London-based accountant Nikhil Oza is here to help untangle your tax conundrums. Nikhil is a chartered accountant (ACA), at RDP Newmans. With over 14 years of experience, Nikhil specializes in corporate tax matters and has worked with clients of every size. In our Ask an Accountant series, he shares his tips on tax preparation for the self employed.
1. How can self-employed professionals lower their tax burden? Are there any deductions that they should be aware of?
There are many ways that taxpayers can (legally) reduce their tax bill and each person’s circumstances will be different, so it is impossible to list them all! Speak to your accountant/tax advisor to ensure you have considered the below as a minimum:
- Make full use of tax-free allowances, such as the personal allowance, dividend allowance, savings allowance, marriage allowance, property and trading income allowance and annual CGT exempt amount to name but a few.
- Rent-a-Room Relief, currently £7,500, where you let out a room in your home.
- Use your Individual Savings Account (ISA) entitlement to help you save tax-free.
- Pay into your pension pot to obtain tax relief.
- Give to charity—you will get tax relief if you are a higher-rate taxpayer.
- Don’t forget your SEIS/EIS investments provide income tax relief of up to 50%.
- Incorporation is one of the more advanced options, but setting up a company can yield tax savings given the corporation tax rate is only 19% (due to fall to 17% from April 1, 2020). There is an additional tax charge on getting money out of the company (usually by way of dividends) but the combined tax rate can still be lower than paying income tax rates of 40%/45%. Also, companies offer access to additional tax reliefs, such as Research and Development (R&D) Tax Relief (if the qualifying conditions are met) and can make inheritance tax planning easier.
2. What is the Making Tax Digital initiative? Any tips for helping small businesses and self-employed professionals get prepared?
Making Tax Digital (MTD) is the government’s idea to digitise tax in order to improve the efficiency of submitting tax returns and collecting tax. MTD’s first foray will be in the administration of VAT.
VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) are now required to use the MTD service to keep records digitally and use software to submit their VAT returns for VAT periods that started on or after April 1, 2019. There are some exceptions where the VAT returns are complex, but these too are expected to fall within the regime on October 1, 2019.
My advice? Don’t get caught out! These requirements are already in place and if you haven’t got compatible software, then you need to speak to your accountant urgently to consider your options. It may be that your existing software provider is MTD-compliant, in which case you can breathe a sigh of relief! But if you are preparing your VAT calculations in Excel, you will need to consider the “bridging” solutions available to allow you to comply with the rules.
3. Do I need to register with the HMRC as a sole-trader? How do I know if I qualify?
You need to set up as a sole trader if any of the following apply:
- You earned more than £1,000 from self-employment between April 6, 2018 and April 5, 2019
- You need to prove you’re self-employed, for example to claim Tax-Free Childcare
- You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
To set up as a sole trader, you’ll need to register for Self Assessment and file a tax return every year. The registration process can be done online and is usually completed within 10 working days.
Registration must be completed by October 5, 2019 in order to avoid penalties.
4. Similarly, when should I register for a VAT number? Are there benefits to registering?
You must register your business for VAT with HM Revenue and Customs (HMRC) if its VAT taxable turnover is more than £85,000.
When you register, you’ll be sent a VAT registration certificate. This confirms:
- Your VAT number
- When to submit your first VAT return and payment
- Your “effective date of registration”—this depends on the date you went over the threshold, or is the date you asked to register if it was voluntary
You can register voluntarily if your turnover is less than £85,000, unless everything you sell is exempt (e.g. insurance, online lottery games, financial services).
Registering for VAT voluntarily can ensure that you are ready to grow as a business—creating a positive impression about your intent—and allows you to reclaim VAT on purchases you make.
If your “input tax” (the VAT you pay) is greater than the VAT you collect from your customers, you can claim the difference back from HMRC. However, you could end up paying more to HMRC if the reverse is true.
Also, you would need to charge VAT to your customers, pushing up prices. This is fine if the customer can also reclaim the VAT (i.e. they are VAT-registered), but may not be agreeable if you are selling to the general public who can’t reclaim the VAT.