Understanding Tax Requirements

By Samantha Senior / 08 Jan 2020

Accountant Samantha Senior details what new practitioners need to know about becoming self-employed and registering for tax

Tax season is here. The self-assessment tax return deadline for the last tax year is January 31; the end of this month. 

This means it’s perfect timing to discuss the responsibilities of a sole trader in regards to personal income tax when starting out in the medical aesthetics specialty.

I am regularly approached by medical professionals who have invested in themselves through training as aesthetic practitioners. They often move from employed roles in the NHS and are taking the leap to become self-employed, which can be daunting for many. As life and work are busy, the formality of registering the new business gets pushed down the to-do list and often becomes a cause of anxiety and panic later down the line.

The most common questions I get asked in my tax clinics are:

  • “How do I register my business?” Or “Help! I haven’t registered my business; will I get in trouble?”
  • Followed by, “Does THIS tax deadline affect me?”
  • “How much tax do I need to pay?”
  • And “What is making tax digital?”

As an accountant, I meet many business owners that get completely overwhelmed by the concept of small business accounting and tax, so this article aims to help simplify the basic steps and advise those new to the industry on what responsibilities lay with becoming a sole trader, while providing practical advice on when they should submit a self-assessment tax return.

Registering as a business

Taking the leap from leaving employment and becoming self-employed needn’t be scary. A few simple steps and you’re ready to go. When starting out, the first step is to decide what type of business you want to be. In the UK, the simplest way to set up a business is to become a sole trader, also referred to as ‘self-employed’. The alternative is to set up as a limited company.

Setting up as a limited company may be of benefit later down the line when your business grows, as it can be more tax efficient, but there is a lot more administration and responsibility with being a limited company than a sole trader. As such, I generally recommend that becoming a sole trader is the easiest and most common route for newly-trained practitioners.

There are a lot of free resources online, either at HMRC or the Low Income Tax Reform Group (LITRG), which is a charity that offer a free 108-page document on self-employment; as well as unlimited free resources.1 They both offer a wealth of advice on the advantages and disadvantages of being a limited company or a sole trader if you want to know more, or you can read Sole Traders vs. Limited Companies by Dr Qian Xu, which was published in the June 2018 issue of Aesthetics and is available online.2

For this article, however, I will focus on the responsibilities of sole traders.

HMRC states that as a sole trader it is your responsibility to:

  • Keep records of your income and expenditure
  • Send a self-assessment tax return every year to HMRC
  • Pay income tax on your profits and Class 2 and Class 4 national insurance, if profits exceed the respective thresholds3

When you decide to become self-employed you are responsible for your own personal tax and national insurance. For these to be accounted for, you must register as self-employed. According to HMRC, ‘You must have done so by October 5 in your business’s second year and you could be fined if you are not’.3 A tax year runs from April 6 to April 5, therefore if you start your business in February 2019 you will have until the October 5, 2019 to register. If you start your business in June 2019, you have until the October 5 2020 to register. It’s simple to register as a sole trader; it just involves filling out a form on the gov.uk website.3 It can be completed by the individual running the business or by an accountant on behalf of the business owner.

Taking the leap from leaving employment and becoming self-employed needn’t be scary

Accounting records and Making Tax Digital

Developing a good accounting system early on in business is the best foot forward. I encourage new businesses to ensure they have a separate business bank account as soon as they start trading. The next advice I would give is to start organising a book-keeping system that works for the business owner, which is simple and non-complicated.

Making Tax Digital is here to stay. According to HMRC, the primary aim is to make tax administration more effective, efficient, and easier for taxpayers through the implementation of a fully digitalised tax system.4 In April 2019, HMRC made it mandatory for all VAT registered (over the VAT Threshold) businesses to become digital – meaning all VAT Returns to be submitted using a digital accounting system.

With income tax becoming mandatory by 2021 (earliest),3 I would advise that new businesses find a digital book-keeping system that they are comfortable using and understanding.

There is a vast amount of accountancy software products on the market that are user-friendly and have apps that will work on most smartphones. I recommend using one that will grow with your business and is compliant with HMRC. You should look out for software that has:

  • Recording ability – can record and keep a digital image of a receipt
  • A payroll system – if/when you take on staff having a system that already includes a payroll feature would be prudent
  • Permission setting – does it have permission levels for staff to use? For example, you may want staff members’ input and the ability to record their own expenses or their invoices/sales for clients, but not see all your financial information for the business
  • A stock feature – as you grow, keeping clear and accurate records of your stock levels is imperative for stock control
  • Ability to submit VAT Returns if you become VAT Registered

Most accountancy software companies offer free training and webinars to get the best out of their products and apps.

Sage, QuickBooks, Xero and FreeAgent are the products I have found very practical for businesses. Their basic standard packages generally range from £10 to £30 per month. For my clients working in aesthetics I have found FreeAgent is taking the lead, with users having no previous accountancy or book-keeping knowledge and finding it easy to use. In my experience, its functionality fits around the modern business; everything can be completed easily on a smartphone, allowing business owners to successfully juggle their life/work balance. There are no additional apps to be purchased to photograph receipts. FreeAgent can also be obtained free when banking with NatWest and is free for all NatWest business account holders. NatWest also offers free business banking for new businesses for 18 months.5

Business and training expenses

As stated on the HMRC’s website; ‘If you’re self-employed, your business will have various running costs. You can deduct some of these costs to work out your taxable profit as long as they’re allowable expenses.

Costs that relate to your business and certain training expenses can be claimed against your business turnover/income as ‘allowable expenses’.

For example, if your turnover is £40,000, and you claim £10,000 in allowable expenses, you only pay tax on the remaining £30,000 – known as your taxable profit.3

According to HMRC, costs you can claim as allowable business expenses include:3

  • Office costs e.g. stationery or phone bills
  • Travel costs e.g. fuel, parking, train or bus fares
  • Clothing expenses e.g. uniforms
  • Staff costs e.g. salaries
  • Things you buy to sell on e.g. stock or raw materials
  • Financial costs e.g. insurance or bank charges
  • Costs of your business premises e.g. heating, lighting, business rates
  • Advertising or marketing e.g. website cost

As most aesthetic practitioners invest in themselves by committing to expensive training courses, it is likely these are directly relevant to your business and are used to keep your current skills updated. This therefore means that the costs for these can be claimed against your income, lowering your tax liability. HMRC states, ‘You can claim allowable business expenses for training that helps you improve the skills and knowledge you use in your business (for example, refresher courses)’. As such, I recommend keeping all your receipts for training and have an accountant double check what training courses are allowable.

All allowable training courses enable you to claim further expenses in relation to the allowable training course; for example, travel costs, and expenses relating to the materials needed for the course. If you are in doubt, please speak to an accountant.

You cannot claim for training courses that help you:3

  • Start a new business
  • Expand into new areas of business, including anything related to your current business

For example, if you were a self-employed dentist and you trained to give botulinum toxin injections, this would NOT be claimable. Yet, if you were a self-employed toxin injector already, and you committed to a CPD course to refresh your skills, then this WOULD be claimable.

Tax return

Once you have your expenses and income recorded for the tax year, you will need to complete an annual self-assessment tax return. Self-assessment is to calculate your personal tax liability including income tax, Class 2 and 4 national insurance (NI) and capital gains tax for the tax year.

  • Income Tax for the 2019/20 tax year is calculated on profits after the £12,500 personal tax allowance has been disregarded. Any profits remaining after deducting the personal allowance will be taxed at 20% from £0 to £37,500, 40% from £37,501 to £137,500, then any after will be taxed at 45%. If your total income exceeds £100,000 your personal allowance is tapered down by £1 for every £2 until £125,000, when you will no longer receive a personal allowance.
  • Class 2 NI at £3 per week for the 2019/20 tax year. You only need to pay Class 2 NI if your annual profits are above £6,365. However, you can make voluntary contributions to maintain your national insurance record. 
  • Class 4 NI at 9% on profits between £8,632 and £50,000, reducing to 2% on profits over £50,000 for the 2019/20 tax year.

The deadline to complete your tax return is January 31 every year unless you prepare a paper return which is due by October 31 following the end of the tax year. Therefore, for the tax year that ended April 5 2019, if you are completing your tax return online, you will need to submit and pay all tax by January 31, 2020.

It is common for most businesses to make a loss in the first years of trading. A trading loss occurs when the business outgoings are more than the business income. For example, if a business made £40,000 in income but paid out £50,000 to make that income, the business would have a loss of £10,000.

This loss can be recorded on your tax return. If you are employed and have paid tax during the tax year, this loss can be allocated against the tax paid on your employment income, potentially resulting in a tax refund.

Alternatively, if you have made a loss and are not employed or have not paid tax in the tax year, the loss can be carried forward into the following next three tax years to be netted off against any future profits, potentially resulting in reducing your future tax liabilities.1 For further reading on tax losses I would recommend reading the free resources at HMRC or LITRG.

Summary

My recommendations for self-employed aesthetics practitioners who are new to the industry are to firstly begin with registering for self-assessment as soon as possible and open a separate business bank account. You should always keep records of all business income and expenditure and find a user friendly (HMRC compliant) accounting software/app to assist you. Understanding and managing tax doesn’t need to be difficult, there are plenty of free resources available that can help you and everything is becoming much similar with the new Making Tax Digital processes.

References

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