Updated: May 4, 2018
Becoming self employed can be something a person sits and considers for a long time, they may map out a business plan, have grand ideas about a fast growing business, snowballing into a mega organisation earning tonnes of cash all for very little effort. Or, as is the case for many self employed people, they are offered work directly by a customer or decide to buy something and sell it on, taking each day as it comes to earn a little money into their pockets each month.
If you have become self employed you may now be doing some very important research (mostly involving googling "I'm self employed, what do I need to do about tax") and have ended up here.
As a Chartered Accountant with my own practice, I make a commitment to my clients to be straight talking, jargon free and treat them as my colleagues. I meet many newly self employed individuals and they pretty much ask me the same thing, What do I need to do? So I thought I would lay out my first 5 pieces of advice I would give to clients that I meet.
1 - Inform HMRC.
I know that everyone wants to stear clear of HMRC, but in the endless list of reasons you have to contact them, this is one of the easier tasks. You need to tell HMRC you are self employed, all you need to do is fill in the following form. https://www.tax.service.gov.uk/shortforms/form/SA1
There is a deadline for telling HMRC which can confuse people. Whatever date you start working for yourself, follow the calendar forward to the next March and then forward again to the following 5th October. This is the deadline. In practical terms, I advice just to jump on it and get the task done as soon as possible.
2 - Gold Dust - UTR
Once the form above is done HMRC will send you a UTR (Unique Tax Reference) this is your personal 10 digit code, which if you lose it, can only be gained again by letter, so treat it like gold dust and don't lose it. You need this code to speak to HMRC about your tax affairs, appoint an accountant, or even to file your own tax return.
Get your UTR and then register on HMRC for a Government Gateway, this is the system that you file your tax return if doing it yourself, and this is only accessible once HMRC send you a security code to your home address, so again, jump to it, get it registered so it's done well before you need it.
3 - Pinches of Salt
Friends, family and even random strangers will all offer advice to you as self employed. They will no doubt all tell you that pretty much every expense can be deducted as a legitimate business expense so that you can pay zero tax and zero national insurance. Software adverts will tell you that by photographing your receipt the system will magically know the complexities of the UK tax system and work your tax bill out. My advice is take all unqualified advice with a pinch of salt. Everyone completing their own tax return is unique and so is their business. Many people completing their own tax returns will claim expenses and HMRC website will just take whatever figures it is provided. It is not until that person may be investigated by HMRC that some of the expenses they have claimed may well be challenged by HMRC. At this point, friends are not usually so generous with advice and experience!
So my top tip is to go and seek a little professional advice. Most accountants will provide a free half hour or full hour of advice. Take this up! Ask them questions, get some pointers as to what expenses you can claim, safe in the knowledge that you are not doing something completely wrong.
4 - Go to the bank!
Make the effort to set up a separate bank account for your business transactions. Honestly, you (or your accountant) will thank you for making the effort. Use this separate bank account to receive all money from your customers and pay all your expenses. When you need cash for yourself transfer a chunk from this business account to your personal account.
Try to leave enough cash in the business account to cover your tax bill at the end of the year (see our blog on How much do I need to save for tax?)
5 - Basic Bookkeeping
As much as you may feel like just leaving all your receipts in your email account and relying upon your own memory to recall who every amount of money paid into your bank account is from, just don't!
There are far too many people and far too many companies who are pushing every kind of bookkeeping software onto anyone and everyone. Our advice is that in the next few years you will need to use some kind of software to keep records (see our blog - Making Tax Digital, what do I need to do now?) but until that point, get a basic system of listing out the following:
Sales - Date, customer name, £value and when received
Expenses - Date, supplier name, £value and when paid.
It really helps you (or an accountant) if you then total up the expenses into categories, such as all the motor expenses, all the costs of goods you purchased to sell, all your telephone costs etc.
Finally - Warning signs you should seek advice
Many people are more than capable of preparing their own tax returns, but the following situations should flag up red lights and point you towards seeking professional advice.
1 - If you think you will sell over £85,000 of income in any 12 month period
2 - If your profit will be over about £20,000 as may be able to reduce tax liabilities with a different business structure.
We hope the above has been helpful and wish you great enjoyment at launching your own business. Butlers Chartered Accountants does offer a free half hour of advice to new clients, so if you would like more help, please do not hesitate to contact me. HM@butlersfinancial.co.uk