Going it alone and starting your own business can often present something of a culture shock when it comes to admin. Especially if you’ve come from an environment where your employer took care of everything for you.
Terms that you were previously only vaguely aware, such as ‘tax years’, ‘financial years’ and ‘bookkeeping’, suddenly take on a whole new significance as you realise that all of this is now your responsibility.
Your aim as a business owner is to keep on top of everything, to ensure that you’re not bogged down in paperwork and you’re not involved in any last-minute scrambles to meet tax deadlines. Headaches are easily avoidable so long as you’re prepared. Here we focus on the end of tax year, what it means for an up-and-coming business and how you should prepare for it.
What does ‘end of tax year’ actually mean?
When you see the phrase ‘tax year’ the chances are that it’s referring to the personal tax year, which runs from April 6- April 5 the following year.
Typically, business owners start out as sole traders or partners in a partnership. Here the taxman treats you as a self-employed individual and you are required to register as such. In practical terms, the end of the tax year then means you will be sent a notice requiring you to file an income tax Self Assessment tax return for that particular tax year. You have until October 31 to file a paper return and up to January 31 to file online.
Becoming a limited company
There’s a strong likelihood that ultimately it will be the right move to start operating your business as a limited company. By setting up a company, you are creating a separate legal ‘person’. It’s taxed separately from you and any co-owners of the business.
With this comes potential liability for a further tax, Corporation Tax, which adds a further set of dates to the mix. The tax year for Corporation Tax is called the ‘financial year’ or ‘fiscal year’ and runs from April 1- March 31. When new Corporation Tax rates, reliefs and credits are announced they almost always come into force at the beginning of a fiscal year.
As a director of the company, the end of the personal tax year is still relevant, especially if part of your pay package consists of dividends from the company, which are liable for income tax. All company directors are required to complete a personal tax return each year.
Income tax and end of the tax year: how should I prepare?
Think of getting prepared as an ongoing process rather than something that has to be dealt with all in one go at the end of the tax year or when the payment deadline looms on the horizon. Here’s what you should be thinking about:
File your paperwork as it arrives (rather than having to sort through it from scratch at the end of the tax year)
Self-employed business owners are taxed on their business profits after deductions for expenses. For this to be assessed accurately you need to be able to track each and every transaction your business is involved in. In the early days, these transactions may seem few in number. It is inevitable that invoices, statements and bills will mount up and the pile of unsorted paperwork is only going to get higher.
A simple lever arch file subdivided into ‘incoming’ and ‘outgoing’ with documents stored in date order can make all the difference in terms of time wasted on hunting down that missing order form at the end of the tax year.
Think smart about bookkeeping
In the early days especially, a simple spreadsheet may be all that’s required to give you an at-a-glance overview on what’s happening with transactions. Allotting an hour or so a week to review this is useful not just from a tax perspective, but also for keeping on top of unpaid customer invoices to prevent storing up cash flow problems. As activity increases and bookkeeping starts to eat into more of your valuable time this may be your cue to invest in a dedicated invoicing and accounting software solution.
Deductions: get everything in place early to avoid losing your entitlement
Travel costs, using your home as an office, phone bills, overdrafts, capital allowances on equipment and even wining and dining prospective clients: don’t leave it until the first week in April to start thinking about how much you’ve actually spent on nurturing your business over the last year.
Cash basis accounting
If your income is £82,000 or less you can choose to work out your income and expenses for your Self Assessment tax return through cash basis accounting. For this, you must keep records of all business income and expenses throughout the tax year. One benefit of this is that you are only taxed on income you have actually received during the tax year and not on invoices that have been issued but not yet paid.
For business vehicle costs, working from home and living in your business premises, sole traders and partnerships can also use simplified expenses: a system of flat rates for calculating costs in these areas. Throughout the tax year record, your business miles and the hours you work at home and then at the end of the tax year apply these flat rates to work out your expenses.
Checklist for preparing for the end of the tax year
Make sure you have a system in place for retaining receipts and logging transactions as they happen.
Keep your receipts
Otherwise, you are at risk of under-calculating your business running costs.
As your business grows, as transactions become more complex and you consider taking on staff, expert accountancy advice can help save you money in the long run.
Could restructuring your business as a company make you more tax efficient? Take a look at our help centre to find out more.