Freelancer tax returns – explained

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Sole trading freelancers: What about my tax return?

If you’re a sole trader, you’re in luck because you only have to do one tax return a year. Your business’s accounts go into the self-employed pages of your tax return. And if your business’s annual sales are under £70,000 (excluding VAT if your business is VAT-registered), you’ll usually be able to fill in the short self-employed pages. One advantage of this is that you don’t have to put all your different kinds of expenses in separate boxes. You can put them all in one box together.

If your business’s annual sales are over that limit then you’ll need to fill in the full self-employed pages.

HM Revenue & Customs provide useful help for how to fill in these pages, both short and full, and if you’re using specialist tax software, this will usually walk you through filing in your tax returns, including which set of pages you need to use.

Limited company freelancers: What about my tax return?

A limited company is the only kind of business that pays its own tax. In all other cases, the business owner (s) pays income tax on their share of the business’s profit. Limited companies pay corporation tax on their profits and must file their own corporation tax return.

For April 2011, for year ends that fall on or after 31st March 2010, both the payment of corporation tax and filing of the return must be done online. You’ll need to register with HMRC to use online services in order to do that – which isn’t the same as completing form CT41G to tell HMRC your company exists.

Corporation tax is payable nine months and one day after the company’s year-end, so companies with a year-end of 31st March must pay their corporation tax by 1st January of the following year. Watch out for your company’s cash flow if it’s also registered for VAT. But the corporation tax return itself doesn’t have to be filed until 12 months after the company’s year-end.

Along with the corporation tax return, you must also send a copy of the company’s accounts to HMRC. HMRC and Companies House do have a joint filing initiative whereby you can send your company’s accounts to both parties at the same time. Remember though, that Companies House needs them three months earlier than HMRC, so don’t be late!

Expenses on your tax return – What you can include

When you’re preparing your accounts and filling in your tax return, the profit figure that tax is paid on (which accountants call your business’s ‘taxable profit’) is basically your business’s income, less its day-to-day-running costs.

If a running cost can be used to reduce your business’s income and form part of the taxable profit calculation, then accountants say you can claim tax relief on that cost. But there are some costs that you can’t claim tax relief on, so when you’re working out your taxable profit, they must be added back.

One classic example of this is if you entertain anyone other than employees of your business. So if you take a customer out to lunch, that’s entertaining, and it’s a day-to-day running cost of your business, so it can go in the expenses in your profit and loss account - but HMRC say that it’s a cost on which you can’t claim tax relief.

Overall with expenses, HMRC’s rule of thumb is that your business can only claim tax relief on genuine business costs. So anything that’s not related to your business doesn’t qualify for tax relief. Accountants also describe these costs as “disallowable for tax”.

More on freelances taxadviceand the latest 2018/19 rates and allowances.

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