What is this cash basis thing?

When you complete your self assessment tax return and the self employment section, there is a question about if you have used “the cash basis” to do your accounts.
 
Many people understand it to be if you have created your accounts based on money received and money spend in the year. It’s supposed to be a simple process, but there are hidden problems that most people are not aware of. This is all around losses & capital allowances for it you have purchased equipment like a new computer or an instrument etc.
 
Hopefully I have explained it in this video as well as what is known as the accruals basis (the opposite to the cash basis).. It is a little on the long side, so please bear with it. Ooh – and i mention cake !  No surprise there.

 

Here is the approximate transcript.

 

This is a question that gets asked plenty of times because there is a box in the self-assessment tax return that asks the question whether you have used cash accounting to do your self-assessment and your self-employed accounts in. Cash accounting is exactly what it says on the tin. It says you make your accounting records when you physically receive payment into your business or into your bank account, or into your cash. It doesn’t matter if it’s received via PayPal, received directly into a bank account, received physically in cash or check. It’s when you have received the actual money.

Let’s say for example, you raise an invoice to Mr. and Mrs. Blythe for their daughter’s singing lessons. You raise it at the beginning of the term, but you don’t actually get paid it until near the end of the term, ignoring the annoying part of that. You would only account for that invoice when you received the money from Mr. and Mrs. Blythe. You don’t account for the invoice when it’s raised. Equally, on the other side you account for your costs when you have physically paid for them. Now, that is very easy if you actually pay in cash. It’s very easy if you pay by direct debit or transfer out of your bank account, or indeed if you pay via PayPal, because they’re fairly instant payment methods.

The trick comes if you pay by a credit card, you might have put the cost on a credit card but you haven’t actually paid for it until you pay the credit card bill. If you only pay a credit card bill a certain amount per month, it’s very hard to know whether you’ve paid for which business expense. That’s what cash accounting is. There are problems with it. You have to keep very good records as to know when you physically have paid for things, but in your business, if you make a loss in your business, then you cannot do anything with that loss. It could be your first year of business you’ve had a lot of setup costs, not too many people know about you, so they haven’t employed you very often, but that loss is dead, so you cannot carry it forward to next year and use the loss against any profit in the following year.

It also means if you have purchased any capital items, so a new instrument, a computer, an expensive printer, or various things like that, under the cash accounting rules, it is a cost incurred at that time, because you’ve paid for it at that time, and therefore it goes into the accounts for that tax year. That means you cannot claim any capital allowances. All costs come out of that year. Again, if you make a loss, you cannot carry forward that loss or the capital cost into next year. The only positive side of that is if you’re buying a new instrument on a loan agreement, then technically you’re only putting towards let’s say 100 pounds a month, instead of 3000 pounds for the instrument. You’d actually expense out 100 pounds a month.

That is what cash accounting is. Very simple, because if you were HRMC, they have two hats. They say you have to have the invoices and receipts to be able to do proper accounting, but then under making tax digital, they’re encouraging people just to do their accounts from bank statements. They want their cake and they want to eat it. Now, the other side is what is accrual accounting. This is the correct form of accounting that accountants will use all the time and it is definitely our method of doing accounts. What this is, when you raise the invoice, that is when it hits your accounts.

Mr. and Mrs. Blythe, you have invoiced them in let’s say the beginning of the term, which is January, they didn’t pay you until April, which is the end of the term, but you would account for the income in January, and you ignore when they actually paid the bill, which may be a little harsh because it might be across two tax years, but by the time you actually have to pay the tax on that payment, they should have already paid you. Now, the good thing about that is you base it on a supplier invoice date. Even though you might not pay it until two weeks later, two months later, six months later, you account for it at the time you incur the cost, at the time the liability hits you, really.

There are various accounting rules we can jiggle around with, so if you’ve taken a deposit upfront for something, so I don’t know, you’ve taken a deposit for a concert but the concert’s not until four months’ time, then you can defer that income ’til four months’ time, in order to match the income off with the costs. That gets a bit complicated. Accountants can easily do it. It’s what we’re trained to do. Now, there are great things with that, in that you can have the capital allowances. If you do incur losses, you are able to carry them forward for future years. That is much the preferred method.

However, if you are a limited company, the cash accounting system is not open to you. You can do cash accounting for VAT, that’s a completely separate blog post, but actually to run your accounts and your corporation tax, you cannot use cash accounting. Many people do, because they don’t understand the difference. Several people will do cash accounting throughout the year and their accountant will then pull it back into line to say, “It has to be under an accural basis.” Cash accounting is really only open to the self-employed.

That’s it. Never tick the “Have you used a cash basis?” on the self-assessment tax return if you are doing the accruals basis, or if you’re doing it, you tend to know when you’ve raised the invoice, that’s when you’re accounting for it. Don’t tick the cash basis, because it may cause problems later on down the line.

 

What is an appropriate receipt?

As you can imagine, I get lots of paper arrive via the postman (I’ve yet to have a postwoman), and in it are loads of receipts that the client expects i can create a set of books and then accounts from them. Well – that is my job. But sometimes it is hard to explain what an appropriate receipt is in case their tax return is pulled up by HMRC for inspection. It’s worse still if the client is VAT registered, as not only do you have to have an appropriate receipt, it needs to be a VAT receipt.

Just a wee bit of advice below on what you need to provide either your bookkeeper, accountant or me, or if HMRC want evidence of costs. It is relevant for the self employed and limited companies, so buckle up – it is only a short one !


And here is the transcript if you would prefer to read the text.

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People ask me about credit card receipts and debit card receipts. Well, they are not really an allowable receipt for your business. The reason being is there’s no detail on what was purchased, there’s no evidence that the purchases are wholly and exclusively for your business and if you’re registered for VAT there’s no split on the VAT account. So really, using your debit or credit card receipts is not a very effective accounting, bookkeeping you need. What you always need to do is make sure that when you go into a store, you get a proper till receipt or a proper itemised receipt that you use for your business.

Now if you’re using an online accounting system then you need to make sure you only take the picture of the full receipt and not the debit card because the systems going to think they’re two different receipts and it’s going to book it twice. Me as an accountant, when I get a shoebox of stuff, the first thing I do is put everything into date order and match the two credit cards and the debit card receipt to the actual receipt. It takes a lot of time, your paying an hourly rate, so it’s something you can probably do yourself.

I always advise, match the credit card receipt to the actual receipt, only put through the actual receipt for your bookkeeping and then if you do spend cash, separate it out. So yes, debit card receipts you can use but please always, always, always collect the proper receipt, especially if it’s something for entertaining or subsistence. If I see a receipt for the Mcdonalds say, for £30, I know it’s really not just for you, unless you’re very, very hungry. The debit card receipt for that goes straight to entertaining. So ignore the debit card and credit card receipts, go for a proper receipt, use those in your bookkeeping.

Records For Your Tax Return

When it comes time for that dreaded tax return, I get asked a lot about what information a client needs to provide. Of course if you are reading this and you are not a client of ours, this will help you understand what you need to provide your client or indeed the information you need to have to hand to do your own tax return.

This quick 192 second video will go through the typical things you will need, but don’t worry about pausing it and writing it all down, as a complete check list is at the bottom of this post which goes into the main categories. There are areas missed out like seafarers allowance, residency, maintenance payments etc, but the bulk of it is covered.

Any questions, please let us know, or feel free to join the performers tax & accounts group on facebook – a safe place to ask the questions you can’t find the answers to , or not sure if you have found the right answers. That link is here >>https://www.facebook.com/groups/PerformersTax/

Louise


Checklist for Self-Assessment – 2016/2017

This is a checklist of the most common information we will need to prepare your tax return. It does assume a self assessment year to the 31st March 2017 / 5th April 2017 so if you have a different year end under self employment, then the date range will be different. It will be your accounting year that ends between 6th April 2016 and 5th April 2017, so if you are a teacher and you make up accounts to 31st August, then I will need your self employed information for the year to 31st August 2016, but all other tax information as at 5th April 2017. Sorry – I know it gets confusing.

Just so you are aware, HMRC do check tax returns against information from banks & building societies so make sure you get your interest certificates; they also run checks against employers PAYE returns when they compare your national insurance numbers. If there are differences, HMRC will open an enquiry into the tax return – although the delay is often 9 to 18 months after submission.

Employment(s) – All employments in the year

  • Salary and tax paid
    • P60 for employment as at 5th April 2017 (normally available April / May)
    • P45 for each employment left in the year
    • If you have a student loan, then the last payslip for each employment left so that we can see how much student loan was deducted for that employment
  • Benefits & expenses
    • P11d from all your employers in the year if you had any benefits (normally available June / July)
  • Notice of coding for 2016/2017
    • Not vital, but it shows what HMRC are expecting on your tax return
  • Employment expenses
    • A list of tax deductible expenses with regards to your employment – e.g. professional subscriptions, uniform cleaning, travel expenses etc

Pension income

  • State pension letter for 2016/2017
    • This will be dated around Feb 2015 and says how much per week you will get. We cannot use your bank statements showing actual payment.
  • Personal/occupational pensions
    • P60 or certificate of pension paid. Normally tax will have been deducted.
  • Other taxable benefits
    • If you have taken a lump sum as your pension, you should have been issued a P45 or other certificate showing amount taken and tax deducted.

Self Employment

If we are doing your bookkeeping for you (pre-arranged) then we need all your business records including bank statements, invoices issued, remittances for money received, invoices paid, expenses paid, fixed asset information, car mileage, working at home allowance details etc.

If you are providing you bookkeeping information, then please provide the summary sheets and back up files (we have standard workbooks to help), plus justifications for tax sensitive entries.

Property Income

  • Details of income under the “rent a room” scheme
  • Accounts per property for rental including mortgage details showing the split between capital & interest. If we are doing the bookkeeping for your property, then please provide the rental statements, and invoices/expenses paid, along with the mortgage statements
  • Details of the property as to whether it is furnished or unfurnished, or if a holiday let.

Investment income

This needs to include any joint account (please advise the split to be made) as well as any accounts that may have been closed in the year.  We do not need details of interest on cash ISAs or dividends received in stocks & share ISAs.

  • Interest from banks & building societies
    • Certificates of interest received
    • Bank statement sheets (normally April) showing how much interest has been paid and the tax deducted
    • Statements showing if interest has been paid gross
  • PPI settlements received
    • The amount received will also have some interest paid and tax deducted so a certificate/letter will be issued along with the repayment.
  • Dividends from UK companies / unit trusts
    • Dividend / distribution vouchers showing dividends received, date & tax credit. If you are a director/shareholder of your own company, it is vital you have this information yourself or from the company accountant.
  • National savings interest received gross
    • Statement of interest received
  • Overseas income – Dividends or other income
    • Dividend vouchers
    • Income withheld certificates from each country where income has been received from and a note to tell us if included in self employment accounts.

Other Income and State Benefits

  • A note on child benefit received, and if either parent has income over £50,000
  • State benefits received as some are taxable

Outgoings

  • Payments in to a personal pension (not employer pension)
    • Payments made – dates, amounts, policy details
    • Payments made into an annuity
  • Gift aid
    • A list of payments made (charity, date and amount) and if a regular payment or a one-off. Gift aid certificates are available if through an on-line giving site, or your knowledge if you signed a gift aid form.
  • Student loan repayments
    • This is often found on payslips, but you should be able to get a student loan statement showing payments made for the year to 5th April 2016
    • A note to say if you expect the student loan to be repaid in the next two years.

Capital transactions

  • If you have sold any major assets (main residence), or sales of shares etc which may give rise to a capital gains tax transaction.

 

A Webform which you can use as a tick box, and be found here:  https://form.jotform.com/60867899526982

 

 

Temporary Place of Work

Before you walk on pass this post, it affects the employed and self-employed.

The ability to claim travel costs to this workplace depends on how long you have been going there, and also the proportion of your income that job brings in for you.

Have a squizz at the video , and feel free to contact us if you have any questions.

 

Small Trader Relief

A new tax allowance was introduced from April 2017 that not many people know about, so if you have a small amount of self employed income or even rental income, you may want to make use of it for 2017/2018 – I know, jumping ahead, but you will need to keep appropriate records. What is this new allowance? I hear you say. Listen up

 

 

Lost P45 or P60

I was going to make a play on words about the Lost Boys in Peter Pan, but could not think of anything.

As people start to prepare their tax return, the call on self employed income & expenses can be time consuming. But, you need to also declare your employed income if you had any. If you have had several jobs, then tracing your P45 and then any final P60’s can be a nightmare, so don’t leave this until the last minute.

Can’t find your P45 or P60? Oopsie – this may help.

 

 

Payment on Account

Why do I have to pay an amount of tax for next year now?

Why is my bill so high?

This 90 second video hopefully explains the payment on account situation and why/how it comes about.


 

Essentials of transcript:

HMRC would like every person to be employed and paying tax on a monthly basis. The self-employed don’t get the opportunity to do that and they pay their taxes on the 31st of January, which means HMRC can wait mainly up to 18 months to get their money. The decision was made many years ago that, for the self employed, if they owe HMRC more than a £1000 of income tax & class 4 National Insurance, then they have to pay a further  50% as a payment on account at the same time paying the main tax bill. On the 31st of January, not only are you settling the in year tax bill, you’re also paying 50% of the same amount as a payment on account for the following year.

However, it doesn’t end there. What you also need to do is pay a further 50% of your in year tax bill on the 31st of July. So therefore effectively you’ve paid 100% of your potential tax bill ahead of when you actually have to file it. The good news is though, if you file following year your tax return early you will discover whether you have to make the July payment on account and potentially you could get the money back. When you do pay the following years tax bill, you need to remember to offset the payment on account already made, as HMRC won’t remind you of this.

Struggling with bookkeeping?

The previous post was all about what your bookkeeping records are (you can view it >>> here <<<  ). But what if you are struggling with it? What do you need to do? Here are a few hints & tips.  Watch out for the blooper part way through.


If you are a UK based performer, why not join our facebook group for your tax & accounts questions answered, or to find more useful hints & tips. You can join in >>> HERE <<<

 

Transcription: Well, what should have been the script, but you know what Actors are like – we do ad-lib sometimes.

You didn’t become a musician or an actor or a freelance performer to be able to sit there and do paperwork, but unfortunately, as with all self-employed businesses, paperwork is a key aspect. Accounts, tax, more tax, and even more tax tends to run your lives at certain times of the year, and a lot of people struggle with the amount of paperwork you end up having to do.

What do you do if you are struggling? Well, there is the option of shove it in a box and deal with it later, but quite often that later doesn’t come, and then you start incurring fines, or you’ll just do your tax return in such a hurry that you don’t actually consider what you’re doing. Here’s my suggestion. All you need is potentially an hour or half an hour a week say on a Sunday to, I don’t know, empty your music bag, empty your pockets, your jacket, your handbag, and find all the receipts that relate to whatever business you have done that week. Note it down in a spreadsheet. Shove the data into an Excel spreadsheet, and then just mark on top of that receipt that it’s done and you don’t have to worry about it. We provide templates for our clients that are fairly easy to use if you use Excel.

What do you do with those receipts? Well, you could get something very simple like an expanding January to December file, and just put them in a plastic wallet inside those expanding files, label it up for that tax year, and there are your accounting records.

Obviously, you have to deal with income. Now, have you been billing your students? Do you get remittance advice from your agent so you don’t actually raise invoices? Is money just being dumped into your account, bank account? What you have to do is put all that together in a different spreadsheet that’s labelled up as income. If you raise invoices, a big tick from me, then what you need to do is also note opposite that invoice, when it’s been paid. That way you can chase up in order to collect payment.

There are also things like mileage. If you use your car for business, you can claim a mileage allowance. As soon as I sit in my car, I write down, in an exercise book, the date, where I’m going, the start mileage and the end mileage, and work out what my business miles were.  At the end of the week, I transfer that onto an Excel file, and then I know I’m charging my business 45p a mile or 25p a mile, depending on how many miles I’ve done that year. It doesn’t take much each week, if you are disciplined to do it. What would you rather do? Sit there and struggle for days on end at the end of the tax year knowing the 31st of January deadline is coming up, or just do something simple like this?

Now, obviously, there are accounting & other tools out there on the internet. We do provide some of these tools ourselves. Yes, they do cost money, but, again, what you can do with some of them is take a photo of your receipt, it wings its way off into a system on the internet, and then it comes back, and you can either download it all as a spreadsheet, or you can get it downloaded into an accounting system. The joy of an accounting system is that if it’s learned it once, you very rarely have to keep typing things in. With making tax digital coming on the horizon, then you will need to be getting some kind of accounting system anyway like this. What I advise clients is bite the bullet & start to do it early. Then you’re getting in the swing of it, so you know you will be completely compliant.

Really, all you need for your accounting records, and if you’re struggling with paperwork, are plastic wallets, one per month for purchases, one per month for sales invoices, one for your bank statements, and make sure you have a separate bank account for your self-employed business, and just an expanding folder, January to December. Yes, I know the tax year starts in April, so you’ll start in April, go to December, and then you’ll fill up January, February, March at the beginning of the folder. It might look a bit odd, but it’s safe and secure to hold paperwork. Load it into Excel or other spreadsheets on an accounting system, and that’s it’s done.

An hour a week is not a lot, a couple of hours a month, depending on how much you do. It saves a lot of time and a lot of grief, or, of course, you can give it all to your accountant or your bookkeeper, and they can charge you for it. It’s up to you.

 

 

 

 

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