Seeking an idiot-proof guide on how to start

[Random3]

Hi,
I'm hoping you guys could help with me with self employment and self assessment. I recently started earning money freelancing doing music production and audio editing, and other similar things. I am not selling any products, I am offering a service. I have set up a website (not live yet) and get paid via PayPal. All business-related payments in and out have been written down on a spreadsheet.

My partner has limited knowledge of self employment, as she works in The Department for Work and Pensions, and has occasional dealings with self employment. She has registered me as a Sole Trader on HMRC, and I know I have to complete a tax return in April. The problem I have is, I know nothing else. I am aware there are different types of National Insurance contributions, however, I am not sure which I would be paying, if any. Do I just need to complete the self assessment at the end of each year, and keep accurate books, or is there more I need to do?

I have invested a lot of money in equipment, prior to the business starting, can I claim back any costs on these? How does VAT apply to my business? The online Sole Trader application I did essentially told me not to apply for a VAT number, however I am currently in the process of creating a website, and if I have a VAT number, I can take the VAT off the cost of the website and pay a lower fee.

I also have customers abroad, do I need to declare this in some way, or list it separately on my spreadsheet? Is this relevant?

All of my freelancing work is done from home, do I need to do anything with regards to that? I use household electricity, internet connection etc, so would I claim these back? I know I need to change my household insurance.

I simply want to earn money doing what I enjoy, but seem to find myself caught up more and more in the bookkeeping side of things, in an effort to be compliant with government guidelines. As is probably clear, I know next to nothing about this sort of thing, and I didn't want to waste an awful lot of money each year employing an accountant, for what should, I hope, be something fairly easy and simple for me to do myself. Suffice to say, please help in any way you can, any and all responses are appreciated.

 

[Iain_Henderson]

You could learn how to do it all yourself but it would take time and probably a few mistakes along the way.

Having been in a similar position to you I'd recommended employing the services of an accountant for a couple of years.

They will (should) minimise your tax liability, give advice re vat registration, calculate your tax and NI liabilities, and submit your self assessment.

After a year or two you'll either be grateful for their services and keep going with them or decide to do it yourself (and you'll have a couple of years template to help).

I'd be looking for an independent accountant without premises and be willing to pay up to £1000 but having not used an accountant for a few years no idea how realistic that is!

 

[Scalloway]

I didn't want to waste an awful lot of money each year employing an accountant

You can waste an awful lot more money if you don't employ one.

 

[Random3]

Well to be honest my realistic goal is to be making £400 a month consistently and reliably in 12 months time. So anything anywhere near £1000 a year is well outside of what I can spend.

I don't really get how there is that much to it. I need to declare what I earn and what I spend. I don't understand how there can be much (any?) more to it than that.

 

[STDFR33]

Well to be honest my realistic goal is to be making £400 a month consistently and reliably in 12 months time. So anything anywhere near £1000 a year is well outside of what I can spend.

I don't really get how there is that much to it. I need to declare what I earn and what I spend. I don't understand how there can be much (any?) more to it than that.

1st mistake.

 

[Random3]

So the implication is that no one can ever start a business unless they have a guaranteed income of thousands of pounds per year.

Otherwise, unless you are earning £10,000+, at least 10% of your income is going on an accountant. Which seems like a massive, massive waste.

It doesn't make sense to me. So far in the first month of doing this, I have had three items in and two items out. If I had hundreds of incoming and outgoing payments then sure.

 

[STDFR33]

It doesn't make sense to me.

Well there’s a lot of questions you are asking.

And you probably expect somebody that knows what they are talking about to answer them? Free of charge, obviously.

The problem is, when my boiler breaks down I have a lot of questions too. I have a lot of questions because I don’t know schit about boilers. I wouldn’t think of asking 30 questions on the Internet. I would just find a professional that actually knows what they are doing.

Have you actually considered that whilst the profits might not be there, sound advice could save you a lot more in the long run?

 

[Random3]

I was under the impression that this was the precise purpose of this forum but I guess I was mistaken. I am asking for a poke in the right direction. And if the right direction is for a new business with the goal of earning £400 a month in 12 months time to go out and spend a significant chunk of that on an accountant then fair enough. I just don't understand how that can be necessary.

Like what will an accountant actually do for me? In the first month of being self employed I have had three payments come in totalling about £300, and two go out totalling about £150. I wasn't under the impression that an accountant was necessary for those kinds of numbers. But if you say it is, then I guess thank you for your advice.

 

[Mr D]

Well to be honest my realistic goal is to be making £400 a month consistently and reliably in 12 months time. So anything anywhere near £1000 a year is well outside of what I can spend.

I don't really get how there is that much to it. I need to declare what I earn and what I spend. I don't understand how there can be much (any?) more to it than that.

So don't do things requiring a thousand pound accountants bill.

Self employment can be a few hundred accountants bill. Just depends how much work you get them to do - a hundred hours work will cost you more than 12 hours work.

You don't have to get an accountant for self employment. Can do tax returns yourself and do accounts yourself. When you know what you are doing it may be simply a few hours each year spent doing it, the first time or two likely to take longer.
Check your library for books on business and on accounts.

Your income with self employment is effectively the income of the business minus its relevant costs.


There may be a local business support group who can advise on tricky questions or you can ask on the forums.

VAT however is something I would suggest you talk over with an accountant. As you approach £85k sales / turnover in a rolling 12 month period you would need to decide (currently) if you are to keep below it (by stopping/reducing trading for weeks or months) or registering.
Once you register for VAT (which you can do at any time anyway below the limit) yes you can claim VAT back that you have paid out.
You would also become an unpaid tax collector for the government collecting 1/6th of what the buyer pays as VAT. Government money not your money.

At £400 a month don't worry about VAT for now. Later when you do get an accountant (and they can be cost effective) you should discuss VAT.
Government was looking last year at reducing the VAT threshold, it would be much harder to stay below the limit. So expect the threshold to change at some point.

 

[Random3]

Thanks for the reply.

So to be clear, until I am earning £85k a year I do not need to worry about VAT? It doesn't benefit nor hinder me in the slightest?

I will do further research but basically what you are saying is as long as I keep track of everything in and out of the business, I can then fill in a yearly tax return and not worry about anything else?

 

[Scalloway]

I am aware there are different types of National Insurance contributions, however, I am not sure which I would be paying, if any.

Class 2 and Class 4 NI will be collected through your self assessment.

I have invested a lot of money in equipment, prior to the business starting, can I claim back any costs on these

Yes

All of my freelancing work is done from home, do I need to do anything with regards to that? I use household electricity, internet connection etc, so would I claim these back?

You can either claim a fixed rate or work out the business proportion.

So to be clear, until I am earning £85k a year I do not need to worry about VAT? It doesn't benefit nor hinder me in the slightest?

You don't say if your customers will be businesses or private individuals. Businesses quite often expect their suppliers to be VAT registered. You do say you will have customers abroad. If they are in the EU they may be a bit sticky about paying you if you can't quote a VAT number.

 

[DavidWH]

So to be clear, until I am earning £85k a year I do not need to worry about VAT? It doesn't benefit nor hinder me in the slightest?

Depends - If you are dealing B2B, VAT may not be an issue for your customers.

If you start buying new equipment, moving to premises, turnover starts increasing, it may be beneficial to Voluntarily register for VAT below the £85k threshold.

There are lots of posts on here, where people have hit the VAT threshold, and now have to start charging VAT, making them more expensive, and if dealing B2C, loose sales as non VAT registered co's are cheaper.

 

[Mr D]

Thanks for the reply.

So to be clear, until I am earning £85k a year I do not need to worry about VAT? It doesn't benefit nor hinder me in the slightest?

I will do further research but basically what you are saying is as long as I keep track of everything in and out of the business, I can then fill in a yearly tax return and not worry about anything else?

That's £85k turnover in a rolling 12 month period, not £85k income for you.

Benefit or hinder is open to question. Selling to businesses there are benefits to it, selling to consumers not so much.
There are businesses that will choose a VAT registered business to buy from over non VAT registered.

For keeping track I used to record a bunch of things in a notepad as well as on computer and when end of year came round spend a few hours collating everything, income on one A4 sheet and expenses on another.

Tax return for HMRC can be done online (register well in advance to get the access) and took minutes.

Self employed are taxed at personal rates, if you owe tax you often pay it twice a year - payment for the accounts just done by end of January following end of tax year and payment on account towards next tax bill the following July.

 

[Mr D]

Depends - If you are dealing B2B, VAT may not be an issue for your customers.

If you start buying new equipment, moving to premises, turnover starts increasing, it may be beneficial to Voluntarily register for VAT below the £85k threshold.

There are lots of posts on here, where people have hit the VAT threshold, and now have to start charging VAT, making them more expensive, and if dealing B2C, loose sales as non VAT registered co's are cheaper.

Yes, some of us advise building the VAT you would end up charging into pricing from the start, so extra profit for the business to start off with and no change in pricing later on.
One way or another, until such time as government reduces the VAT threshold, businesses either have to register or have to keep their turnover below the threshold.
Shutting down for say a month every year is not optimal for keeping business going.

 

[The Byre]

And if the right direction is for a new business with the goal of earning £400 a month in 12 months time to go out and spend a significant chunk of that on an accountant then fair enough. I just don't understand how that can be necessary.

I'll explain things in audio terms!

That point where you are, where acoustics, electronics, audio technology and music all come together is one of the most fiendishly complex fields known to mankind. By the time we have worked out the implications of the fact that sound travels at one foot per millisecond and that we can locate the direction of a sound down to a few degrees as a result, plus the whole issue and complexities of all the World's music and then try to knock all that together in Logic, ProTools, Reaper, whatever and learn that software to Ninja level, years have passed! We could go on about transients and different types of microphones and speakers and their response times and then their interaction with the various mic pre-amp designs and pretty soon, any sensible person will be grateful that there are people like you, who understand all that for them!

Accountancy is worse! The UK has the most complex tax laws on Planet Earth. Yes, there are special rules for recording studios, film companies and hair dressers. The tax regime for the way a recording studio deals with customers from the US differs to the way they must deal with a customer from Canada or Brazil and each is different to one another. There are special rules for farmers, riding stables and, well, you name it and some vapid politician has come up with a special tax regime just for his or her pet scheme or hobby horse.

The UK tax code runs to about 10 million words, according to the accountancy body Icas. No single human being understands more than a smallish fraction of it. The 2015-16 edition of Tolley’s yellow and orange handbooks, the tax lawyer's bible, comes in at a record 21,602 pages. It’s a hopeless, dreadful situation.

Even HMRC does not understand UK tax laws!

When Osborne became Chancellor (after promising a drastic simplification) the combined Tolley’s, then a mere 17,795 pages, was already the longest tax code in the World. The extra 3,807 pages added since are five times more than the entire length of the UK tax code in 1965.

I have a UK company and a German company and on my shelves somewhere there is the German tax code. It is a single book. If I want to know what is what in German taxes, I can look it up and there it is in black and white. It is perfectly possible for a single human being to understand German tax law! The same cannot be said for the UK.

Google, Amazon et al can dance a merry dance around UK tax systems simply because they are better resourced than HMRC and they can use their international status to circumvent taxes, something HMRC cannot do by definition.

So you can no more complete a tax return and hope to get things right and in your favour, than an accountant could hope to simulate surround sound, by means of the use of phase and the Haas effect!

 

[Mr D]

Can do the tax return and not make too many errors however.
Claiming for all that can be claimed, knowing how to claim for particular items, that takes more specialist knowledge - more learning or using a good accountant.

Saying that, every year that I have been both employed (and paying tax) and self employed the P60 tax figure has turned out to be incorrect for tax paid. Usually in HMRCs favour and if I was just an employee I'd have had a refund most years.

 

[TexasLarry]

If you find a really competent accountant - and that will take lots of work - is that you not only have someone to do your taxes, but you can learn crucial things that will help save you tons of money down the road.

So don't feel like you are shelling out loads of $$$ just to have someone fill out tax forms. Instead, look at this as a chance to learn from an expert.

My last accountant showed me how to save thousands and thousands of dollars in taxes each year.

And now that I understand how to "play the game", I can do my own taxes if I choose.

Just my 2-cents...