Becoming self-employed is a big step for anybody and tax is always a scary thing. While you might be one of the best photographers in the UK or the star of the latest must-see musical, you’re probably not an accountant at heart. While you don’t need to add ‘accounting professional’ to your list of business skills, as expenses specialists at 1Tap Receipts, we thought we’d give you a little helping hand by highlighting five common mistakes and misconceptions we see all the time.
1. I can claim cinema tickets, food and mileage, right?
If you work in the entertainment industry you are often able to claim expenses that most other self-employed people can’t. However, you must be careful to make sure that you can prove they are ‘wholly and necessary’ purchases for your business. If you are researching a role for an audition for example, you may well be able to claim cinema and theatre tickets for related research but don’t get carried away with your two-for-one Tuesday deals!
Many self employed get confused about whether they can claim food or mileage while on the go. HMRC has taken a hard line on these in recent years. We all have to eat and drink, so you can’t claim food or drink as purely business expenses. However, here are the key points to guide you on when reasonable costs can be claimed: Usually where travel costs have been incurred, when the business trip is outside of normal working pattern of travel, when you are attending a one off engagement or when the trip takes you more than 10 miles from your base location. Also note that you can only claim tax back for your own meal, not your guest’s. With 1Tap you can even split out your portion of the bill without having to keep the physical receipt.
Again, be sensible and only claim for specific events (and keep a good record of each).
Tip: The important thing here is to be honest and realistic. You should definitely record everything you spend out on, but sometimes it is good to reflect a bit and decide if you really should claim an expense. With 1Tap, you can record your expense and share with an adviser or accountant who can help guide you. You can even split out your portion of the bill without having to keep the physical receipt.
2. 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 self employed people leave their self-assessment reporting (due on January 31) 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 April 5, 2016 up until the April 4, 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.
3. Tax deductible?
Another common misconception is that ‘tax deductible’ means claiming an expense of £100 (for example) will reduce your tax bill by £100. This is not how expenses work!
In reality, as a self employed person 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.
4. No receipt required
One thing self employed people 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 six years), 1Tap also records the location that the photo was taken so you can refer to your records later.
5. Wrong categories
If we had a pound for every self employed person who frets over their receipt categories, we’d have lots of pounds! The truth of the matter is, if your turnover is less than £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 self employed people 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 miscategorised receipts is not the tax crime of the century, so don’t fret it!
Tip: 1Tap Receipts automatically puts your expenses into one of the nine recognised HMRC 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.