Keeping Accounts and Filing Taxes
I’m not going to pretend I’m an expert at this or that I found it easy, in fact I found it incredibly difficult and very confusing at first. I had no idea how or when I had to fill in tax returns or how and when the DWP would check my accounts. I was worried about exceeding the £99.50 per week some weeks if I had no expenses, and whether I’d be allowed to ‘pay myself back wages’ if I didn’t earn enough until months down the line. And probably a hundred other things.
I finally got a couple of really helpful advisers from the Benefits Agency and HMRC who patiently explained things (I just got the phone bill, they weren’t cheap calls!). I was basically confusing the information I needed for filing taxes and the information I needed for DWP.
You don’t have to keep two sets of accounts unless it is easier for you, there are a couple of small differences, but mostly it is just keeping records of all transactions between April and April for HMRC and for 1 year from your start date for DWP.
Basically, the way HMRC work out your taxes is: Turnover (total of all sales) minus Expenses equals Profit.
Everyone has a personal allowance (£8,105 at the moment). Profit minus personal allowance equals taxable amount.
Wages are not a business expense and have to come out of what’s left after tax. Because you can only earn up to £99.50 per week on Permitted Work, it’s very unlikely you’ll earn enough to get taxed. (As mentioned in my previous post, this is for ESA claimants, and could be different if you get different benefits and have other sources of income).
52 weeks of permitted work at a maximum of £99.50 per week after taxes equals £5,174 which is well below the personal allowance for tax.
For Permitted Work: Turnover (total of all sales) minus Expenses equals Profit. The Profit must be less than £5,174 or work out at less than £99.50 when divided by 52.
When I phoned up the benefits agency to see if they’d made a decision about me doing Permitted Work, I was told that I would be assessed after 6 months to see if I still fit the criteria (i.e. working less than 16 hours per week and earning up to £99.50 per week after tax.)
It can be hard to get your head around at first because the tax year is from April to April, and the accounts for your year of Permitted Work will most likely be different, but if you keep track of your accounts and keep them simple, it makes it easier.
You need to keep track of every sale and business expense for your accounts. Keep all receipts/bills.
Business expenses are the costs of running a business i.e. Start-Up costs, costs of goods for resale, rent for premises, website hosting, EBay or Etsy fees, utilities (phone, electric, internet) and office supplies such as envelopes, printer paper, cartridges etc.
HMRC have a guide to what you can claim:
Accounts, Book-keeping and spread-sheets can seem daunting, but for the most part they just have to be a simple way for you to keep track of your sales and expenses. You don’t have to use computer programs, you can write it all down by hand if that is easier. Lyn from rosiepink gave me a link about Cardboard box accounting, which has some good advice:
One simple way to do your accounts is to use an A4 ring binder. You can customise your records, and you can add, remove or redo pages wherever necessary, and create separate sections with dividers.
I’ve split my accounts into Start-Up costs; Sales and Expenses. (Actually, I had to split my Start-Up costs into two sections because I had been working towards self-employment for more than a year buying supplies, and only needed the receipts back to last April for filing taxes, but I need a record of all my start-up costs for the Permitted Work scheme.)
Keep all your receipts from your start-up costs, print out relevant invoices from PayPal and online spending/purchases and try to keep them in chronological order so they are easy to find. You can always photocopy them or print out copies to keep in your ring binder to add dates, notes or anything that makes it easier for you. Try to keep a written list and record them regularly; it’s amazing how easy it is to forget what a receipt is for if all the information isn’t on there, especially when buying second hand items or from charity shops.
customise your sheets depending on how you sell your product or service. Keep separate sheets for the different ways you make sales if it makes it easier for you. Hopefully you will have too many sales to record every individual one, but you will need to keep track of them all, so maybe do a daily or weekly tally and keep track of online and cash sales.
For keeping track of Expenses, you can record them in a similar way to Sales. I split my expenses into those paid online, and those by cash.
Instead of recording online and cash expenses separately, you may want to keep separate records for the different types of expenses so it is easier when it comes to filing tax returns.
You don’t have to print out a receipt or invoice for every sale or everything you pay for online as long as you have a record of it and can find it easily. If your accounts are clear and simple, this should be easy. If you use PayPal, you can download a weekly (or monthly) record of your transactions.
Click ‘All Transactions’
Select the dates for the week or month you want to view
Under ‘More’, Select ‘PDF-All Activity’
This will download a PDF file of all transactions (sales and expenses) between the dates you chose. It will be named ‘Download’, so make sure you rename it so you can identify it.
To make it easier to keep track of receipts for cash expenses, put them together in an envelope each week or month and write the time period on the outside of the envelope. You could even keep these in the ring binder with the expenses sheets, just remember to put the holes in the envelope before you put the receipts in :)
Filing tax returns
Tax years run from April to April. Whichever month you start your business, the tax year ends the following April. For example, if you start in May 2013, you have to file tax returns after April 2014 (all income and expenses from the date you start trading in May 2013 to April 2014). HMRC will send you a letter in April 2014. If you file by post, you have until Oct 2014 to file. If you file online, you have until Jan 2015. It’s easier to do it as soon as possible.
If you receive a letter from HMRC at any other time, asking you to complete your returns, you have 3 months from the date you received it.
This video explains it well: