Being self-employed offers various advantages over being an employee, such as being in control of your time, not having to answer to anyone and being able to financially benefit from all your efforts in the business. However, if you are the boss, then the responsibility of dealing with all the administrative “red tape” falls on your shoulders including sorting out your own tax liabilities and dealing with all the reporting requirements for a business.
Our Self Assessment tax system means that each individual is responsible for correctly declaring all of their income and calculating the tax due each year. Failure to meet the dates for filing your return (31 January for online filing and 31 October for paper forms) and not paying your tax bills on time (31 January and 31 July) can end up with financial penalties and interest. Penalties can even be charged for incorrectly declaring your tax - with seven chunky books full of complicated tax legislation and rules, it is very easy to unwittingly fall into tax traps if you are not adequately prepared.
As a blogger, income comes in various forms, from advertising, sponsorship, donations from subscribers and consulting or freelancing invoices. All of these sources count as income for tax. HMRC may even wish to argue that products given to endorse or review should also count as business income.
Against your income you can deduct business expenses to arrive at the taxable profit. However what counts as business expenses?
The starting point is any expenses incurred specifically for the purpose of your business such as stationery, professional fees, travel costs, website and domain costs etc. Being based at home, a proportion of your utility bills, mortgage interest/rent and other home costs can be claimed. As an example, say you spend 20% of your time at home working on your blog and there are eight rooms in your house. You could make a “just and reasonable” apportionment of your household bills by adding them all up, dividing by 8 (to give the costs for the office) and then claiming 20% of this figure (to represent the time spent on your business activities).
A similar partial claim can be made for mobile telephone, broadband or motoring expenses to reflect the % business use - you would need to be able to justify your deduction should HMRC ever want to query it. The keeping of records can be an arduous task, so there are a few fixed deductions that HMRC will allow you to deduct, such as £4 per week to represent your home costs, or 45p per business mile when driving.
Money spent on items that you might expect to last for more than a year is not deductible from your income (such as laptops, cameras, furniture, car etc.) You can claim capital allowances on these items instead. Such claims relate to the business usage of the item e.g. the family PC would not receive a 100% deduction, as the kids use of this asset does not relate to your business, but if you have a separate laptop which is only used for blogging, then 100% of the cost of the laptop can be claimed in the form of capital allowances.
The easiest way to keep track of your finances is to regularly fill out a spreadsheet keeping track of your income and expenses as you go along. This will make the completion of the return form so much easier. Remember that HMRC has the right to ask questions and make checks about the income and expenses shown on the return form, so it is worth taking a bit of effort to be able to justify the claims. HMRC checks can even go back to previous years, so records should therefore be kept for six years after the end of the tax year just in case.
Working for yourself can give a great work life balance but comes with some administrative headaches and burdens. Make sure you get expert advice; you could save yourself some money!
Knill James Chartered Accountants, UK200Group Members.