use the tax return to claim a tax refund.
If you are self-employed or a sole trader, you need to file a self-assessment tax return to report your income and/or claim a CIS tax refund. Filing and claiming is a complex matter and all relevant figures must be reported correctly, including income, accounts and expenses. When the return is received by HMRC, an automatic comparison is made between the deductions claimed and the total payments made to the trader during the tax year and a tax refund is given where applicable.
Make sure you know all about Class 4 National Insurance contributions
If you’re self-employed and your annual profits are over a certain amount, you normally have to pay Class 4 National Insurance contributions in addition to Class 2 contributions.
The amount of Class 4 National Insurance contributions you have to pay for any tax year is based on your profits for that year. You make a balancing payment of nine per cent on annual profits between £7,755 and £41,450 (2013-14) and two per cent on any profit over that amount.
Familiarise yourself with Payments on Account
You may see an entry for a Payment on Account (POA) on your tax bill. A POA is how HMRC collects tax due for the current year and results in you making a payment on your tax bill account, with the amount due calculated with reference to the tax bill for the previous year. If the tax bill, including Class 4 National Insurance, was more than £1,000, then a POA would be due, unless more than 80 per cent of the tax has been collected at source, for example if you were a sub-contractor operating under the CIS.
Two POAs are due in 2014; half on January 31st and half on July 31st. If you think your tax bill will be less than the previous year’s, then you can apply to have the POA reduced using an SA303 form. If the tax due is greater than the POA made, then interest will be charged on the difference.
Know the rules surrounding cash accounting
In April 2013, new rules were introduced which allowed self-employed sole traders to account for some business expenses using new, simpler rules. The new guidelines allow costs to be recorded on what is called the ‘cash basis’, meaning when they are paid. Currently, the accounting rules state that transactions should be recorded when they are incurred rather than paid; known as the accruals basis. The difference between the two sets of rules occurs when items are bought or sold on credit.
In addition, the changes mean that a flat rate allowance can be used to record business costs, such as use of your home as an office and the use of your car for business trips. However, caution should be exercised, as using these simpler rules does impose some restrictions, which mean that some could be worse off than using the old rules.
Know the rules surrounding travel expenses
If you are a contractor working through your own limited company and are outside IR35, then life is very simple. HMRC rules state that expenses can be claimed provided they are wholly and exclusively for the purposes of your business.
For travel expenses you can claim the cost of travel to and from your contracted place of work; mileage rates are 45p per mile for the first 10,000 miles in any fiscal year and then 25p per mile thereafter.
It’s important to keep receipts for your travel expenses or a record of any journeys. When claiming travel expenses, it is advisable to keep a note of the dates, reason, locations mileage and type of transport used.
Late returns aren’t an option
Each and every person who is required to submit a self-assessment tax return for 2012/13 must do so before midnight on January 31st 2014. Failure to meet this deadline incurs a £100 late filing penalty as well as a potential surcharge on any tax paid after January 31st.
Late taxpayers also risk coming under HMRC’s watchful eye, which increases the risk of an investigator probing through your financial history.
Filing a self-assessment tax return in advance of the deadline, if you can manage it, enables you to receive any tax refunds (if applicable) soon after submission. Moreover, filing or returning early helps to organise your finances before any balancing payments and payments on account must be made to HMRC.
Be prepared (and don’t leave it until the last minute)
Once you have gathered all the necessary paperwork, put aside a day to go through the forms with a fine tooth comb. The biggest – and most simple – mistake most people make is forgetting to sign the form before sending it off!
Do not round-up figures
HMRC has said that doing this can indicate a person’s financial affairs have not been properly maintained and could trigger an HMRC enquiry. If you face a revenue enquiry, you’ll have to produce evidence that your tax return is correct. Around one in 20 returns are liable to be subject to further investigation.
Where exact financial figures aren’t available, enter estimates
Ensure they are as accurate as possible and don’t forget to state that these are provisional figures. Exact figures must then be submitted to HMRC at a later date.
Following these golden rules will help give you peace of mind and should result in a smooth self-assessment that you can replicate for many years to come.
For more advice or if you would like to discuss our services please get in touch on 01244 500195
