An introduction to Tax Self-Assessment A guide for small businesses
MGTSA001 OCT2016 Forum of PrivateBusiness
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An introduction to Tax Self-Assessment A guide for small businesses. Tax self-assessment is the method used by HM Revenue & Customs (HMRC) to collect income tax and some types of National Insurance Contributions (NICs) annually through a tax return. People and businessess who have sources of income that have not been taxed under PAYE must complete a self-assessment return and submit it to HMRC. This normally relates to sole traders or partners who are running a business on a self-employed basis. However, some individuals with investment or rental income, and company directors must also account to HMRC under self-assessment by declaring their personal income.
Who must register with HMRC for self-assessment? All sole traders and partnerships must contact HMRC to register for self-assessment when starting up their business. Failing to register can result in a penalty of £100 and further penalties for trading illegally and not paying tax. As best practice, sole traders must register for tax self-assessment with HMRC as soon as possible after starting to trade, and at the latest by 5 October after the end of the tax year for which a tax return is needed. For example, anyone starting to trade between April 2015 and March 2016 must register by 5 October 2016. When setting up a partnership, although the process for registration and deadlines are essentially the same as for sole traders, one person must be designated the ‘nominated partner’ who is responsible for keeping the business records and managing the partnership’s tax returns. Each individual partner must be registered with HMRC for self-assessment, and the partnership must also be separately registered. However, nominated partners who register the partnership for self-assessment will also automatically be registering themselves. Partners do not have to be individuals, as a private limited company is treated in law as a ‘legal person’ and can also be a partner, so must also be registered for tax self-assessment, as must Limited Liability Partnerships (LLPs). It is mandatory for a company director to file a tax return if one has been issued to them by HMRC. However, if a self-assessment return has not been issued by HMRC and a company director has no further tax liability when sufficient tax has been deducted at source to meet their liability for the tax year, there is no requirement for the director to file a self-assessment return for the year in question. For a full list of who need to complete a Tax Self-assessment for visit www.gov.uk/self-assessment-taxreturns/who-must-send-a-tax-return
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What is the tax self-assessment process? In order for income tax to be collected under self-assessment, you must register for self-assessment with HMRC, complete an annual tax return and pay any tax due in two instalments each year. Partnerships have to submit a partnership tax return in addition to individual returns on behalf of each of the partners. HMRC sends a letter each April to everyone who is registered for self-assessment, reminding them to complete their tax return, which must be submitted, at the latest, by the following 31 January, although filing deadlines vary according to the method of submission, either online or via paper forms.
Registering for self-assessment The registration process takes at least 10 working days to complete as it involves HMRC posting out a 12-digit activation code, which is required when logging on to the online account. Anyone registering for self-assessment is also issued with a 10-digit Unique Taxpayer Reference (UTR) and a user ID (also known as a Government Gateway Account), and can then create a password and report details of any earnings from self-employment or income as a company director by completing an online tax return each year. Following registration for self-assessment, sole traders and partnerships must keep full and accurate records of all business sales and expenses as well as details of personal investment income so that a tax return can be completed in due course. To register for self-assessment visit www.gov.uk/register-for-self-assessment/overview
The ‘tax year’ The information included in a tax return, which is used to calculate any tax due, relates to the income received and expenses incurred that result in taxable profits in a given ‘tax year’. The tax year runs from 6 April in one calendar year to 5 April in the following year, for example 6 April 2015 to 5 April 2016. Tax year dates do not always coincide with the business’ accounting year end, which is the annual period over which profit and loss accounts and other financial statements are prepared. However, in order to simplify accounting processes and the completion of tax returns for most start-ups, if possible the business’ accounting year should also end on 5 April. In the first year of trading, sole traders and partnerships can prepare their trading accounts over a shorter period than 12 months, in order that the accounting year-end can be brought in line with the tax yearend. For example, a sole trader who starts to trade at the beginning of October could choose to end their accounting year on 5 April the following year, so that their first year’s trading accounts would show figures for only six, rather than 12 months.
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The bill Once you’ve filed your tax return you will get a bill of the tax you owe. If you complete your self-assessment form online, you can view your bill before you submit the form, in the ‘view you calculation’ section. Once you have submitted your return, it can take up to 72 hours to receive the bill in the final tax calculation. HMRC will send your bill by post if you did a paper return.
Hints and tips • It is important to register for tax self-assessment as soon as possible and to allow plenty of time as the registration process takes at least 10 working days to complete. • All paperwork related to the tax year, such as subcontractor vouchers and bank and building society interest certificates, should be kept together to make completing the return quicker and more efficient. • Details of user IDs and UTRs should be kept in a safe place that can be accessed easily, as they will be needed each time when logging on to the HMRC website. • Self-assessment can be made easier by getting accounts prepared as soon as possible after the year end.
Did you know? By 2016, five million small businesses will have access to digital tax accounts. Operating just like an online bank account, businesses will be able to interact with HMRC digitally. This will reform the way individuals complete annual tax returns. Read more about digital tax accounts here www.gov.uk/government/uploads/system/uploads/attachment_data/ file/484668/making-tax-digital.pdf
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Where to register for tax self-assessment Visit either of the below sites: Sole traders and traditional partnerships can register for self-assessment online at. www.gov.uk/new-business-register-for-tax
Company directors can register online by completing form SA1. https://online.hmrc.gov.uk/shortforms/form/SA1
Partners that are not individuals cannot be registered online and in his case form SA402 must be completed and posted to HMRC. www.gov.uk/government/publications/self-assessment-register-a-partner-for-self-assessmentif-theyre-not-an-individual-sa402
Limited Liability Partnerships (LLPs) cannot register online either, and in order to register an LLP for selfassessment, form SA400 must be completed and returned by post to HMRC. www.gov.uk/government/publications/self-assessment-register-a-partnership-for-selfassessment-sa400
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