The Ultimate Guide to Filing Tax Returns and Expense Claims

This guide covers everything you need to know, register for, prepare for and organise so you can file a timely and accurate tax return and make sure your expense claims are legitimate. Whether you’re a small business or individual, or even a company that owns property, we’ll guide you through what you need to keep a record of.

For businesses – Registering for and Paying VAT

The red tape associated with being VAT registered can be a huge burden for small businesses, so it’s worth double checking whether you need to be registered at all. Particularly as the registration and de-registration thresholds change regularly.

1. Registration

The current registration threshold for VAT is £85,000. This means if your turnover for the previous 12 month period (on a rolling basis, not based on your financial year) exceeds £85,000 you must register for VAT. You must also register if you think your business will go over the threshold in the next 30 days.

Registering for VAT is actually very easy and can be done online via the HMRC website. We can help if you get stuck!

2. Deregistration

If you are VAT registered and your turnover falls below £79,000 within a 12 month period or you have good reason to believe it will do in the next 12 months, you can choose to cancel your VAT registration.

Again, this is something that is very easy to do from the HMRC website. But, make sure you do not deregister prematurely as the penalties for failing to be registered for VAT are very severe.

It is also worth checking whether your business is better off being VAT registered or not. If you aren’t sure, book a meeting with us to discuss how VAT registration will impact your business.

3. VAT Schemes

There are several VAT schemes designed to reduce the administration burden on small businesses by simplifying the process of producing and filing quarterly VAT returns.

The most common scheme to be used by small business is the flat rate scheme, which is available to businesses with an estimated turnover of under £150,000 excluding VAT (or £191,500 including VAT). This scheme enables you to apply a percentage to your VAT inclusive turnover to calculate your quarterly payment to HMRC. You must leave the scheme once your annual turnover exceeds £230,000.

VAT is a notoriously complex area of tax legislation and the penalties for getting it wrong are pretty harsh. So if you are in any way unsure, or would like to receive specific advice for your business, please do get in touch on 0800 140 4644 or email [email protected].

Justifying and claiming expenses

HMRC in one form or another has been around for more than 160 years and in that time they must have seen every sort of business expense claim under the sun!

It’s all been tried before, whether it was a railway magnate claiming that his top hat counted as working wear or a ship’s captain insisting his ship couldn’t sail without a full hold of rum to keep his crew happy.

The advent of self-assessment tax return forms gave the general public full rein to use their imaginations to reduce their tax bill and some self-employed business people have stretched the definition of expenses a little too far, instead of checking with their accountant first.

Here’s our most unusual self-employed business expense claims that didn’t make the cut:

• A daughter’s wedding for more than £10,000 was recorded under “sundry expenses”
• Someone put their dating website subscription through the business account (risky business?)
• A holiday to the Seychelles (travel and subsistence)
• Home renovation (repairs and renewals)
• A claim for a Brazilian wax (ironically filed under clothing expenses!)
• New dining room furniture was for a ‘Boardroom’ (Furniture expenses)
• Herbal Viagra substitute was included in a claim that took a couple to Barbados (Travel and subsistence)

Navigating the world of business expense claims can be difficult, so it’s advisable to consult with a self-assessment accountant to ensure that your deductions align with the regulations and won’t raise eyebrows at HMRC.

Be realistic about business expenses

As you can see, some self-employed business people seem to get a little confused about what a legitimate expense is, even though HMRC offers plenty of guidance online.

Some business expense categories are pretty self-evident; tools of the trade; building materials, stationery or marketing for your company.

Keeping track of expenses

Other expenses are harder to keep a track of unless you’re well organised (or make use of a dedicated book keeping service), like working out the proportion of your phone bill or car mileage can be attributed to business rather than home life.

However, expenses involving food or clothing are particularly problematic. The general rule of thumb that we apply at Black and White Accounting is that an expense must be “wholly and exclusively” for business purposes.

So, if you are claiming for food and drink, it should be as a travel expense and must be outside your normal working routine. Travelling to and from your office every day, or buying a sandwich for lunch at your desk don’t count, but a journey to a potential client to deliver a sales pitch would be acceptable.

Even barristers have fallen foul of the law when it comes to clothing. If it’s personal protective equipment (steel-toed boots, overalls) or it’s emblazoned with your company logo, you’re probably OK. However, a new suit for the office could just as easily be used for a wedding or a party; it would be impossible to prove that it’s “wholly and exclusively” for business purposes.

Keeping track of tax documents

It is a legal requirement to keep records that support a tax or VAT return. HMRC want to see that your figures add up and make sure you are paying the correct amount of tax. Without accurate record keeping you could face penalties for inadequate records (or for not keeping them for the required period of time), and this may also result in penalties for an incorrect tax return – without up-to-date records it becomes increasingly difficult to file an accurate return.

But it’s not all doom and gloom, good record keeping works for your business too; allowing you to manage cash flow, keep track of expenses, chase money owed and pay the right amount of tax, not too much!

How Long Do You Need To Keep Records?

Perhaps one of the most popular questions I get asked is “how long do you need to keep records?” Fortunately, the days of storing shoeboxes full of receipts are long gone for many businesses: computer software means that most records can be stored securely on a local disk or in the Cloud, and there are lots of apps available for keeping track of your expense receipts. Incidentally, in most cases, HMRC accepted scanned copies of receipts (or photos), just remember to scan or snap both sides of the receipt.

However, even though you don’t have to keep paper records, it’s helpful to know that in most cases you must keep records for 6 years. There are exceptions, for example a contractor in the Construction Industry Scheme (CIS) need only keep PAYE records for 3 years, while if you own a limited company the Companies Act may compel you to keep certain records for different periods of time. If in doubt, check with your accountant!

Essential Record Keeping

Below is an outline of the essential records you need to keep whether you are self-employed, in a business partnership, limited company, an employer, or a combination of these. For a more detailed guide download HMRC’s A General Guide To Keeping Records For Your Tax Return.

Self-Employed and Partnerships Records

Sales and takings:

• till rolls
• sales invoices
• bank statements
• paying-in slips
• accounting records

Purchases and expenses:

• receipts
• purchase invoices
• bank and credit card statements
• chequebook stubs
• motoring expenses and mileage records
• accounting records

Construction Industry Scheme Records

Contractor:

• records of payments made to all subcontractors for work done – invoices.
• records of materials subcontractors have purchased – receipts.

Subcontractor:

• payment and deduction statements – copies of invoices issued and payment statements received.

Limited Companies Records

Accounting records:

• assets
• liabilities
• income
• expenditure

Business records:

• bank statements
• paying-in slips
• accounts books
• purchases and sales information

Employer Records

PAYE records:

• payments made to employees
• deductions from your employee wages (Income Tax, National Insurance contributions (NICs) and Student Loan payments)
• details of employee benefits and expenses
• all records of statutory payments

IMPORTANT! If your business is VAT registered by law you must also keep: VAT accounts, VAT sales and purchase invoices, import and export documentation (eg. delivery notes).

As always, if in doubt speak to your accountant about anything you’re unsure of – as a general rule it’s better to hold on to documentation than bin it!

Common Mistakes On Tax Returns

Filing your tax return in a hurry is a recipe for making mistakes. The best advice is to get it done early, or get a professional to do it for you. But if you’re up against the clock, don’t make these common mistakes:

1. Leaving Income Out: Many self-employed people also have income from other sources as well as their own business; perhaps you also have a salaried job, are in a partnership or have income from UK property. You’ll need to complete the relevant section to declare this income, these are called “supplementary pages”; help is available here. Don’t forget to also include any non-cash benefits an employer provides (such as medical insurance), and if you’ve been reimbursed for expenses incurred as part of a salaried job include these in boxes 17-18 of the “Employment” pages, so that you don’t pay extra tax on these.
2. Not Declaring Interest On Savings And Bank Accounts: HMRC want to know every single penny you have earned, including interest on personal savings or bank / building society accounts. If you have a joint account with your partner or spouse, you’ll need to declare your share of any interest. Also include interest from PPI compensation payouts. ISAs are tax-free so these are excluded.
3. Mixing Up Gross and Net: A common mistake when under pressure is to mix up your numbers and this can either result in you paying more or less tax than you should. Either way it’s an incorrect return that could mean a penalty. Check that you know what HMRC require when declaring income (gross or net), and ensure that you understand what numbers in your accounts refer to.
4. Forgetting Unpaid Invoices and Costs: Unless you are using the cash basis for your accounts, you must also include any unpaid invoices and unpaid costs falling in the 2019/2020 tax year period. To help keep your accounts in order now’s the time to chase outstanding invoices, or declare bad debts, and account for costs incurred such as business mileage.
5. Not Declaring Gift Aid: This may not affect your personal tax (unless a higher-rate taxpayer*), but it does impact on those charities you have supported over the tax year. For every donation of £1 gift aid is worth 25p to the charity. You’ll need to know exactly how much you have donated during the tax year so if you don’t have this information this time around, make sure you keep a record for future donations. *Higher-rate taxpayers can claim the difference between the higher and basic rate on each donation.

Taxes on Properties

Companies that own properties may be liable to complete an ATED return. To avoid fines ensure you are complying with HMRC and have your return completed correctly and on time.

Who should complete an ATED return?

Companies that own residential property in the UK valued over £500,000 should completed an ATED return. There are some exemptions, such as companies that own properties in their capacity as a trustee of a settlement.

What is an Enveloped Dwelling?

If a dwelling is owned by a company, a partnership with a corporate member or other collective investment vehicle then it is said to be enveloped because ownership is ‘enveloped’ within a corporate wrapper’.

A dwelling is a property that is used, or can be used, as a residence or is suitable for use as a dwelling. There are nuances around what is considered a dwelling so it’s worth understanding what comes under the scope of ATED to avoid unnecessary tax.

What is not considered a dwelling?

In addition to non-residential properties, other properties that fall out of the scope of ATED are:

• Hotels
• Guest houses
• Boarding school accommodation
• Hospitals
• Student halls of residence
• Military accommodation
• Care homes
• Prisons

How are properties valued?

ATED charges are banded and depend on the value of the property. You can value the property yourself or it can be done by a professional who will base it on the open market willing buyer/willing seller principle. If you’ve only owned the dwelling, or it has only been a dwelling under the scope of ATED, for part of the year, ATED applies on a proportional basis.

Can you get ATED relief?

There are instances where you may be eligible for ATED relief, which includes but is not limited to the following properties:

• Let to a third party on a commercial basis and not occupied by anyone connected to the owner
• Open to the public for at least 28 days a year on a commercial basis
• Property developed for resale by a developer
• Used by employees of the company for company business where the employee has less than ten percent interest in the company
• Owned by a registered provider of social housing
• A farmhouse if it is occupied by a farm worker, their spouse or civil partner

If you think you are eligible for relief you can only claim by submitting a return or you may still be fined.

When does an ATED return need to be submitted?

As standard, an ATED period is 1 April to 31 March each year and the ATED return needs to be completed and any payment due made by 30 April each year. New properties that come within the scope of ATED must have a return submitted within 30 days.

Help is at hand

If you’re behind on your tax returns or struggling to work out what you need to pay and when, have a chat with the team at Black and White accounting. We offer a free initial consultation and have helped business owners who have nothing but a box of crumpled receipts or are years behind on their returns file accurate returns and avoid penalties. After your initial consultation, all of our work is for a fixed fee so no surprises or extra costs.