The self assessment forms
You're in your first year of working self-employed and 6th April has come and gone. You are now ready to be assessed for your first year's tax. If you have notified HMRC that you are liable for Class 2 NI, you should receive a paper copy self assessment return through the post, (although with the push towards filling online, that is by no means certain).
You will need, and should have received, supplementary pages SA103 which comes in two shapes - the short form SA103S and the long form SA103F
. For the tax year ended 5th April 2011, you will only need to complete SA103F if your turnover is £70,000 or more, otherwise use the short
Preparing for the assessment
It goes without saying that you will need a Profit and Loss account in order to work out your profit. If you have enlisted the services of an accountant
or Certified Bookkeeper, you will have received a set of accounts that contain Profit and Loss together with a Balance Sheet. You are now ready to proceed.
The next step is to adjust your accounting profit to arrive at taxable profit, because the two are not necessarily the same.
Accounting profit vs Taxable profit
When a Profit and Loss account is prepared, it may contain items which either are not allowable as tax expenses or revenues that should not be taxed as trading income, but as something else.
. . . Disallowable expenses
Foremost among the disallowable expenses is depreciation. Depreciation is an accounting method for spreading the cost of an asset over its useful life. However, there are special rules that relate to how much relief can be claimed for purchases of assets. The rules are quite complicated, but involve 2 steps.
Step 1 - add the depreciation charge back on to net profit.
Step 2 - work out the capital allowance for the type of asset. Normally, for plant and machinery, you can claim the full cost in something called the Annual Investment Allowance, which is £100,000 for the year ended April 2011, and is set to fall thereafter. A complication arises with cars, because
cars are not eligible for Annual Investment Allowances, and have to be written down by either 20% or 10% per annum, depending on whether the CO2 emissions are above or below 160g per km. Vans however, are eligible for the full AIA.
Furthermore, the allowances are for a full year. If you have been trading for less than a year, they must be pro-rated. Any allowance must be further pro-rated if there is any private use of the asset.
This whole area comes under Capital Allowances, is quite complex, and is beyond the scope of these pages. I have merely covered enough to make you aware of some of the pitfalls.
Other disallowable expenses include gifts to customers unless they are
a) under £50 per head, and
b) not tobacco, food or alcohol, and
c) contain an advertisement for the business
Any personal expenses in the accounts are also disallowable, as are fines.
Any items of a capital nature are also disallowed - they should be relieved through the Capital Allowance regime.
Add all these expenses back onto net profits
. . . Income that was not included
The main item for sole traders is goods taken for personal use. These must be assessed at their retail value, not at cost.
. . . Income taxed in another way
This could include interest from bank deposits or rental income (where renting is not part of the business). Deduct this income from net profits and itemise them in the relevant parts of the self assessment forms.
Special note for partnerships
The partnership tax return - SA800 - contains a summary of the share of taxable profit for each partner. But this is NOT the end of the self assessment.