You must register for Self Assessment with the Inland Revenue within three months of becoming self-employed or risk a fine of £100 (you will not have to pay any tax on registration). They will then automatically send you a tax return each April. Although you can work out your own tax bill, the Inland Revenue will do this for you if you send in your return by 30 September.
Broadly speaking, after your first year in business, the tax you have to pay will be based on your profits for the previous tax year. A tax year runs from 6 April to 5 April the following year. Experienced professional advice can make your life much easier and help your future cash flow enormously.
See the Inland Revenue website for more details on Self Assessment.
Keep records of everything you spend
Keeping full and accurate records from the start will make it easier to work out what you owe in terms of tax and National Insurance. Failure to keep records could lead to a fine or, worse still, paying too much tax. Let an accountant look at all your receipts and advise you on how best to minimise expenses and tax.
Tax breaks for new businesses
Many expenses are tax deductible. This covers not just obvious expenses, but many common every day expenses. For example, if you work from home, this could include a proportion of household expenses such as heating, telephone and electricity bills.
The amount you can deduct will depend upon the agreement you have made with your tax inspector, but as a rough guideline about one third of your total household expenses are tax deductible. You can probably deduct the whole cost of buying a computer or other equipment which is specific to your work.
If your turnover reaches a threshold of £52,000 in any 12 month period, you will be required to register yourself for VAT. It is advisable to become VAT registered because this will enable you to claim back VAT on all goods which you have purchased for the use of your 'business', as outlined above, but means you will have to start quoting and charging your clients inclusive of VAT.
If you buy equipment for your business, you may be able to claim tax relief in the form of capital allowances. These allowances are for equipment that you buy to keep and use in your business, such as vehicles, tools, computers and business furniture. Capital allowances do not cover things you buy and sell as part of your trade - you can claim these as business expenses.
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