Completing your first self-assessment tax return remains a tedious task. Many UK citizens do not dare to do so until and unless they are sure of it. However, it is a necessity now, and you need to keep your accounts fair before the HMRC. It is easy to know what to do if you understand the dynamics of taxes in the UK.
If you do not know many clues about it, then stay away from filing any paperwork. Read through guidelines and build your knowledge first. This article is for small businesses and emerging entrepreneurs who are doing their self-assessment for the first time. By the end of this article, you will be confident in doing so and maintain the deadline and ultimately keep visits from HMRC officials at bay.
It is a mechanism of tax collection for the UK’s HMRC’s. Most workers in the UK pay their income tax via their salaries and wages, savings, and pensions. The requirement for self-assessment is actually for those who are outside the bracket of the abovementioned sources of income, and they need to file taxes through a self-assessment tax return.
Individuals who are self-employed or run small businesses primarily need to file tax returns. It is also applicable if you are registered as a “sole trader” or have earned more than £1000 in the tax year if your status is of a corporate partnership. You will not need a self-assessment if your entire income is based on salary or wages. However, if your sources of income are diverse, in the form of rental property, commissions, investments, foreign income, dividends, or savings, you will require a self-assessment tax return.
Register for self-assessment
If you are taking on this step for the first time, you will need to register. Depending on your circumstances, here is what you will need to do:
Self-employed individuals will need to fill in this form by HRMC. You will need to complete the form latest by 5th of October during your company’s second tax year and then pay Class 2 National Insurance. Failure to do so may result in a penalty.
After you have filled this form, you will get a ten-digit Unique Taxpayer Reference (UTR). At the same time, you will enrol for the self-assessment online service. You will soon receive an activation code, and that would be around ten days before you can access your account.
Those who aren’t self-employed will still need to fill the self-assessment in a case where you are a company’s Director, receive property income, have taxable foreign income, or other income sources listed. For this, the SA1 online registration form is applicable. After registering, you will need to wait around ten working days to receive a letter with an activation code and UTR. Same as above, you will need these credentials to log in to your account.
Filling the form
This form is quite simple, and you will not always find yourself scratching your head. Make sure to have all your information present before you. Besides, you will also need your UTR number and accurate figures of all expenses that shall be deducted as well.
This can be best done if you stay organized throughout the year. If you have recorded all your expenses regularly, then you will have information readily available. Online software and mobile accounting applications will allow you to record these expenses quickly.
You will need to put in all figures regarding expenses and income, and the amount you have to pay the National Insurance. You have to pay £6205 if you are a Class 2 or £8424 if you are Class 4. Also, keep in mind that if it is your first time filing a tax return and your tax for the next year exceeds £1000, you will need to put up an estimate of your income for the year to follow to make payments for the upcoming year. Eventually, the amount you owe would become half of the tax bill. Once you have entered this information, all calculations will show the due amount and the National Insurance contributions and other amounts.
Important considerations about deadlines
Your self-assessment tax return has to be completed at the end of the tax year, which is applicable. The deadline for online returns is the 31st of January, next year. If you want to submit a hardcopy of your profits, then the period is 31st of October of the current year.
This can be explained better using an example. If you are submitting a tax return for the year 2019/20, it has to be completed by the 31st of October, 2019 should you choose to go with the hardcopy option. If you are moving forward with the online process, you have an extended deadline of 31st January 2020. This is the maximum time by which you need to submit all returns. If in case you miss the deadline, then you will have to sustain a penalty that can be costly.
Failure to meet deadlines
It may seem like a rare situation, but many UK citizens miss out on deadlines. HMRC lodges penalties on tax defaulters who miss deadlines or even make late payments. There is a whole mechanism for this structure. If you file your tax return three months after the deadline, then you will have to pay a penalty of £100.
Should you fail to pay even after three months of missing out on the deadline, then worst-case scenario, the penalty multiplies since HMRC levies high interest on the sentence. This is one of the biggest reasons why you will need to adopt proper organization when filing your tax returns and not miss the deadline. If you believe you have missed the deadline, here is a way to estimate your penalty. A good thing to notice is that you can get a waiver on this penalty if you have a legitimate reason for not doing so.
Expenses that are “allowed” to SMEs
When filling the self-assessment form, you will need to add correct figures of business expenses that your company bears. Small businesses can claim funds for costs, including stationery, operational overheads, fuel costs, parking tickets, utility bills (phones), bus/trains, and uniform expenses. That is not all; staffing cost is also covered in terms of contractor wages and salaries.
Also, you can file a claim for banking charges, insurance claims, or the purchase of raw materials. Apart from that, costs relating to enterprise premises, lighting, business rates, and heating are also added. Furthermore, the expenses that are allowed for SMEs include marketing, web hosting, and advertising expenditures.
If you work as a freelancer, self-employed status, or a small company from your home premises, you are also eligible for claiming premises costs. However, these can only be a percentage of bills. What also covers this sum is the proportion of your heating and electricity bills, council tax, rent, phone, internet bills, and mortgage interest.
While you are doing this, there are some critical factors to keep into consideration. This will save you a lot of time as well as visits from HMRC. You will have a clean slate and move forward with your company smoothly. Here is what you need to do::
Keep your records complete and in a proper arrangement
Official documents should always be kept safe and secure, as a rule of thumb. Running a company, you have many legal obligations on your shoulder, and to maintain your run, keep a solid record of everything. The whole self-assessment process would be ridiculously more natural and more straightforward, provided that you have all the information readily available.
It does not matter what the nature of your business is, keep all invoices, no matter how big or small. Keep business receipts, formal contracts, published accounts, statements, and official notices. You can do this by acquiring some software or application that allows you to maintain all records in the form of invoices, reports, and contracts.
Maintain a format of your filing
You have a choice between completing your assessment via mail or online. Due to the digital revolution, the HMRC highly encourages UK citizens to get on board the online procedure because it is easier and safer to do so. However, one of the most important things to keep in mind is that you will need to first register on the online service portal. So, if you decide to file your assessment at the last minute, you may miss the deadline because it takes some time for your online profile to be created and made functional. You know the process – you get the activation and UTR number by the HMRC.
Be wary of deadlines
Do not miss the deadlines. Not only you give an impression of a responsible citizen, but you may never be under the surveillance of HMRC and might get facilitations in other matters. You must adhere to the deadlines if you have every opportunity to do so. Keep January 31st and October 31st as sacred calendar dates.
Look for additional pages.
The entry-level self-assessment form applies to all taxpayers in the UK. But your circumstances can be different in many cases, and to fill other information, you will need more pages. It is a common practice to acquire additional pages. You can get the SA900 and SA904 pages in this regard. It is also recommended that you should contact your tax lawyer or accountant regarding this. If you do not have a solicitor at your disposal, you can visit HMRC offices in your locality or district and take their help regarding it.
Always complete your form.
You need to have all the documents, and additional pages present beforehand. This way, the whole process of filing the self-assessment would be quite straightforward. You will not have any hassle at this point. Citizens who are opting for filing self-assessment in the form of a hard copy can avail extra guidance from the HMRC.
Ideally, you will receive critical information and handouts to help you file it. But if you are submitting the self-assessment online, keep wary of question marks in the green. If you tap or click on these question marks, you will see guidelines being prompted on your screen in popups containing information for your perusal.
With any online forum, you mustn’t submit without a final check. Review of your documents is necessary because it can have some implications if anything goes wrong. Adding incorrect information can lead you to suffer specific penalties.
Apart from the apparent penalties, you may also end up paying more tax than you were supposed to in the first place. You will never know if you spent too much or too little.
Before your envelope sees the daylight, make sure it contains all documents, and all the information is up to date as well as correct in the sealed envelope. If you have questions regarding anything, you should go out and reach an HMRC official and get your queries answered. At the same time, you can also get in touch with a tax accountant to help you prepare for this. Asking for help is better than committing mistakes and suffering from a penalty. It is also suitable for your reputation as a trader or a citizen.
Many companies in the first year of their operation require accounting services to stay updated with these obligations, and it is worth doing so. Filing the self-assessment should not only be your accountant’s job, but you as a business owner must take interest into it- so you understand how the system works and your steps to take in the future concerning filing taxes on time.
If you prepare and take measures now, it will be effortless to face the future. You may even let yourself withhold certain expenses to make room for taxes in your fiscal budgets.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.