How to avoid five common tax mistakes for the self-employed

Blogs 20 Sep 2022

Getting ready to file your tax return? Here are five common mistakes in the self-employed tax process and advice on how to avoid them.

Business owner with paperwork and receipts

This article was first published in First Voice. Written by Tom Walker, Partner at Wellers.

Tax can be an intimidating prospect for the self-employed, as you don’t benefit from having an employer, or financial department, to take care of your tax affairs on your behalf. Instead, you are responsible, and any mistakes can be costly, as errors can lead to an HMRC investigation and result in significant penalties.

The PAYE system for employees largely removes room for tax errors, as it provides automatic calculations based on earnings, deducting tax owed from employee pay before they receive it. Yet for self-employed workers, this process isn’t so streamlined. You must submit a tax return including everything you have earned throughout the preceding tax year. Although this sounds straightforward, as anyone who has had to fill one out will agree, it often isn’t.

To help you through the tax process, here are five of the most common mistakes I see self-employed workers make, and advice on how to avoid them.

1. Not engaging professional help

Tax is a complex issue, and not everyone’s area of expertise. The self-employed should make an honest assessment of whether they have the time and capacity to commit to regular bookkeeping.

Should the answer be no, it would be best to seek outsourced, professional assistance. Accountants will reduce the potential for errors, and ensure books remain fully compliant with legislation, including:

  • Allowable expenses
  • National Insurance Contributions
  • Tax returns and liabilities

Accountants can also advise on the tax allowances and reliefs which might be available and beneficial to you. These are complex pieces of legislation, but ultimately could save you potentially thousands of pounds on your tax bill.

They will also know when the deadlines are and plan for them, alleviating any last-minute panic to complete forms – a process that can often result in minor but costly mistakes.

2. Not maintaining accurate records

Maintaining up-to-date, accurate accounts is a key vulnerability for the self-employed, especially when trade is busy. Important administration tasks are often left to another day, with filling orders or completing projects taking priority.

Yet it is hard to keep track of important income and expenditure without an accurate filing system. How do you know you’ve been paid for an invoice from three months ago unless there is a record of it? Such instances can lead to a game of connecting the dots and make filing an accurate tax return practically impossible.

Every incoming and outgoing transaction should be recorded, ideally in real time. This is the only way to maintain accurate records and have a true gauge of finances.

If claiming allowable expenses, HMRC requires receipt-based evidence from the previous six years. Poor record-keeping will make this difficult, leading to disputes with HMRC. If you are likely to lose receipts, take a picture of it, and email it to yourself as a quick solution.

Accounting software does exist to help the self-employed record income and expenditure. Some systems are better than others, and it is worth conducting market analysis before deciding which one is the best fit for you.

If any uncertainty remains, seeking professional help regarding the right solution for your individual circumstances is a good idea. Selecting a system that is fit for purpose is now more important than ever before, as HMRC requires digital records.

3. Overlooking cash flow

A positive cash flow is important for the long-term prosperity of a business. It is not efficient or effective to operate from one day to the next, which can happen all too often among the self-employed.

Promptly invoicing customers is essential. By doing so, you are more likely to receive payment in a timely manner. This will allow you to settle personal liabilities with your own suppliers in suitable time, before there is a risk of late fees. Prompt payments will ensure you are well-regarded by suppliers and seen as a dependable customer.

If you don’t invoice immediately, delays can happen later down the line, as customers take longer to pay. This can result in cash flow issues which can impact personal finances, as well as business ones. The foremost common reason businesses fail is by running out of cash. Ensure that you avoid making the same mistake.

Accounting systems are available with built-in tools which can help streamline this process and ensure efficiency for a healthy flow of cash.

4. Not budgeting for the tax bill

While filing the paperwork for a self-assessment tax return requires a significant amount of time and effort, it is important to budget enough money to pay it too. A budget needs to be set aside regularly (preferably monthly) to pay for the liability. If this is not done on a regular basis, you will struggle to find the funds to pay HMRC in one block at the end of January.

Despite the filing deadline being 31 January, it helps to prepare shortly after the end of the tax year on 5 April. This leaves plenty of time in the year to set money aside.

5. Cash misuse

Bank transfers or card payments automatically keep a digital log of the transaction date, amount, and recipient’s name. This is valuable information for business accounts. Making or receiving payments in cash, however, means the information needs to be manually recorded later.

It is easy to forget a particular transaction or make a mistake when inputting the information. Avoid using cash to prevent this, especially for allowable expenses. This process reduces the risk of missing transactions when constructing a tax account, and having to pay unnecessary tax liabilities.

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