One of the most stressful areas of running a micro business has to be managing your own tax affairs. When you’re employed, the tax system is basically invisible, as your employer managers this for you. When you move into self-employment or develop a side hustle, you suddenly have to become a tax expert.
As the UK has one of the most complex tax systems in the world, navigating its subtler aspects needs the help of an expert. One of the best decisions I took when I started my micro business was to hire an accountant. They have vast experience of the tax system and can save you substantial amounts of money that more than covers their costs.
With the UK moving inexorably towards a completely digital tax system as Making Tax Digital takes shape, if you’re thinking of moving into self-employment, or starting one or more side hustles, you need to get your tax affairs in order.
To gain an insight into the tax environment at the moment, I spoke with Emily Coltman FCA, Chief Accountant at FreeAgent.
What are the key pressure points that micro business feel when managing their tax affairs?
“In my view, the key concern for small business owners is making sure they are complying with all the relevant rules and regulations. The UK’s tax legislation is four times as long as the complete works of Shakespeare, so for a micro business owner, it can be something of a labyrinth to navigate.
“They must make sure they register for the correct taxes at the correct time, claim as much tax relief as they are entitled to but not more, file the right forms and pay the right amounts to the right accounts at the right time. It can be quite frightening for a small business owner trying to comply with the depths of tax law, which is where a good accountant can come into his or her own.”
How can accounting applications help micro businesses manage and even reduce their tax liability?
“When a small business owner uses an accounting application such as FreeAgent to keep his or her records, they have the peace of mind that all the relevant records are in one place and easily and securely accessible.
“Books can be kept in real-time and even give a tax projection that’s updated as each transaction is entered, meaning that the business owner has a very good idea of how much tax they can expect to pay and when.
“Keeping records online, in real-time, also gives the business owner’s accountant the chance to review them and suggest opportunities for tax planning while there is still time to put them into practice. For example, advising the business owner to buy an asset before the end of the year instead of after and claim tax relief earlier.”
Many of the app-based accounting and tax services seem to offer an automated way to manage tax and accounts, but are the skills of an accountant still needed?
“I would say absolutely yes. A computerised accounting system can automate a lot of the manual element of bookkeeping and recording transactions. However, when it comes to business and tax planning and decision-making, the input from a skilled human being is crucial.”
With Making Tax Digital around the corner for my businesses, what’s your advice when choosing an accounting and tax application to use?
“My recommendation is always to choose the application that is the best fit for your business’s own needs. For example, if your business sells a lot of goods, or makes goods for resale, you would be well advised to choose an accounting application that comes with, or integrates with, a stock control and/or Bill of Materials system.
“You are also right that business owners need to be mindful of the upcoming changes under Making Tax Digital, so any business that is VAT-registered and has yearly sales over the £85,000 threshold will need to make sure they are keeping records digitally ready for the beginning of April.”
Many micro business owners (sole traders) see incorporation as a way to save tax, but is the decision to incorporate much more complex?
“Yes, it is. There are lots of reasons why a business may or may not incorporate. The key point for incorporation is that the individual and the business will become separate legal entities. This has both its advantages and its disadvantages.
“For example, if an incorporated business (limited company or limited liability partnership) is successfully sued, then the creditors can only seize the business’s assets to cover the debt, not the individual’s unless the individual is guilty of wrongdoing or has given a personal guarantee to pay the debt. For a sole trader, on the other hand, legally creditors can seize the individual’s own assets as well as the businesses to cover any debts.
“However, legal separation also means that it is harder for the individual to withdraw money from the business without paying additional tax, and creating a new legal entity also creates extra reporting obligations in the form of accounts to be filed, a tax return to be prepared and filed for the company, and potentially also payroll reports to be filed.
“It is not a straightforward decision, especially as in recent years the tax advantages of incorporation have diminished, so this is certainly something that a business owner should discuss thoroughly with their accountant before taking the step of incorporation.”
Are there simple ways micro businesses could use to reduce their tax bills, but often don’t implement?
“Yes, there are. For example, sole traders can often claim a percentage of their expenses for business use of the home. They can also claim mileage travelled on business in their own cars. Food and drink when a sole trader is away on business overnight is also a cost that can be used to reduce a business’s profit and hence its tax bill.”
With increasing numbers of people embracing the ‘side hustle’, flexible working, portfolio careers, will the tax system have to change to support this new working environment?
“I believe it should! For example, currently a sole trader who prefers to work in cafes and use the free Wi-Fi cannot claim tax relief on the cost of the food and drink he/she purchases there, even though what he/she is effectively purchasing is the use of the Wi-Fi, on which tax relief would normally be available.
“Also, a group of freelancers who regularly meet to work together and buy each other cups of coffee, would not be able to claim the costs of those cups of coffee as they would count as business entertaining.
“And there is no tax relief currently available for freelancers who walk or cycle to their appointments rather than taking the car or bus. Surely the government should be encouraging greener means of transport? The tax system needs to be overhauled and simplified to reflect the changed face of today’s working environment.”
Tax they say shouldn’t be taxing, but for many micro businesses, it can easily become a time-consuming and frustrating part of their lives. As work continues to evolve into ever-more exotic shapes, taking advice to understand your precise tax position is a sensible first move before you make what could be radical changes to your working and tax life.