Freelancers’ Questions: How to fix my sole trader tax mess of overspending and not self-assessing?

Freelancer’s Question: In 2019, I started a career as a freelance photographer and I realised five photographic services for a total amount of £1,130.

Since I was only starting out and lacked the benefit of experience, my photographic expenses such as a camera and lens were £676; and female designer outfits used for my shootings came to £4,966 -- both very high, for a total amount of £5,643.

I registered myself as a sole trader in January and I received the government gateway user ID. But the problem is that I haven’t filed the tax return for 2019, since I thought – wrongly -- that I had to pay taxes in my second year!

Also, in the same period, I achieved £3,570 from sales on eBay (personal items or objects I previously bought that I didn’t need anymore). For this, do I have to pay taxes? Will there be penalties? For both income streams, how do I fix this mess? I’ve been told to hire an accountant but the fee to enlist one deters me. Please help!

Expert’s Answer: Firstly, congratulations on your new photography business venture!

What and when

Assuming that you started trading within the 2018/19 tax year, then you should have completed a Self-Assessment Tax Return for that year. The amount of income and expenditure to declare on the tax return will depend on what your basis period is, and what your accounting period is.

In the first year, your basis period runs from the date you started trading until the following April 5th. It is simpler if you prepare your accounts to April 5th each year.

Your expenses -- an issue

In terms of the expenses that you mention which you wish to claim, only those expenses that were incurred ‘wholly and exclusively’ are allowable. Unfortunately for you, it is unlikely that HMRC would accept that the designer outfits are ‘wholly and exclusively’ for the business.

But then again, the Revenue may accept it, depending on the detailed circumstances. There are other expenses that you may be able to claim as a self-employed sole trader, however, and details of these can be found on this .gov webpage, which I recommend that you read.

When eBay activity escapes tax...

With regards to eBay income, selling your own personal items that you no longer want or need would not be considered a trade and so is not subject to income tax. However, if you bought items with the intention to selling them at a profit, then that would be a trade and subject to income tax, in which case you would need to declare the profit from that on the tax return.

If you were employed prior to starting the photography business, you will also need to include this income on the 2018/19 tax return.

As to penalties, unfortunately, yes. There will be penalties for late submission of the 2018/19 Self-Assessment Tax Return. These start at £100 and will rise until such time that the return is submitted. If you have a tax liability for 2018/19, you will also be charged late payment interest on this. The final penalty and interest will only be confirmed once the return has been submitted.

How to fix your 'mess'

So what should you do to fix this “mess,” as you put it? Well, you should complete and submit the 2018/19 tax return as soon as possible, to avoid the penalties and interest charges rising even further.

An accountant can assist you with this; guide you through the types of expenses that you can claim and deal with HMRC on your behalf, as well as calculating the self-employment income to be declared on the 2018/19 tax return and corresponding with HMRC on your behalf with any queries you may have. More often than not, the fees incurred in employing an accountant to complete the tax return for you save you time, money and heartache.

The expert was accountant Graham Jenner, founder of Jenner & Co, a tax and accounting advisory specialising in freelancers and the self-employed.