BASIC ACCOUNTING + BOOK-KEEPING
There are generally two types of people.. The people who keep receipts in a drawer and tackle their return with days and/or weeks to spare in January, and the organised people who keep on top of everything as the year goes on and smugly say 'Oh! I did my return in mid-April last year..' I was the first type for a long time and I've been slowly morphing into the second type as time has gone on.. I've finally reached a point where doing my tax return doesn't fill me with dread, and I have my own system. It may not work for everyone, but it works for me. I'll also talk about systems that I know other people have themselves too, for balance.
GETTING STARTED + REGISTERED WITH HMRC
To start your business - as I talk about in trick 'Getting Started' - you need to register with HMRC. In the early days you will most likely to registered as a sole trader rather than a limited company, and you'll need to register when you start earning and spending money on your business. It's simple to register with HMRC and you'll get various log in details and a user area when your registration is complete; through this area you'll file your self-assessment tax return. I'll attach a link at the bottom of this page to more information from HMRC about registering and filing your first return.
SELF-ASSESSMENT TAX RETURNS
Your online tax return and the payment of any tax and NI is due by 31st January, the year after the end of the last tax year on April 5th. For example, you will need to file your tax return for 2016/2017 (between April 6th 2016 and April 5th 2017) by January 31st 2018.
When you have organised your book-keeping and are ready to file your return, you log in, answer a variety of other questions (there is a guide + FAQ about them as you work through the self-assessment form), file your return, and you'll be given a summary about how much you have to pay any tax, NI and forward payments, and you can pay online, over the phone or through the bank by 31st January.
INCOME TAX, NATIONAL INSURANCE + PAYMENTS FORWARD
They may be stating the obvious but I'm going to break it right down into simple terms - when I started I knew *nothing* about the financial side of everything, so I'm going to keep this all very basic and start at the beginning.
Once you've filed your return, you'll be shown what you are due to pay in income tax, Class 2 and Class 4 National Insurance contributions and any payments forward for next year's tax bill (more on that further down). You are only taxed on profits, which means (I've rounded these figures slightly to keep things simple) if you earn £30,000, but you have spent £10,000 on business costs including kit/office supplies/postage/petrol allowance etc then you'll be taxed on the £20,000 after your personal allowance has been deducted (currently around £11,500) - so your 'taxable income' will be around £8,500.
You have to pay income tax on your taxable income (so after your profits exceed £11,500) and this tax is 20% -so in this example there would be £1,700 to pay.
You have to pay Class 2 National Insurance Contributions (NICs) after your profits exceed £6,025 a year. The rate is flat at £2.85 per week, so would be £148.20 on top of your income tax.
You have to pay Class 4 NICs if your profits exceed £8,164. Class 4 NICs are 9% on profits over £8,164 and 2% on profits over £45,000. So in the example above, Class 4 NICs would amount to £1,065.
BASED ON £30,000 TURNOVER
More payments that will be due by 31st January, and the second by 31st July the same year, are your two payments 'on account'. When you file your self assessment, the HMRC assumes you will be earning a similar amount or more the following year, and asks for a payment forward towards your next self-assessment tax return bill. The amount you pay forward comes off next year's tax, but next year you will be paying forward again towards the year after. The first time you are due to pay tax will be the largest amount tax that you will pay as a proportion of your income because you will be paying your first tax bill, as well as your first payments on account. Be aware of this and save over what you think you need - having a 'cushion' in your account is good practice anyway.
Depending on your circumstances, you may also have student loan payments deducted from your self assessment return too.
So the final calculation for the example self-assessment tax return that I've discussed above looks like this:
TURNOVER - £30,000
BUSINESS EXPENSES - £10,000
PERSONAL ALLOWANCE - £11,500
INCOME TAX - £1,700
CLASS 2 NICS - £148
CLASS 4 NICS - £1,065
FIRST PAYMENT ON ACCOUNT (DUE JAN 31ST) - £1,382.62
SECOND PAYMENT ON ACCOUNT (DUE JULY 31ST) - £1,382.62
I have reliably heard numerous times that HMRC are very understanding and willing to work with you if, for whatever reason, you are worried about making your tax bill payments; and will also help you balance your forward payments if you predict you will be earning less the following year. You can be fined for filing your return later than the date - if in doubt about affording your tax bill and filing your return I would advise you talk to them directly and see what they can offer in way of help. Yes, you may be on hold for far too long, but it's a better option than letting late payments build up and worrying about your return.
DO I NEED AN ACCOUNTANT?
It depends. You can pay an accountant to do your book-keeping and file your return, or just to file your return and you provide them with your own book-keeping records. Accountants can provide some great advice and clarify certain things you can claim for that you may not have realised (and maybe also tell you some things you can't claim for..), and you are able to pass the responsibility of filing your return and checking everything is accurate over to someone else. If you are applying for a mortgage you may need a chartered accountant to help produce documents to prove your income and prepare certain documents for your application, too. An accountant will also be able to advise you and explain the benefits of becoming a limited company further down the line - there are pros and cons, and they will be equipped to work out whether it'll be the best decision for you and your business when/if the time comes.
HOW TO STORE + ORGANISE RECEIPTS
Some business owners get their book-keeping up to date constantly, I know some people who update everything once a month, and some do it once a year for their tax return. Personally, I find that, due to the fact I work quite seasonally, that I do my book-keeping in stages at different points in the year when I have blocks of time I can set aside.
At this point, with a few tax returns under my belt and following advice from an accountant, I have my own system when organising receipts, invoices and bills, and how I organise my book-keeping for my return. I'm sure there are lots of ways to do it (just like there is conflicting advice from different people's accountants), but this is how I do mine, and this is what I know. As I work in a similar way each year, use a lot of the same suppliers and because my business buying habits don't need to change much, I have worked in my own certain way for years now.
I organise my receipts by what type of expense they are (more on breaking down your tax return and what you can claim later in this trick); and I keep track of where my online receipts are for when the time comes to finish my book-keeping and file my tax return. Regular online stores that I use (such as Amazon, or the various companies that use PayPal) usefully keep receipts and invoices on file as well as send them to your inbox, and it's easy to download and print from those sites directly. Personally, I'm old school and I like to have everything in front of me, printed and physically tangible, and after I've filed my return, I then physically file all my receipts and printed receipts, invoices, bank statement, my final calculations and the confirmation of my submitted return in a box file.
As a general rule you're meant to keep your receipts and book-keeping in case you are audited or need them for any other purpose for five years after a return was filed.
WHAT CAN I CLAIM FOR IN MY SELF ASSESSMENT TAX RETURN?
In short, your business running costs. I'm going to break this section down into categories based on how I myself break down my book-keeping and make my own calculations.
Below is how I work through my book-keeping based on advice that I've personally been given. Use this section as a guideline, but I would advice that you seek professional advice before filing your tax return if you are, in any way, unsure about anything.
Mileage, for your tax return, is calculated at 45p per mile. This 45p is to cover petrol and vehicle maintenance costs (so you can't also put through other vehicle-related expenses such as sorting out a flat tyre). I keep a driving log on my Google calendar and later calculate mileage from postcode to postcode then work out what I can claim for each journey at 45p/mile; I then break it down into months and come up with a final total too. I also keep track of what type of journey it was, i.e. WEDDING TRAVEL / CLIENT MEETING / FAMILY SHOOT etc. There are other ways of expensing your own vehicle costs, but this is generally the simplest and covers all bases.
OTHER TRAVEL + ACCOMMODATION
Keep receipts for parking, train tickets, travel insurance for work, car hire for work, flights, transfers, accommodation.. Often a lot of these are traceable online now (such as when you use your debit card instead of an Oyster card on London Underground, or when Uber sends you an email receipt), but keep the hard copies too - especially for parking machines, it may be just £5 or £10 here and there but it all adds up. As a sole trader you can also claim for meals if you keep the receipts and if you are a fair distance from home (an hour plus seems to be a general rule) or on an overnight stay. Obviously don't go too far, though.. champagne benders won't look great if you're audited.
POST OFFICE COSTS + PACKAGING
Exactly what it says on the tin - you can claim for your postage costs. Keep receipts and it's a simple case of adding them up - again, it may only be £2-£4 here and there but it quickly adds up.
KIT, SOFTWARE + EQUIPMENT
Obviously your kit is a business expense, and could also fall under a 'Capital Allowance' on your tax return, which means that it's a business asset that you've invested in - these expenses are still taken off your profits, but it's a way of separating expenses into 'investment' expenses of higher value that last longer (i.e. your new camera body and lens) and smaller ongoing expenses (like portable hard-drives). You can also include things like your camera bag, extra cables, chargers, batteries, hard-drives, SD cards and any software you use for work.
ALBUM/PRINTS + FILM DEVELOPING
Your outgoings for any prints or albums you include in your packages or sell at a later date can be expensed. I use Folio for albums and Loxley for prints, and always get a digital receipt and invoice from both to my email which I print out when it's time to file my return. I also shoot film regularly and blog about it for my own professional development, so I expense my film developing costs too.
Any web hosting is a business expense. For me, personally, this includes paying annually for my domain and website, my client gallery host, my film gallery host, my email address and I also expense any wifi I've had to purchase when working away from home here too.
OFFICE SUPPLIES + PACKAGING
Everything from your desk to the tissue paper you pack your boxes for clients with. For example, my last return had a bookcase, an office chair, envelopes, storage bags, pens, files, extra cables, USBs that I send to clients, stickers for packaging, flyers, and a few other special little items that I include in the final boxes I send to clients.
This would include any marketing materials you use to promote your business, anything you would buy for a wedding fair or anything you purchase yourself for a shoot. Any small marketing gifts for clients would be included in this section too. As a general rule, it is advised that you don't/can't claim for edibles as a sole trader, i.e. you can't send hampers, food or alcohol to clients and then expense it.
In this section, you can claim for any workshops you attend, any networking costs, books you buy related to work, and any entrance fees for exhibitions or shows you attend for professional development. For example, in my last return I claimed to attend a workshop with other photographers, an exhibition at The Barbican, and a artistic photography book.
When you employ professional services from other people for your business you can expense their fees here. This could include copywriters, web designers, your accountant, mentoring and any second shooters that you've worked with. You will need them to send you an invoice or receipt to claim their fee back on your tax return.
You can claim any advertising you use to promote your business. Keep invoices and receipts so you can file them later, if you advertise through social media platforms such as Facebook or Instagram then it's usually through PayPal, which means you can log in to your PayPal account and access all receipts for these expenses there.
This is maybe the trickiest expense to work out. I have been told to make my calculations one way by my accountant, but others have been told different formulas for working this section out. I'm going to break down this section as I understand it - but I would strongly advise you source your own professional advice for this section. Basically, I'm not letting you say "Well Sally said it was right!" to anyone who may question you further down the line (!)
If you work from a room in your home (and it must be an entire room, there are different calculations if you have a desk in your living room, for example - again, ask for professional guidance) then you can claim a percentage of your utilities through your tax return. Calculations are made based on how many rooms you have in your house, excluding bathrooms, and you can expense a portion of your bills based on what proportion of your house you use for work.
For example, if you live in a house with six rooms (excluding bathrooms) and use one for work, you can claim 1/6 of your mortgage/rent, council tax, internet, gas and electric and water through work. It seems that there are plenty of ways that accountants and business owners work out these expenses in slightly different ways; if your expenses here seem reasonable then you're probably expensing an appropriate amount.
CASH BASIS VS ACCRUAL
In my own experience for myself and other photographers, we all tend to work on 'cash basis' rather than accrual when book-keeping and filing returns. Cash basis is working in basic terms of when money comes in and goes out. Accrual is when income and outgoings are recorded when they're earned rather than the date the money actually comes in or out (i.e. when you get a booking, rather than when you're paid for it months/years down the line). I've included a link at the bottom of the page that explains Cash Basis vs Accrual in greater depth.
There is a 'grey area' for expenses for which you have lost your proof of purchase or receipts. If it's clear or reasonably clear what those expenses were on a bank statement, then it seems to be generally accepted as a fair expense. If it was a new lens or piece of computer equipment of a higher value that you don't have a receipt for, then it may not be acceptable to include in your return. For example, in the past I've included Post Office expenses where I've lost a receipt but it clearly said 'Post Office' on my bank statement, and also things like 'Q Park', where it's clear that it's a parking expense and is very unlikely to be anything else. If you're unsure, again, I would check with an accountant.
THINGS YOU CAN'T CLAIM FOR
You probably know yourself whether you're being fair.. anything that seems a bit cheeky is probably 'not OK'. This isn't Wolf of Wall Street; lobsters, champagne and 'entertaining' aren't going to go down well with the HMRC when you file your return..
You can't claim for clothing unless it's a uniform - meaning it would need to be branded with a logo or similar. So even if you bought those brogues that you wouldn't usually buy because you're going to be on your feet all day at a wedding.. they're not tax deductible if you're a sole trader (pun unintended, but left in intentionally).
'Entertaining' isn't going to go down well either. As a general rule, unless you're far from home and are expensing meals for yourself, buying food and alcohol through work might not be acceptable. So no 'taking clients out for lunch', even if it is strictly business.
PRTINABLES - CLICK HERE TO DOWNLOAD
TAKEAWAY MATERIALS - table sheet for tax return. safe sheet for log ins. mileage calculator
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