Employed and self-employed - which documents must be submitted?

Will_d

A relative of mine recently asked me about how best to declare freelance income, but, despite conducting my own research, I was not able to answer her questions. Before advising her to consult HMRC, however, I thought I'd canvass the good people on this forum for their insightful perspectives.

Currently, she works part-time as a receptionist, but is toying with the idea of undertaking some freelance admin work to supplement her income. Having never been self-employed, she hasn't a clue about tax returns. I can assist her in filling out the form, but I'm not certain about which supporting documents are required by the Revenue.

She intends to put her freelance income into an account (Account 1) separate from her main account (Account 2), as she wants to save up the new source of income. Not being particularly financially astute (avowedly so), she'd thus be better able to manage her money in a more ordered fashion.

So, when she comes to render her tax return, for which account must she also submit bank statements? And what else, if anything, must she present to HMRC?

Your advice is much appreciated.

:xmastree:

anamenottaken

Will_d wrote: »

A relative of mine recently asked me about how best to declare freelance income, but, despite conducting my own research, I was not able to answer her questions. Before advising her to consult HMRC, however, I thought I'd canvass the good people on this forum for their insightful perspectives.

Currently, she works part-time as a receptionist, but is toying with the idea of undertaking some freelance admin work to supplement her income. Having never been self-employed, she hasn't a clue about tax returns. I can assist her in filling out the form, but I'm not certain about which supporting documents are required by the Revenue.

She intends to put her freelance income into an account (Account 1) separate from her main account (Account 2), as she wants to save up the new source of income. Not being particularly financially astute (avowedly so), she'd thus be better able to manage her money in a more ordered fashion.

So, when she comes to render her tax return, for which account must she also submit bank statements? And what else, if anything, must she present to HMRC?

Your advice is much appreciated.

:xmastree:

Have you completed a tax return yourself?

You don't have to submit bank statements as a matter of course. You simply have to tell them on the form how much you earned, what expenses of the business need to be deducted from that to obtain the profit for tax and NI calculations. You also declare the earnings from PAYE work and what tax has been deducted from those earnings.

Of course, using an account dedicated solely to self-employed earnings (and expenses) does help in keeping track.

Will_d

anamenottaken wrote: »

Have you completed a tax return yourself?

You don't have to submit bank statements as a matter of course. You simply have to tell them on the form how much you earned, what expenses of the business need to be deducted from that to obtain the profit for tax and NI calculations. You also declare the earnings from PAYE work and what tax has been deducted from those earnings.

Of course, using an account dedicated solely to self-employed earnings (and expenses) does help in keeping track.

Thanks for your reply anamenottaken.

I haven't had to submit a tax return myself, so my advice to her on this issue is pretty unreliable.

She's eager to bring a much-needed sense of order to her finances, hence the separate accounts. Equally strong is her wish for total transparency, as she's concerned that the separation of her income streams may suggest impropriety.

Understandably, she'd rather afford the Revenue too much documentary information than too little. Are there any circumstances in which they would request the disclosure of bank statements and the like?

PlutoinCapricorn

Large numbers of people top up their PAYE income with some freelance work - I did myself before becoming totally self employed.

There is no need for two bank accounts: I just used one.

You need to keep evidence just in case HMRC decide to enquire or investigate. Filing very late/early, getting paid in cash e.g. from a burger van, street trading or being a taxi driver, having a huge rise/drop in self employment income, a huge difference in expenses from someone doing similar work ... these are some of the things that could trigger HMRC.

Will_d

PlutoinCapricorn wrote: »

Large numbers of people top up their PAYE income with some freelance work - I did myself before becoming totally self employed.

There is no need for two bank accounts: I just used one.

You need to keep evidence just in case HMRC decide to enquire or investigate. Filing very late/early, getting paid in cash e.g. from a burger van, street trading or being a taxi driver, having a huge rise/drop in self employment income, a huge difference in expenses from someone doing similar work ... these are some of the things that could trigger HMRC.

Thanks PlutoinCapricorn.

You say there are certain events or scenarios that could pique HMRC's interest, but if they did demand more evidence from her, would they look at just the freelance account or both?

The more records she needs to retain, the bigger the risk that she'd overlook something.

LittleVoice

Will_d wrote: »

Thanks PlutoinCapricorn.

You say there are certain events or scenarios that could pique HMRC's interest, but if they did demand more evidence from her, would they look at just the freelance account or both?

The more records she needs to retain, the bigger the risk that she'd overlook something.

They will have evidence from the returns made by her employer as far as the PAYE part of her income is concerned. She should remember to keep P60 forms each year and any P45 if she changes job.

The freelance earnings is what I would expect HMRC to ask about, if they have queries.

As well as paying money into the "freelance" account, she should keep simple account (books) on that aspect of her earnings. If money does get paid into or from different bank accounts or in cash which she doesn't put into a bank, it can all be recorded.

You have probably already found that as soon as she begins self-employment (freelancing), she should tell HMRC. Technically it can be left a while (depending when in the tax year she starts) but it is best to do it as soon as it starts generating income.

Will_d

LittleVoice wrote: »

They will have evidence from the returns made by her employer as far as the PAYE part of her income is concerned. She should remember to keep P60 forms each year and any P45 if she changes job.

The freelance earnings is what I would expect HMRC to ask about, if they have queries.

As well as paying money into the "freelance" account, she should keep simple account (books) on that aspect of her earnings. If money does get paid into or from different bank accounts or in cash which she doesn't put into a bank, it can all be recorded.

You have probably already found that as soon as she begins self-employment (freelancing), she should tell HMRC. Technically it can be left a while (depending when in the tax year she starts) but it is best to do it as soon as it starts generating income.

Many thanks LittleVoice and all those who've provided advice. :T

I've now got a much clearer understanding of the scope and nature of the record-keeping she'll have to employ. Wish her luck.

:xmassign:

PlutoinCapricorn

It is best to maintain a spreadsheet to record income and expenses and invoice the clients.

Keep receipts and bills in addition to bank statements, all "just in case". You can scan and shred after 6 years.

HMRC may enquire about an aspect of the tax return, and they then may launch a full investigation. They would only do this if they suspected that income is being concealed and/or the expenses being claimed were not legitimate. Another red flag would be someone who reports a very small income, not enough to live on; yet another is if someone has not reported getting bank interest: HMRC know who gets it.

There is no harm in finding out what the rules are, and in being prepared to show the records, but you may be worrying unnecessarily about being investigated.

Will_d

PlutoinCapricorn wrote: »

It is best to maintain a spreadsheet to record income and expenses and invoice the clients.

Keep receipts and bills in addition to bank statements, all "just in case". You can scan and shred after 6 years.

HMRC may enquire about an aspect of the tax return, and they then may launch a full investigation. They would only do this if they suspected that income is being concealed and/or the expenses being claimed were not legitimate. Another red flag would be someone who reports a very small income, not enough to live on; yet another is if someone has not reported getting bank interest: HMRC know who gets it.

There is no harm in finding out what the rules are, and in being prepared to show the records, but you may be worrying unnecessarily about being investigated.

Thanks for that.

I have to admit that my uncertainty in this area perhaps aggravated her concerns, but I'll just stress the importance of diligent bookkeeping.

If the practice of keeping separate accounts for separate income streams is indeed prevalent among the self-employed, she's bound to feel reassured that she's not doing anything abnormal or suspicious.