Aunty Flo - chocolates, Grandad Len - socks (again), HMRC - £100 (again!). OK, so it's not exactly a Christmas present but just as the dreaded Christmas Visa bill arrives, you find that you've not got around to completing your Self Assessment return. "Well, things have just been so busy with the business and there always seems to be more urgent stuff to sort out". That might be a reasonable excuse in July, but as we head towards Christmas, this really is one job that sits at the top of the list.
The deadline for submission of electronic Self Assessment returns for the 2016-17 tax year is January 31st 2018. The deadline for submitting paper based returns was back on 31st October 2017; now long gone. Those people who are old hands at submitting a Self Assessment return will be familiar with the information they need to collate, but circumstances change, and it is important to check every year that everything that should be declared is included. Sole Traders, for whom 2016-17 is the first financial year a return is required, should be aware that as a Sole Trader their personal finances and business finances fall within the same entity. This differs from a Limited Company where the Director's personal finances are separate and distinct from the finances of the business and each are reported differently for tax purposes. As a Sole Trader, your net business profit for tax purposes will be reported alongside income from savings accounts, pension contributions and charitable giving to name but a few.
What may not be obvious, particularly if you are doing your own accounts, is that the net profit as reported in the Profit & Loss A/C of the annual accounts is not your net profit for tax purposes and the difference between the two can be substantial. Here are some key areas of difference:
- Depreciation is not an allowable business expense. HMRC view the concept of depreciation as a rather arbitrary one and indeed it is. Depreciation in the books can be straight line or reducing balance and the rate chosen does not conform to a standard. To formalise the measurement of depreciation for tax purposes, a scheme of capital allowances is used. Furthermore, the treatment of depreciation is different between traditional accruals accounting and when using the cash basis.
- Expenses are an area that causes much confusion and there are many urban myths about items that are 'tax deductible' or can be used to 'offset against tax'. There are plenty of areas where misconceptions arise around things like gifts and entertaining staff or clients, donations to charity and clothing purchased for work purposes. However, HMRC does offer some quite explicit guidelines and knowing how to correctly categorise your business expenses is important.
- Personal use of business goods and equipment needs to be treated carefully and the basis used for apportionment of business and private use must be clearly defined and justifiable should you ever be challenged in an inspection. You may also need to choose between actual and simple expenses in some areas such as motoring costs and using your home for business purposes.
- It is possible to misrepresent certain expenses, usually because of a misunderstanding. A good example is assigning funds taken out of the business as salary rather than drawings. This not only gives an inaccurate set of accounts but an incorrect net profit for tax purposes.
So, what can be done if you just don't have the time to complete that return or there are aspects you are struggling to understand? An option is to engage an HMRC Authorised Agent for Self Assessment to act on your behalf. You will still need to provide them with all the necessary information and you can expect plenty of questions about personal finances and the 2016-17 business accounts in order that they can complete the return on your behalf. You will also need to sign a declaration before the return is submitted. Ultimate responsibility will always remain with you. If you do choose to engage an Agent, don't leave it until January 30th. Agents can be a great help, but they cannot achieve the impossible.
If your 2016-17 Self Assessment return has yet to be filed, then time is running out. Act now if you do not want to give that £100 Gift Voucher to HMRC this Christmas!