Guest blog - How to stay compliant with HMRC as a Sole Trader

by Suzanne Donaldson, VA and Founder of Daisy Digital Solutions

I’m Suzanne, a Virtual Assistant, ex-employee (30 years) of HMRC and a qualified (though a bit rusty) Accounting Technician.

I am the owner of Daisy Digital Solutions, a Virtual Assistant Business which helps sole traders and small businesses with the ‘back office’ tasks of their business and website development.

I’m often asked by other Virtual Assistants and Sole Trader clients for advice with their book-keeping and business finances, so I’ve put together some hints and tips for keeping on the RIGHT side of HMRC as a Sole Trader and having a bit more understanding of some of the minefield of Income Tax!

Important HMRC dates to remember:

05 April Tax year ends

06 April New tax year starts

31 July Deadline for 2nd Payment on Account

05 October Deadline to register for Self-Assessment

31 October Deadline for paper tax returns

31 January Deadline for online tax returns

31 January Deadline for payment of tax due and 1st Payment on Account

Registering with HMRC:

If you are a new business owner and have never registered with HMRC before, you will need to register by 05 October AFTER the end of the tax year you began trading

e.g. if you began trading in June 2022, you would need to register with HMRC by 05 October 2023 and your first (online) tax return would be due by 31 Jan 2024.

Claiming Business expenses:

As a Sole Trader, you can claim allowable expenses which you have incurred during the course of running your business. This will reduce your taxable income and therefore the amount of tax you will be due to pay. Expenses can only be claimed if they were incurred “wholly and exclusively” for the operation of your business. These can include:

Office Costs (e.g. stationery or phone bills)

Travel Costs (e.g. parking, train or bus fares)

Clothing Expenses (e.g. uniforms)

Staff Costs (e.g. salaries or subcontractor costs)

Things you buy to sell on (e.g. stock or raw materials)

Financial Costs (e.g. insurance or bank charges)

Costs of your business premises (e.g. heating, lighting, business rates)

Advertising or Marketing (e.g. website costs)

Training courses related to your business (e.g. refresher courses)

**More information about Self Employed expenses can be found on the Gov.uk website HERE

Alternatively, you can claim a “TRADING ALLOWANCE”:

If you are Self Employed, you can use the tax-free Trading allowance, instead of deducting any actual business expenses. This is a fixed amount which you can deduct from your profit, to reduce your tax due and is offered to Sole Traders as a way to simplify their expenses.

For example, if your business expenses amount to less than £1,000 you can claim a ‘Trading Allowance’ of £1,000 which will be beneficial for you and does not require any receipts etc, since it is a flat-rate amount.

However, if your actual expenses are more than £1,000 it may be more beneficial for you to claim actual expenses instead of the allowances, since they are a higher amount.

You cannot claim both trading allowance and expenses.

**More information about the Trading Allowance can be found on the Gov.uk website HERE

(The rules for Limited Companies are different and can be found HERE)

Recording business finances:

There are lots of different methods available for recording your business finances, from accounting software to spreadsheets to pen and paper, but from 06 April 2024, if your annual business income exceeds £10,000, then it will be compulsory for you to use the ‘Making Tax Digital’ system of reporting your business finances to HMRC.

*Self Employment Financial records must be kept for a minimum of 5 years after the date of tax return submission. HMRC can charge you a penalty if the records you keep are not accurate, complete and readable or if you do not retain them for the required period of time.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a government initiative to get small businesses and the self-employed to complete digital tax records and returns.

Businesses with income above £10,000 must register for MTD from 06 April 2024.

MTD became compulsory for All VAT Registered businesses (over £85,000) from 2019.

What will this mean to me?

The 2 main impacts on Sole Traders will be:

1. You must submit your records quarterly, as opposed to annually.

2. You must use compatible software to submit your records to HMRC (listed below):

123 Sheets

Apari

Cirrostratus Exedra Ltd

FreeAgent

Quickbooks Online

Sage

Untied

Vital Tax

Xero

**More information on compatible software can be found HERE

**An overview of Making Tax Digital can be found HERE

Payments on account:

Self Assessment Tax is collected IN ADVANCE as opposed to PAYE Tax, which is collected in arrears.

Your tax will need to be paid in advance, in the form of 2 'Payments on Account' (POA's).

HMRC will estimate your tax (and POA’s) for the upcoming year, by using the figure from your previous year’s accounts. You will need to pay half this amount on 31 January and the other half on 31 July. If your tax due stays the same as the previous year, you will have no balancing payment to pay when you submit your tax return.

For example, if your tax bill for 2021-22 was £2000, then your POA’s for 22-23 will be £1,000 due on 31 January 2022 and £1,000 due on 31 July 2022.

When you submit your tax return again on or before 31 January, if your final tax bill exceeds the amount you have paid through your POA’s (£2,000) then you will also need to pay the remaining balance (balancing payment) by the tax return deadline on 31 January PLUS the first POA for the following year.

**More information on Payments on Account can be found HERE

If you would like to ask me about any of the above, or about my Virtual Assistant or Website Services, please feel free to contact me via the Contact Page on my website www.daisydigitalsolutions.com . Please let me know in the comments on the contact form that you are contacting me from reading this blog post.

Suzanne is the Owner/Founder/CEO of Daisy Digital Solutions. She was born and bred in Liverpool, UK and is mum to one grown-up daughter.

Suzanne is a huge animal lover and has a menagerie of animals she has adopted.

Suzanne qualified as an AAT Accounting Technician some years ago, but then went in a slightly different direction and was employed at HMRC for over 30 years dealing with PAYE and Self Employment tax. She changed direction again within that role and spent the last 8 years based in an I.T. role, where she became a Microsoft O365 expert.

Suzanne started her Virtual Assistant business last year, offering services in General admin, data input and management in spreadsheets, website creation and management and she loves the variety of different types of businesses she works with.