Tradespeople are no different from any other self-employed workers. They’re equally bound by tax legislation and need to maintain their accounts in order to comply with HMRC. However, because their role is so dynamic and physically demanding, it’s easy to get outpaced by their responsibilities.
It can be difficult to know how you should identify yourself to the taxman or what expenditure qualifies as a business expense – especially when you spend the majority of your time physically creating things. So, as a helping hand, we’ve provided the below guide on a tradesperson’s guide to tax.
Register as a sole trader
If you’re moving into the realms of self-employment, you’ll typically want to identify as a sole trader as opposed to a limited company. If this is the case, it’s important you fill out a self-employed registration form if you earned over £1,000 from self-employment in the previous tax year.
It’s important that you register as self-employed immediately. Failure to do so can result in you being fined up to £100. You must register by 5th October following the end of the tax year in which you started your business.
But don’t worry – it’s easy enough to register. Simply visit HMRC’s sign-up page or alternatively call their self-employed helpline on 0300 200 3300.
Once done, you’ll need to organise your accounts so that you’re able to effectively submit your Self Assessment tax return come 31st January (or 31st October should you prefer paper submissions). This submission will include all the relevant income you receive and the business expenditure you make.
Claim the relevant expenses
Speaking of expenditure, recognising what qualifies as a business expense and what doesn’t can dramatically impact your tax bill and, ultimately, your take-home pay. Business expenses are purchases wholly made for the purpose and benefit of your business. They can be deducted from your taxable profit to reduce your liability.
Some expenditure may seem more obvious than others. Perhaps the most common ones are tools, repair costs and DIY materials. However, think of yourself as a business – HMRC will permit you to claim for things that genuinely develop your operation.
For example, consider claiming for:
- Mileage – Tradespeople are forever travelling between clients. Consequently, you’ll encounter a number of vehicle running costs which can, fortunately, be offset, including fuel. If you do not want to record all motor-related expenses, then instead you can use the simplified method and claim HMRC’s mileage rate of 45p per mile for the first 10,000 business miles you travel in a tax year, dropping to 25p a mile from that point on.
- Home computer – Need a computer to keep your accounts and finances in order? The purchase of a laptop or home desktop that supports you in your business can be classed as a business expense.
- Uniform – If you consider taking on an apprentice or would benefit from a more cohesive appearance, branded uniforms are covered under business expenses. Whether that’s protective clothing (eyewear, footwear or overalls) or t-shirts with your business’ logo on, you’re entitled to claim if these are worn in order to perform your work.
Once you’ve started growing your operation using the above investments, be sure to log each purchase in order to actually qualify for the tax bill reduction.
Self Assessment tax returns must include business expenses and other expenditure. Without doing so you risk being incorrectly taxed – or worse, fined.
There isn’t a default format to this storage of expenses, although Making Tax Digital for Income Tax (expected to be rolled out in 2021 at the earliest) is likely to force all self-employed individuals into digital submissions. Consequently, using spreadsheets or cloud-based software provides a more scalable solution.
It can be difficult to log expenditure every time you pay for petrol between jobs, or even when you buy raw materials for clients – so much so, that the likelihood of still having every receipt at the end of the tax year is low.
But the total amount that all of these lost receipts and low-cost purchases equate to could be a considerable sum. That’s why it’s important to enter your expenditure into a spreadsheet as and when it occurs – or, better yet, take a photo of your physical receipts and upload them to your software.
Ahead of your Self Assessment tax return, you’ll want to total up the number of deductions following your claims, detail the final figure on the tax return, and then file it directly to HMRC.
Submit in a timely manner
The 31st January often sounds like a million miles away. But in truth, there’s little time left in the days leading up to the deadline to effectively dedicate resources to filing your Self Assessment tax return.
It’s an enormous task to log every record of your expenditure, let alone to do this in a single month. Considering that January tends to be a dry spell for sole traders and business owners, you’re in danger of devoting a large amount of your earning capacity to organising your accounts.
So, if you wish to submit on time, it’s best to start your financial admin early. We suggest this is prior to Christmas so that you’re well aware of the tax you’ll owe as you head into the new year.
With GoSimpleTax, your responsibility here is considerably easier. Forget holding on to every receipt, you’re able to take pictures of your expenditure as and when it occurs. Our software will then keep track of your income and costs, alerting you to any opportunities to lower your overall tax bill in real-time.
In addition, you’ll be able to reduce the effort you spend on preparing your Self Assessment tax return, as our software simplifies the process and files direct to HMRC. Sound good? Stay on the right side of the taxman and trial GoSimpleTax today.
Last updated on 25th October 2019.