With the 2009/2010 tax year coming to an end on April 5, if you own a small business in the UK it is likely that you’ll already have had on your doormat a letter from HMRC asking you to complete a self-assessment tax return. If not, don’t worry, it will (unfortunately) be on its way.
Whether this is your first or fifteenth year of completing a self-assessment tax return, unless you are extremely organized, chances are you will delay completing the form for a few weeks (or months). Although this isn’t a problem (as long as HMRC have your paper tax return before the 31 October, you won’t incur any penalties), it’s strongly advised to complete it as soon as possible.
The reason behind this is simple – the longer you leave it, the more of a rush you are in to complete it and therefore the less time you have to make sure your tax return benefits you as best as possible.
For those of you who have just re-read that last paragraph, there are no errors in it. Your tax return can benefit you financially as fortunately, it isn’t all about giving and these 5 tips should all be looked at before completing your tax return to ensure that you get the most from it.
1. Make sure you declare your house
If you work from home, one of the easiest ways to reduce the amount of tax you are to pay on your gross income is to ensure that you deduct any expenses that your incur via working from home.
Initially, you may not think there are any, as you take a lot of the things for granted. But what about lighting? Heating? Broadband? Office space? You are legally allowed to make a reasonable deduction for all of these, should your small business be based from your home.
Unfortunately, it can be a little complicated to work out – but it is definitely worth it. In essence, it works by you figuring out what percentage of the light / heating / broadband (and any relevant other utilities) is taken up by the business. You would then take this percentage from your annual bill (or the equivalent of) and this would be the amount that you could use as an expense.
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2. Have a receipt for everything
One of the first things small business owners are told by their colleagues, mentors or friends, is to keep a receipt for everything you buy (and if you didn’t know this, start doing it now). Unless it is completely irrelevant to your business (such as a birthday cake or Christmas tree for your house), get a receipt for it. Then, when you get home, divide the receipts up into two sections – one for direct business expenses and one for ‘other’. Make sure that you record and date all purchases, primarily for ease of looking at everything at a later date.
A lot of people will tell you to not keep receipts for anything that isn’t directly related to your business. Whilst you cannot claim back the cost of anything personal, a lot of the time what you consider to be personal costs are actually business costs (such as the evening meal you bought when on the overnight training course or the taxi across town to see your client) and should you keep receipts for both types of purchases, you can ensure that you claim the most expenses as possible.
3. Don’t forget about the car
HMRC allow all self-employed small business owners to deduct any travelling costs incurred by use of a car, assuming that they are solely for business purposes.
Whilst costs such as MOT and repairs can be a little tricky to determine for business purposes, the mileage is much easier and in the 2009-10 tax year, HMRC stated that for anyone driving a car for less than 10,000 miles for business, they can claim 40p for each mile. For all miles over 10,000, this drops to 25p per mile.
This is one of the most popular aspects that people forget to include on their tax return, as they believe that as they are using the car for a mix of personal and business circumstances, they cannot deduct costs on their tax return. The only stipulation that HMRC make is that you have to be able to differentiate between personal and business use. Therefore, if you were driving to your friends from home, this wouldn’t be tax deductible. However, if you then drove across town to meet with a client before going home, this mileage you could claim for.
4. Debt isn’t all bad
There’s a good chance that some how, you owe someone money. We’re not talking cash amongst friends, but credit card debt, bank loans or an account overdraft. Whilst you might feel a little unsettled at owing money out, there is a silver lining on this cloud, as HMRC will allow you to put down on your tax return any interest charges incurred on almost any type of debt.
Whether you’ve got a credit card that you use for business which has a 16.9% interest rate or a leasing agreement with a 7% rate, you can put down the amount of interest on your form, deducting it from your gross profit and therefore reducing the amount of tax due to be paid.
5. Buy, buy, buy
Each year, you are allowed to deduct as expenses a certain amount of capital allowances, which are items that are purchased to assist with the growth of the businesses profits. The goal posts are particularly wide here and generally speaking, if you have purchased an item that will help your business, you can use it as a tax deduction.
In 2009/10, HMRC explained that for capital allowances in the form of an Annual Investment Allowance (AIA), they could be up to the value £50,000. A respectable figure for most small businesses, what a lot of people don’t realise is that if you have items that you could account for that would push the figure over this mark, you can still claim a percentage of their cost back.
This is done through a Writing Down Allowance (WDA) and basically entitles you to 20% of the cost of the items over the £50,000 threshold. If this is your first year putting in a self-assessment report, however, double check with HMRC directly, as you may be eligible for up to 40% after an AIA.
Taxes and self-assessments are one of those things that just need to be done, as much as most would like to pretend they didn’t exist. A lot of people take the wrong view on them, however and with enough time and the right knowledge, your annual self-assessment tax return can be something that you no longer dread coming.
N.B. I am not a qualified tax advisor and all of the information I have provided in this post is a combination of personal knowledge and resources from HMRC. The post is not supposed to act as tax advice and I recommend that you contact a qualified tax advisor if you have any questions about your own individual circumstances.