When you need to file a tax return – if at all

In a nod to charity the LITRG that this week published a guide to help self-employed people understand the tax system better, we would like to tackle an issue that we know many a freelancer gets stuck on: when to file a tax return – if at all, writes Mike Parkes, technical director at Go Simple Tax.

Only last month did a FreelanceUK reader pose a similar question, with a not insignificant amount of panic! And much like the Low Incomes Tax Reform Group which authored the guidance for people who work for themselves, we believe arguably less helpful help from HMRC for its customers doesn’t have to be met with resignation.

The Revenue’s roundabout answer to the question we want to tackle is a case in point. Specifically, the tax authority says you will need to go through self-assessment if you are classed as self-employed. Or if you have a source of untaxed income. Quite understandably, it’s not an answer that many people find all that helpful.

Are you covered by the tax return system?

We would say you’re self-employed if you are a sole trader, or in a partnership or a director of a limited company. If these last two describe you, you will undoubtedly have to self-assess. But you’ll also need to go through the system if you are conventionally employed with a 9-to-5 job with an employer, but undertake freelance work as an additional source of income too. So just because you’re employed doesn’t mean you cannot be self-employed too!

The nuts and bolts of your self-employment, in terms of what you do, is something of a blind spot to the taxman. In fact, online furniture sellers for example, or even eBay merchants might not see themselves as ‘self-employed’ like an independent media consultant or freelance graphic designer would. Yet for these internet-enabled trades people, they too are required to ‘Self-Assess’ and register with HMRC if their earnings exceed £1,000. It’s the same for anyone else; if your sales total is more than £1,000, a tax return is required.

And it’s not just income tax that may be owed by you to HMRC. For example, if the item you sold is not a car but is worth a sum exceeding £6,000, then you may owe ‘CGT’ – Capital Gains Tax.

Other people who need to self-assess with HMRC

In our experience, creative freelancers tend to fall into the above categories – or the criteria set out above applies to them. But there are other individuals reading this who may also need to settle up with HMRC using the ‘SA’ system. I’m referring to you if:

• You are a landlord earning £2,500 to £9,999 (after allowable expenses have been deducted)
• You have income from savings and investment that are above £10,000
• You earn foreign income
• You are a minister of religion! Yes, you’re technically on the payroll but no, despite being one of God’s helpers, you can’t escape HMRC, because you’re also required to self-assess and to complete form SA102M!
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Make your tax return less taxing by claiming expenses

As one FreelanceUK reader was no doubt pleased to find out last month, registering with HMRC for self-assessment does not necessarily mean you owe tax. But if you do owe tax (because what you pocketed is in excess of the Personal ‘tax-free’ Allowance – currently £12,500 a year), did you know that you can reduce what you have to pay HMRC by claiming back expenses?

The good news is that there is a medley of different claimable expenses, ranging from the costs of travelling to stationery and stamps. One area of deductions that creative freelancers need to consider in detail if they work from it is their home. Specifically, self-employed sole traders can claim on those parts of their home or property which are used for their business-work. But be aware that, with all expenses, the amount offset must be solely for business purposes. For example, you won’t be able to claim your entire heating bill as ‘home working’!

So there are a number of ways you can reduce your tax bill throughout the year, and a number of things to look for to determine if you’ll pay that bill via self-assessment. The taxman – he who makes even ministers of religion self-assess – is known to insist that ‘tax doesn’t have to be taxing.’ The LITRG having to produce their own guidance for the self-employed, and us giving guidance to freelancers here, suggests otherwise. To make tax as straightforward as possible, we recommend you consider using accounting software that has tax-saving tips built in; and where automatic tax calculations with a full visibility of your financial situation come as standard.