Becoming Self Employed - 2 Tax Questions

R2D2_2

Hi, I wonder if anyone can help with a couple of questions? I am considering becoming self-employed, and although I’ve done lots of research online, I still finding a number of areas quite confusing. I am completely new to this so apologies in advance if my questions appear somewhat naive!

Firstly, if I start trading on October 1st 2008, when would I be expected to make my first tax return? Would I have to make an initial return for the six months up til April 09? I am finding it hard to get my head around how ‘my’ tax year fits in around HMRC's period of April to April.

Secondly, I understand that within the first year of trading it is possible to claim a capital allowance rate of 50%. I already own a lot of the tools and equipment I will need and so I wondered if it would be possible to back date the allowance, and if so how far could I go back?

Thanks in advance for any advice offered.

gordonstights

Hi,

I can't help you with your questions, however I think you may get a better response in the Small Business forum as there seem to have been similar questions over there in the past.

Hope you get some answers

ceeforcat

My first advice would be to get a tax adviser. I always tell my clients they have enough to do in carrying on their business without worrying about how their tax is calculated. A good advisor will save you more money than their fees.

The answer to your questions:

1) You can choose any date you like to make up your accounts to. The HMRC would much prefer you to choose 31st March or 5th April because it is easier to calculate and it suits them! Generally, however, if your business is likely to expand in the earlier years and the first year is low, this is not a good choice. In that case I would make your accounts to 30th September each year. As to how the tax is paid, this is indeed complicated. In simple terms, for 30th September year end:

2008/09 tax year - profits 1st October 2008 – 5th April 2009

2009/10 tax year – profits 1st October 2008 – 30th September 2009.

2010/11 tax year – profits 1st October 2009 – 30th September 2010.

Part of the profits are taxed twice for the period when the business is making least profit – this is preferable and has cash flow advantages.

Tax Payable

2008/09

31st January 2009 Nil
31st July 2009 Nil
31st January 2010 Whole of 2008/09 tax bill.

2009/10

31st January 2010 50% of 2008/09 bill
31st July 2010 50% of 2008/09 bill

31st January 2011 Balance of 2009/10 bill not paid.

2) You can claim 50% allowance as suggested. You must place a value on all your tools and equipment at the start of your business and the 50% allowance is set against taxable profits.

Hope this helps although I suspect it will prompt many more queries.

R2D2_2

Ceeforcat,

Thanks for the detailed reply - I am most grateful. I always feared it would be complicated, now I am certain! In order to try and understand what I might be expected to pay, I've projected these figures:

• Between 1st October 2008 and 5th April 09 – I generate a profit of £6000
• I generate an overall profit for 'my' tax year ( October 1st 2008 to 30th September 2009 ) of £12000

Assuming a tax /NI bill of 25% ( and disregarding allowances etc ) could you extrapolate the above figures into what I would have to pay in relation to the dates you set out:

• 31st January 2010 ( whole 2008/09 bill )
• 31st January 2010 ( 50% of 2008/09 bill )
• 31st July 2010 ( 50 % of 2008/09 bill )
• 31st January 2011 ( Balance of 2009 /10….assuming the same annual profit )

I tried to crunch the numbers myself but got thoroughly confused when trying to factor-in the profits that get taxed twice. Phew!

Looking ahead, when it comes to submitting my first and second tax returns, what tax dates would I use ( this gets back to my original question – how does my tax year fit-in when completing a return ).

My apologies for the rambling questions, but to a novice it’s all very confusing. Hopefully,with your assistance, it will become alittle clearer.

I would like to handle my own finances, as I don't expect to generate alot of paperwork, but if I am not able to get my head around the basis I might have to consider an adviser!

Any further guidance offered would be hugely appreciated.

ceeforcat

O.K. let’s assume profits:

y/e 30th September 2009 - £12000

Y/e 30th September 2010 - £14000

Tax 2008/09 :

Profits assessable 6/12 x £12000 = £6000.

Tax and Class IV NIC due : £224
(I have no idea of your employment position prior to commencement)

Tax 2009/10:

Profits assessable : y/e 30/09/09 = £12000

Tax and Class IV due : £1800 approx

Tax 2010/11:

Profits assessable : y/e 30/09/10 = £14000

Tax and Class IV due : £2100 approx (tax rates not known)

Tax Payable:

2008/09

31st January 2009 NIL
31st July 2009 NIL

31st January 2010 £224

2009/10

31st January 2010 NIL (previous year below £500)
31st July 2010 NIL

31st January 2011 £1800

2010/11

31st January 2011 £900 (half previous year)
31st July 2011 £900

31st January 2012 £300

On 2009 return you declare first year profits with tax adjustments, on 2010 the same profits (with no adjustments) and on 2011 the profits for the year to 30th September 2010. Profits ending in the relevant tax year are relevant.

As I said before , do you really need the hassle when your business needs you?

R2D2_2

Ceeforcat,

Thanks once again for the detailed reply. I am most grateful. I think I need some time to digest all those figures before I come back with anymore questions! Thanks again.