Do you need an accountant?
I want to be really honest and straightforward here. Personal tax returns are not in any way rocket science. If you are comfortable with numbers, have an understanding of the principles of accounting and are willing to spend a day finding out what tax allowances you can take advantage of and what are allowable deductions then you can probably do it yourself. You probably won’t be able to legitimately reduce your tax bill as much as an expert could but you won’t be paying an expert either.
Remember that there must be at least one person at HMRC that runs around telling everyone “normal people should be able to this stuff”. That’s the aim, whether or not you want to is up to you.
Want to give self-assessment a go?
The crucial thing is that you should actually want to to do this. If you make a mistake in your favour and HMRC notice they will be all over you and you definitely don’t want that. So to do it you will have to invest time. This is why most Contractors and Freelancers don’t do it themselves. They are entirely capable but would be better off charging that time to a paying client whilst paying an accountant to do it efficiently and giving them piece of mind. It’s all about comparative advantage.
It’s pretty similar to me thinking I can fix the electrics in my house. I’m pretty sure if I spend enough time reading about it and watch plenty of educational Youtube videos I will gain the necessary knowledge. I’ll still have a niggling worry at the back of my mind though that the house might blow up.
How to do a tax return?
Let’s say you want to complete a tax return. Here are some steps I would follow:
1. Work out your accounting profit – Your starting point for any tax return is a set of accounts prepared under UK GAAP (ie. UK accounting standards). How hard or easy this is depends on the business you are in. If you are an IT contractor and bill at a daily rate this will be pretty easy. Total up all the sales for days you worked between 6th April 2010 and 5th April 2011. From this deduct all expenses you incurred over the same period. Note that here we really mean the same period. If you paid for a service that lasts 12 months then you can only apply the amount that covers the tax period. So if you paid for it on 1 January 2011 and it lasts a year then you need to divide it by 4 (ie. up to the end of March/start of April). If you bought anything that you expect to last longer than one year then this is probably a fixed asset, such as a computer. For tax purposes completely disregard this as an expense for now.
2. Work out your taxable profit – HMRC has different rules to UK GAAP. So you need to go down all your expenses and consider whether these are allowable deductions for tax purposes. Generally anything incurred “wholly and exclusively for business purposes” will be allowable, but some areas such as drinks, clothes and staff/client entertainment get pretty ambiguous. If I was not a trained accountant I would probably err on the side of caution and exclude all these costs. An accountant will also know what expenses aren’t there. Perhaps you work from home, are you charging back a portion of your home utility costs? Another (of many) quirks is money spent on petrol for your own car, you can recalculate the cost of this based on the miles travelled (discussed here). This will add an element of cost for the use of your own car so will reduce your taxable profits.
The next big area is Capital Allowances. This is where your new computer comes back. In theory you need to spread the cost of this over the life of the computer (probably three tax years). However, at the moment you can take advantage of your Annual Investment Allowance, and take the full cost in year 1 as a 100% capital allowance. If this paragraph makes sense to you, you will probably be okay with all of this.
3. Look at your tax return – Go down every box of the tax return. Do you understand what it is asking and why? If not ask Google until you do know. The HMRC website,Business Link website and third party websites such as Tax Donut should be able to explain most of these points to you. If you find yourself re-reading the same pages more than five times, it might not be for you.
4. Fill in your tax return – Are you confident that you understand every disclosure you have made and all expenses you are claiming are allowable? If someone was to ask you why you put the number you did in the box you did can you confidently answer? If the answer is yes then congratulations, file it with HMRC.
What about Corporation Tax?
Corporation Tax is pretty different. The number of fiddly rules is greatly increased and you also need to be comfortable you know what the Companies Act requires of you.
One area that is easy to get wrong is the payment of dividends. If you don’t have the right paperwork to support it and HMRC finds out they will argue that you are paying yourself a salary not dividends and throw a very large National Insurance bill at you. I think the risk here is too much. If you incorporated your business you are probably making a big tax saving, you really need to use some of that saving to pay an accountant otherwise you might lose it all over an absurd technicality.
I don’t want anyone to be scared of filling in a Self-Assessment Personal Tax Return (unlike a Corporation Tax Return). If you run a simple business then the resources are out there to inform you. The system is designed for people to do it themselves if they want.
Which makes me question what I can offer you as an accountant. It’s not revolutionary but here it is:
- Using my experience to identify more legitimate means of lowering your tax bill
- Taking away the pain. For some people tax returns are fun. For most they really aren’t. A good accountant will take away all the pain and hassle involved and give you the confidence it is being done right.
That is purely from a tax return compliance angle. If we are talking about accountants as business advisers then I have a lot more positive things to say. But I shall say those things another time.
If anyone has prepared their tax return themselves but wants a professional to take a quick look before they click submit then please get into contact.