Filing a self-assessment tax return can be daunting at the best of times, but for the people who started working for themselves during the pandemic, it will be even harder.
The deadline for filing a paper return is 31 October – and according to online accountancy service The Accountancy Partnership, more than half a million people still file this way.
But the vast majority who fill out the form online have until 31 January 2022 to complete their return and pay their bill.
Deadline: Tax returns must be filed online, and the bill paid, by 31 January 2021
As the last tax year ran from 6 April 2020 until 5 April 2021, those who turned freelance or started their own business while on furlough or following a redundancy will be required to file for the first time.
They may have a combination of salary income, furlough funds and revenue from self-employment, which could make the process harder to navigate.
And even for those who have filed self-assessment returns for many years, the pandemic has brought about a whole range of new details that they might need to include: for example, having to declare if they received a grant from the Self Employment Income Support Scheme.
‘At the best of times tax returns are not regarded as straightforward forms to complete, but the pandemic has added more issues to consider,’ says Imogen Lea, tax and trusts consultant at Wilsons Solicitors in London.
‘Many people may have started 2020-21 as employed, but were then furloughed before deciding to become self-employed.
‘For these first-time tax returners where there was some employment or furlough income during the tax year, even though it may have been taxed, the income and tax still needs to be reported on the return.’
To help demystify the process, we asked the experts what people filing a self-assessment tax return as a sole trader or small business owner need to know this year.
To hire an accountant or not?
If you don’t already use an accountant, you can hire one on a one-off basis to do your tax return for you. This will cost upwards of £250, depending on how complex the case is.
They will want to look for someone with ACCA or ICAEW accreditation, and can search for firms with accredited staff on their respective websites.
Kayleigh Johnstone, a self-employed virtual assistant coach who has been self-employed for five years, says: ‘If you are doing this, book them well in advance. They will prioritise existing clients before new, especially during tax return season.’
They might also charge more for returns done at short notice.
Accountants will have a queue of customers as it gets closer to the January deadline – and they will prioritise those they have worked for before ahead of new one
A cheaper option is to use one of the whole host of online tax return services, which help self-employed workers complete their returns for a lower flat fee.
Costs start from around £100. The quality of these sites varies, though, so check customer reviews before signing up.
Given the fee, it may not be worth paying an accountant if you don’t have high turnover or your tax return isn’t going to be particularly complex.
But for higher-turnover businesses, an accountant may pay for themselves if they find ways to cut down your bill that you otherwise wouldn’t have known about.
Give yourself plenty of time
It goes without saying that self-employed people should gives themselves plenty of time to complete their return, but this year it is especially crucial.
Lee Murphy, managing director at online accountancy firm The Accountancy Partnership, says: ‘The effects of the pandemic are still being felt by society and businesses, and this set of accounts are likely to feature the use of government financial support adding further complexity to accounts.
‘It’s therefore even more important that accounts are completed accurately and in good time.’
It is also a good idea to put aside money for your tax bill throughout the year if you are self-employed.
Once self-employed workers know how much tax they owe, they can start budgeting to pay the bill – so this should be worked out at the earliest possible opportunity
But for those who haven’t, starting now for a January payment will allow time to budget for paying the bill.
For those who might still be struggling due to the pandemic and are unable to afford their tax bill, now is also the time to act.
Tax accountant Tanya Ibberson says: ‘If you find yourself in financial hardship, and can’t pay your tax liability, contact HMRC directly as soon as you can to make an arrangement to pay.
‘The earlier you do this, again, the longer you’ll have to pay the bill over.’
Declare any grants and furlough income
Many of the support schemes offered to self-employed people and small businesses during the pandemic were taxable, and must be declared.
This includes the Self-Employment Income Support Scheme, Coronavirus Job Retention Scheme (furlough), self-isolation payments, local authority grants, and funding from the Eat Out to Help Out scheme.
Loans, however, don’t need to be included; such as the bounce back loan or one from the Coronavirus Business Interruption Loan Scheme.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, explains: ‘Any self-employment grants should be in the specific self-employment grant box. Any other Covid payments should go in the ‘any other business income’ box.
‘If you’re employed and were furloughed you will need to enter your earnings and income tax from your P60. This will cover your furlough payments, so you don’t need to enter them separately on your tax return.
20 expenses to claim in your self-assessment
By Christian Hickmott, founder and chief executive of Integro Accounting
Printer and printer ink
Telephone line rental (if business only)
Mobile phone bill (if business only)
Internet costs (if business only)
Part of your mortgage/rent payments
Part of your gas bill
Part of your electricity bill
Part of your water bill
Part of your Council Tax bill
Part of your home insurance costs (only if includes business cover)
Home repairs and cleaning (if they apply to the whole house)
Business travel (mileage)
Public transport costs
Reasonable hotel costs
Reasonable subsistence (food) costs
Know what expenses you can claim
Purchases made ‘wholly and exclusively’ for business use can be deducted from the amount you owe in tax.
Ensuring they claim for all relevant items is the main way in which self-employed people can cut down the amount they owe.
This includes anything from office furniture to travel costs, and even the cost of energy bills or mortgage interest if they work from home. These are known as ‘allowable’ expenses.
‘The past 18 months have seen an unprecedented number of people new to home working, as well as freelancers who may be more used to the set-up. Some claims may seem so small that they are not worth worrying about, but they all add up, so it’s worth including everything that is eligible.’
It gets more complicated when declaring items that were used partly for your business, but partly for non-business activities.
For example, if claiming heating bills, you would have to work out the proportion of your total bill that related to the room you use as an office.
An accountant can help you out with this if you are unsure.
Should you use a tax-free trading allowance?
The tax-free trading allowance is designed to simplify the tax return for those who are sole traders, and don’t incur many expenses.
It means the first £1,000 of their income is tax-free. However, by using this allowance, they forfeit their right to write off any business expenses against their tax bill.
Essentially, they will need to work out whether cutting their taxable income by £1,000 would save them more money than they could claim in expenses.
Again, an accountant can help you to work this out.
Doing a tax return for the first time may seem scary, but there are plenty of places you can go for help, whether that is doing a quick search online, asking a friend who is more experienced or hiring an accountant.
There are also Facebook groups dedicated to supporting people with tax returns, such as The Lolly Lounge run by accountant Tanya Ibberson.
Laurence Taylor, founder of tax support social enterprise Easy as 123, part of Royal London’s Changemakers programme, says: ‘HMRC says that tax shouldn’t be taxing but still manages to make this the most complicated tax return in the world, with lots of difficult words, double negative questions, and things that don’t apply to 99.9 per cent of the population.
‘Take a deep breath, don’t panic, and try to reach out for advice if you get stuck – you won’t be alone.’
Small Business Essentials