Anyone setting up in business will at some point feel the sense of dread that accompanies dealings with the tax man. Her Majesty’s Revenue & Customs do have some straightforward policies that are easy to follow – if you take time to find out which apply to you, and which don’t. If you’re a self-employed sole trader, that means you’re all alone. Hopefully, this brief guide will help avoid a trip to Tax Hell.
Before you do anything else
It is vitally important to let HMRC know that you are a sole trader as soon as you set up in business. The period in which you must register runs until the 5th October following the tax year in which you began operating as a sole trader and thus owe tax upon. For example, if you started working as a self-employed virtual assistant with sole trader status in December 2010, you had until 5th October 2011 to register as a sole trader with HMRC. If this situation applies to you, and you haven’t yet registered, then look out –the Tax Man is coming for you, and you may have to pay a penalty.
Self assessment and National Insurance
Registering as self employed means you will have to fill out a dreaded tax return. Thankfully, this can be done online – for most, slightly less of a pain than the paper version. You will also have to register to pay National Insurance. As a self-employed person without any employees, it is likely you will need to pay both Class 2 and Class 4 contributions.
The good news is that as a virtual assistant, it’s unlikely that you’ll have to register to pay Business Rates, and unless you expect annual turnover to exceed £73,000, you won’t have to register for VAT either.
Initial registration for tax and NI isn’t difficult. Fill in this form on the HMRC website.
Once this is done, HMRC will send you a Unique Taxpayer Reference number. This is important – you’ll need it in future dealings with HMRC.
Following that, in April, you will receive notice to complete a tax return. Again, this can be done online, by registering to use HMRC’s web service. To register, you will need your National Insurance number and Unique Taxpayer Reference.
You will receive an activation code in the post. This will allow access to the self assessment web application – but be careful, because the activation code expires if not used within a month of being sent. If it expires, you’ll have to request a new one, further delaying the process and exposing you to a possible fine if your tax return is late as a result.
Filling in the tax return
The complete process of filling in your tax return is far too complicated for here, but there is plenty of advice around. The big advantage of online filing is the later deadline – January 31st, instead of the previous September for offline returns. If you miss this deadline by a day, there is a fixed £100 fine which increases incrementally the later the return is submitted.
The best advice on how to avoid tax hell is simple: keep good records. As soon as you start trading, set up a filing system and stick to it. Keep records of all financial transactions, along with documentary evidence such as receipts and invoices. Also keep copies of your bank statements. You may need to produce evidence if a tax issue arises later.
Tax isn’t actually paid until the January following the end of the tax year for which it is owed. For example, tax for the financial year ending April 2011 is due by 31st January 2012. This can be dangerous for those unfamiliar with the system – it’s easy to spend the money you should be putting aside for tax. Again, prevention is the best cure. Estimate your future tax bill and set money aside.
This brief guide covers the basic points of tax for the newly self employed, but it’s definitely a good idea to plough through some more complete expert advice.
The following websites have excellent tax advice sections: