Last-minute tax return tips
It's not easy being self-employed is it - especially at this time of year. Your online self-assessment tax return is due and the bill must be paid by 31 January. To help you with your returns, Moneywise asked two leading accountants to answer some of the recent questions you've sent us about completing your tax return.
1. I bought a new computer and need to include it in my expenses on my tax return for the last financial year. How do I include it? I'm not sure if I put it down as an expense or whether I'm meant to put it down as some kind of depreciation. Could you explain the rules to me?
A computer is an asset that would be classified as 'plant and machinery'. Business assets such as this would not go on to the tax return as an expense; instead, plant and machinery go under the capital allowances section of the self-employment pages.
However, computers qualify for the 'annual investment allowance', and as long as the full cost of the computer is under the annual investment allowance threshold for the relevant tax year (which was a whopping £250,000 in the 2013/14 tax year) the full cost of the computer can be claimed and offset to reduce your taxable profit (or loss). So if you made a profit of, say, £30,000 and your computer cost £1,000, then this reduces your taxable profit to £29,000.
2. I run a furniture upcycling business in my spare time and only make a few thousand pounds a year from it. My revenue and expenses are small, so should I bother filling in a balance sheet as part of my tax return or just enter my profit?
If your turnover (revenue) is below the VAT threshold (which was £79,000 for the 2013/14 tax year), you may be able to declare your earnings on a 'three- line account'. This type of declaration does not require a breakdown of expenses; instead, you can declare
all expenditure as a total amount.
As a general rule of thumb, if turnover is above the VAT threshold for the year, it is advisable that a balance sheet be included in your tax return. However, filling out a balance sheet can help you keep track of all your income and outgoings.
3. I am part employed, part self-employed. During the 2013/14 tax year, I tried out my employer's private medical policy for a few months. I know that counts as a benefit in kind but seeing as I stopped the policy soon after taking it out, do I need to declare it on my self- assessment tax return? If so, how?
EM, Kingston Upon Thames
Yes, you do need to declare it, regardless of whether you have received a benefit in kind from your employer for a full or partial tax year. The benefit value will be confirmed on Form P11D, which should be given to you by your employer after the end of the tax year, and should be entered on to the relevant employment pages of the tax return.
But bear in mind tax due on P11D benefits can be collected via adjustments in your PAYE tax code should you wish.
4. Some people pay their self-assessment tax bill annually, while others pay in January and July. What's the rule here?
The payments of tax made in January and July are known as 'payments on account' and these are advance payments towards the tax bill you'll owe for that tax year. It can be argued this helps people keep on top of the money they owe. Payments on account are required by taxpayers for a tax year if their liability was more than £1,000 in the previous tax year.
If your liability is below £1,000, no payments on account will be required and the tax will be due on the normal due date - 31 January after the end of the tax year.
You can apply to reduce your payments on account if you are sure that the liability for the current year will be lower than that of the previous.
Either you or your accountant should continue to submit your self-assessment tax return in the normal way and HMRC will notify you of the required payments.
5. I work for myself at home and I have no expenses other than my computer, internet and the energy I'm using. I earn well below the VAT threshold. What expenses am I entitled to? And how should I state them on my return?
Many expenses incurred in the 'execution of your trade' are allowable. HMRC has recently introduced its Simplified Expenses Guidance, where, for example, if you use your home as an office it advises you to take a flat-rate deduction from your revenue depending on the amount of hours you have worked from home. It sets a minimum amount of hours at 25 and the flat rate starts at £10 a month.
However, as HMRC points out, “use of the flat-rate deduction for heat, light, power, telephone and internet/broadband does not prohibit a separate deduction for fixed costs such as council tax, insurance and mortgage interest, where an identifiable proportion can be attributed to business use”.
The guidance can be found at hmrc.gov.uk/manuals/bimmanual/bim75010.htm.
6. I'm employed full-time but do a bit of extra work on the side and have always filled in a tax return. However, I'm always given the option to have the money owed reclaimed through my PAYE. What am I best off doing?
If you owe less than £3,000, you can pay through your tax code and PAYE. But be warned there are several instances where PAYE tax codes are incorrectly calculated by HMRC. It may be preferable, therefore, to keep your self-employed earnings separate and enjoy the six-month interest-free use of your own money (your revenue).
However, from a pure cash outlay point of view (assuming your PAYE code is correct), you will end up paying the same amount using either method. For this tax year, you will need to pay through self-assessment anyway, as you have missed the 31 December deadline to tell HMRC if you want to put the outstanding tax through your PAYE coding notice.
Answers based on advice given by Leanne Flanagan, tax senior at Green & Co Accountants and Tax Advisors in Cwmbran, and Mitch Young, director of tax services at Adler Shine LLP in London
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.