At the turn of the decade earlier this year, there were over 2 million freelancers in the UK. Combined, they contribute approximately £125 billion to our economy. And as working from home has never been easier, it looks likely that the demand for self-employment will only continue to rise.
The trouble is, self-employment isn’t as straightforward as simply winning business and doing the job. To ensure clients don’t incur the wrath of HMRC, you need to ensure they register as self-employed and pay their taxes correctly. What’s more, they need the right records in place should they ever fall under investigation.
But don’t be overwhelmed or let your clients be. In order to support their dreams of working for themselves, we’ve asked Mike Parkes from GoSimpleTax to explain everything they need to know about their tax obligations.
Register as a sole trader
Firstly, they need to set up as self-employed and register for your Self Assessment tax return. This becomes a requirement once they start earning more than £1,000 from self-employment during a tax year, so there’s no harm in getting ahead.
Your clients Self Assessment tax return is due every year as of 6th April with a deadline of the following 31st January and summarises your clients earnings for HMRC so that they can accurately tax your client.
Assuming your client haven’t previously registered as self-employed, they will find two options waiting for them upon clicking through to the GOV.UK site:
- Register if you have not sent a tax return before
- Register if you have sent a tax return before
As this is the first time they will be submitting their records in order to pay Income Tax directly to HMRC, they will need to choose the former. You’ll both have to wait for their 10-digit Unique Taxpayer Reference (UTR) number to come through. Once it does, you’re free to activate their account and start filing.
Keep detailed records
As you are aware all invoices, receipts and bank statements need to be recorded. This isn’t just for safekeeping either – you’ll need them to input the correct information on your clients Self Assessment tax return and in case HMRC disputes your tax return submission.
There’s an added benefit to doing this too: you’ll have better visibility of the expenses they can claim for. Expenses reduce your clients tax liability – in other words, they can be deducted from your clients self-employed income to lower the total amount of profit that they will pay tax on.
Travel, tools and home office equipment are perhaps the most well-known examples of expenses. However, you can also claim back on:
- Financial help – Costs like professional indemnity insurance premiums and lease payments can be claimed back, although there are rules if you’re using cash basis accounting.
- Subscriptions – If your client is required to join a trade body or any professional membership organisations, the cost of the subscription can be claimed using their Self Assessment tax return.
- Stock – Any raw materials that your client needs to purchase for their trade, or the direct costs that arise from producing their goods, may be classed as allowable expenses.
Get ahead with your Self Assessment
Far too often, self-employed workers use the 31st January deadline as a benchmark of when to file, as well you may know. But there’s no good in leaving their Self Assessment tax return to the last minute – start contacting clients now and get their affairs in order.
In fact, in times of economic uncertainty, it pays to file early. Don’t forget, remind your clients – Filing early doesn’t mean paying early (the deadline for paying any tax they owe for the previous tax year remains the 31st January), it just means they will know the amount of tax owed ahead of time. This enables them to be better prepared for the payment.
Getting organised also means clients will avoid the penalties for not filing or for not paying their tax bill on time. When your client is just starting out as self-employed, the last thing you want is for them to run into any avoidable fines – or get on the wrong side of the taxman.
Add up to five income and expense transactions per month and see your clients tax liability in real time – at no cost. Pay only when you are ready to submit or use other key features such receipt uploading.
A simple and quick way to calculate your tax return and officially recognised by HMRC.
GoSimpleTax software submits directly to HMRC and is the solution for anyone who has income outside of PAYE to file their self-assessment giving hints and tips on savings along the way.
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