Becoming self employed is a big step for any sole trader and whilst you might be the most promising new tv actor in the UK or the best boiler installer in Durham, you’re probably like most of the UK’s self employed – no Carol Vorderman! While you don’t need to add accounting professional to your list of business skills, we thought we’d give you a little helping hand by highlighting five common mistakes and misconceptions we see all the time.
1. Mixing up tax years
Knowing what tax year you are getting your information together for can be really confusing – especially if your accounting period isn’t the same as the standard tax year (April to April). Providing the wrong documents (invoices and receipts) for an accounting period is one of the most common errors sole traders make!
One of the reasons for this is because most sole traders leave their self-assessment reporting (which is due on the 31st January) until the last couple of months of the year and because this is so far down the line, it feels like you should be pulling together your information for the year that has just passed. This is incorrect! Assuming your accounting period is April to April, in January 2018 you’ll be reporting on your business activity for the 5th of April 2016 up until the 4th or April 2017. That’s going back a long way!
Tip: Try to get in the habit of recording your income and expenses as you go (ensuring they are dated) – or at least on a monthly basis. It makes it much easier to identify the correct tax year and save yourself wasted hours! 1Tap automatically places your receipts into the correct tax period – saving you even more time and hassle
2. Tax deductible?
Another common misconception is that ‘tax deductible’ means claiming a £100 expense (for example) will reduce your tax bill by £100. This is not how expenses work!
In reality, as a sole trader you can deduct the expense from your income on your tax return. So if you spend £100 on an allowable expense for your business, that will not reduce your taxes by £100. It will reduce your taxable income by £100. Put simply, that means that if your tax rate is 20% (the most common rate for most sole traders) then you will save £20 on your taxes by making that purchase.
Tip: Ensure you are claiming as many of your legitimate expenses as possible by using 1Tap to record them as you go. We even provide you with a running guide to how much tax you are likely to save as you add each receipt. However, It is also important to remember that while claiming expenses will reduce your tax bill, they effectively come off your bottom line.
3. No receipt required
One thing sole traders always get very concerned about is whether they can claim an expense without providing a receipt. This stems from the fear of an HMRC investigation and being unable to prove the payment was above board and allowable.
While you won’t get away with providing no receipts whatsoever, you don’t necessarily need a receipt for every single claim. If you lose a receipt or forget to get one, you can still make a claim – as long as you can provide robust evidence to back it up (date, amount, place and reason) and of course, the claim is deemed a reasonably acceptable one.
Tip: Photograph your receipts as you receive them with your 1Tap app. Not only will that stop you having to worry about losing your receipts ever again (we store the image and data from every receipt safely in the cloud for you for 6 years), 1Tap also records the location that the photo was taken so you can refer to your records later.
4. Wrong categories
If we had a pound for every sole trader who frets over their receipt categories, we’d have lots of pounds! The truth of the matter is, if you’re turnover is under £83,000 then you don’t actually have to provide a detailed breakdown of your expenses at all – just a total amount. Having said that, It is obviously useful for you to know what categories of expenses you are spending your money on and lots of sole traders like to see that sort of level of accuracy – especially if they are trying to work out final costs on jobs they have undertaken (it can help when quoting for future jobs or projects). So there you go, a few mis-categorised receipts is not the tax crime of the century to don’t fret it!
Tip: 1Tap Receipts automatically puts your expenses into one of the 9 recognised HRMC self-assessment form categories for you with an extremely high level of accuracy. And on the rare occasion we do get it wrong, you can easily change the category for your own peace of mind if you want to. We have now introduced custom tags so you can create your own categories to help keep track of where you are spending your hard earned cash.
5. Payment on Account?!
‘Payment on Account’ is a tax payment made twice a year by self-employed people in order to spread the cost of the year’s tax. It is calculated by looking at your previous year’s tax bill, and is due in two installments – the first installment due on January 31st and the second due on July 31st. Each installment will normally comprise of 50% of your previous tax bill. So, if you paid £3,000 in the tax year for which you are filing your return, you will make the first payment of £1,500 on January 31, and another payment of £1,500 on July 31st
Although Payment on Account was devised as a way of helping self-employed people spread out their tax bill, it is one of the most commonly misunderstood parts of the self assessment process and far too often results in unexpected tax bills that have been accidentally overlooked through lack of understanding of the system.
Tip: The main reason people get caught out by Payment on Account is because they often don’t know what they are going to owe in July (because they’ve submitted their self assessment so late in the year) and don’t have time to put cash aside over several months to pay their bill. By using 1Tap to record expenses alongside organised income and mileage tracking, you’ll be in a much better position to submit your self assessment promptly and budget effectively to ensure you don’t overstretch yourself when payment is due.