Sunday, 18 January 2015

FAQs Series: Understanding Tax Returns

For many self employed and small businesses owners, January can be a very daunting month thanks to the looming tax return deadline. When I first started, I was ready to hire an accountant because I just couldn't get my head around it all, but after a bit of research, list making and lots of organisation, I realised it's not as hard as you'd think!

While I'm by no means an expert and I only have experience of doing my own Self Assessment form as a sole trader, I thought I'd share some tips with you to hopefully help you understand how to keep track of your expenses, what you can claim for and how easy it can actually be if you keep on top of it.

Do I need to do a tax return?

You must always send a tax return if you are:
  • a self-employed sole trader
  • a partner in a business partnership
  • a company director (unless it’s for a non-profit organisation, eg a charity, and you don’t get any pay or benefits)
If you’re registered for Self Assessment, you’ll usually get a letter in April or May from HMRC telling you to send a tax return, and outlining the relevant deadlines. Even if you don't have tax to pay, you still need to send a tax return.

Record keeping

The key is to keep your records updated as often as possible. You must keep records of your business income and expenses for your tax return if you're self employed as a sole trader or partner in a business partnership. You'll also need to keep records of your personal income. Each tax year runs from 6th April - 5th April the next year.

I find it's best to use a spreadsheet that you can update at the end of each week (or month, if that's easier for you), with categories similar to those laid out in the Self Assessment form - although I separate them a little more to help me keep track of specific spending. I record income and expenses by the date I was invoiced or billed, with separate worksheets for online sales, wholesale orders and event sales, then separate ones for business expenses and capital expenses, with each worksheet being organised by month with an autosum adding everything together at the end of each month. 

The final worksheet is an overview putting all this information together, so I can see how much I'm spending on various expenses per month, what months I see increases/decreases in orders/spending to help me prepare for the next year, and simple figures that I can input straight into the Self Assessment form when it's time to do my tax return. It's also handy to have when you need to prove your income/expenses but for something that doesn't accept a tax return or needs something more in depth.

I keep all my receipts in a box, organised into little bags by month which is probably unnecessary but helps me keep track of what has been filed and what hasn't. Since most of my spending for supplies etc is done online, I tend not to print those receipts off but instead have separate folders in my inbox for each years tax return, so if I'm ever queried they're all super easy to find and print off, but until then I'd prefer to save on paper and ink if I can!

I do however print off 2 of every order form when I get orders via my website - one to go in the parcel for the customer, and one for my records. Since everything is sent via recorded delivery, I staple the proof of postage receipt to each order form so it's easy to find in case there are any issues. This means I have hard copies ready for tax purposes too. In terms of events, I take a notepad with me each time to mark down what is sold, which helps plan what to take next time while also giving me proof of income from event sales.

What you can claim for

Perhaps the most confusing part of doing your own taxes is actually knowing what you can and can't claim for. The website has a helpful PDF listing all of these, but for ease I'll outline the most relevant below. While most are straight forward, some can be a little confusing, such as what portion of rent or bills you can claim if you work from home, and for this you can use simplified expenses (flat rates) for this. If you decide not to use this method, you must keep all the bills you’ve paid and show what portion of each bill is due to you working at home.

Allowable expenses

Accountancy, legal and other professional fees
  • Allowable expenses: Accountants, solicitors, surveyors, architects and other professional fees
  • Non-allowable expenses: Legal costs of buying property and large items of equipment; costs of settling tax disputes and fines for breaking the law

Advertising and business entertainment costs
  • Allowable expenses: Advertising in newspapers, directories etc, mailshots, free samples and website costs
  • Non-allowable expenses: Entertaining clients, suppliers and customers; hospitality at events

Bank, credit card and other financial charges
  • Allowable expenses: Bank, overdraft and credit card charges; hire purchase interest and leasing payments; alternative finance payments
  • Non-allowable expenses: Repayment of the loans or overdrafts or finance arrangements

Car, van and travel expenses
  • Allowable expenses: Car and van insurance, repairs, servicing, fuel, parking, hire charges, vehicle licence fees, AA/RAC membership; train, bus, air and taxi fairs and hotel room costs and meals on overnight business trips
  • Non-allowable expenses: Non-business motoring costs (private use proportions); fines; costs of buying vehicles; travel costs between home and business; other meals

Communications, stationery and other office costs 
  • Allowable expenses: Phone, mobile, internet, email and fax running costs; postage, stationery, printing and small office equipment costs; computer software
  • Non-allowable expenses: Non-business or private use proportion of expenses; new phone, fax, computer hardware or other equipment costs

Costs of goods that you are going to sell or use in providing a service
  • Allowable expenses: Cost of goods brought for resale, cost of raw materials used, direct cost of producing goods
  • Non-allowable expenses: Cost of goods or materials bought for private use; depreciation of equipment

Insurance policy
  • Allowable expenses: Costs of any business specific policy
  • Non-allowable expenses: Recoverable costs

Interest on bank and other business loans
  • Allowable expenses: Interest on bank and other business loans and alternative finance payments
  • Non-allowable expenses: Repayment of the loans or overdrafts, or finance arrangements

Other business expenses
  • Allowable expenses: Trade or professional journals and subscriptions; other sundry business running expenses not included elsewhere
  • Non-allowable expenses: Payments to clubs, charities, political parties etc; non-business part of any expenses; cost of ordinary clothing

Rent, rates power and insurance costs
  • Allowable expenses: Rent for business premises, business and water rates, light, heat, power, property insurance, security; use of home as office (business proportion only)
  • Non-allowable expenses: Costs of any non-business part of premises; costs of buying business premises

Repairs and renewals for property and equipment
  • Allowable expenses: Repairs and maintenance of business premises and equipment; renewals of small tools and items of equipment
  • Non-allowable expenses: Repairs of non-business parts of premises or equipment; costs of improving or altering premises and equipment

Wages, salaries and other staff costs
  • Allowable expenses: Salaries, wages, bonuses, pensions, benefits for staff or employees; agency fees, subcontract, labour costs; employers' NICs etc
  • Non-allowable expenses: Own wages and drawings, pension payments or NICs; payments for non-business work

Capital allowances

Capital allowances are a little more tricky to understand, and tend to include anything you use in your business that has a useful life of over two years. This means you can claim capital allowances for certain items that don't fall under allowable expenses, such as:
  • Machinery: including cars, vans, computers and tools
  • Fixtures and fittings: including shelves, furniture and fittings
If you buy an item on hire purchase, you can claim a capital allowance on the original cost, but the interest and other charges count as business expenses.

And don't forget to keep receipts/invoices for everything!


The deadline for paper filing is by 31st October, but more relevant these days is for online filing, which is by 31st January. To file online, you must register for Self Assessment and it takes approximately 7 working days to receive an activation code by post.

According to HMRC, half a million tax returns were sent in on deadline day last year, but I can't stress enough how helpful it is to file it early and avoid the last minute panic. It's honestly a huge weight off your shoulders just filing it as soon as you can after the tax years ends (6th April), and if you keep a detailed account of incoming and outgoing expenditure in a spreadsheet like the one pictured above, it should be a breeze.

Simple mistakes such as forgetting to do the last step and submit your completed form result in an automatic penalty, so make sure you check it has been successfully submitted. I highly recommend saving or printing off a copy of your completed return to ensure it has been submitted, as well as ensuring you have a copy for your own records.
You must keep your records for at least 5 years after 31 January of the relevant tax year, and be ready to justify and sums and figures if queried. 

Again, I must stress I am no expert when it comes to taxes, but instead this is all based on my own personal experience. What tips do you have for any new sole traders filing their first tax return?
If you feel like you still need an extra bit of help, there is an HMRC helpline you can call on 0300 200 3310 or you can register for an online chat service to answer any questions you may have. 

Read more FAQs Series posts here.


  1. I found this through a Google search Thank you, it's just what I needed! I feel a bit less confused now haha

  2. i m so agree this kind of term policy about Understanding Tax Returns to represented with statistically and financially report.

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  3. Thank you for the inspiration. This article is very helpful and informative.




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