I know it sounds like a daft question, but it is not that obvious as you could live in England and work in Scotland, or live in Scotland and work in England. So where do you pay your taxes?
The simple answer is: if you live in Scotland, then you are a Scottish taxpayer irrespective of where you work. The taxpayer status applies to the whole of the tax year, and the rules state you cannot be a Scottish taxpayer for part of the year and a non-Scottish UK taxpayer for the other part.
If you live outside of Scotland but work inside of Scotland, that does not make you a Scottish taxpayer, as it is based on where you live.
For a PAYE person, HMRC will make that determination and your tax code will have an S on it.
However, for the self-employed, it is your responsibility to decide if you are a Scottish taxpayer or not.
Now, if you moved into Scotland or out of Scotland, then you need to look at where your main residence has been in the tax year, and if you’ve been resident for more days in Scotland for the tax year, then you are deemed a Scottish resident and a Scottish taxpayer. It’s also vice versa if you spend most of your time in England, Wales, or Northern Ireland, then you would be deemed a non-Scottish taxpayer. So you might have to count your days of where you are residing, and you count a day from midnight at the end of that day.
The complication comes is if you have two or more homes at the same time. Then you have to establish where your main residence or main home is. You look at where you live, or spend most of your time. It doesn’t matter if you own the home, if you rent it, or you live in it free of charge. Woo-hoo.
But there is a but. Isn’t there always? If you have two places to live, e.g., a home, a family, and your social life in Edinburgh, but you work in London for most of the time and you rent a flat in London, you may work more days in London than you are residing in Edinburgh, but that does not necessarily make you a non-Scottish taxpayer. You look at where your life is carried out. If your immediate family is in a family home in Scotland, you spend most of your social life there, your doctor and dentist is there, that then puts you as a Scottish taxpayer. A Scottish taxpayer therefore has to pay tax based on the Scottish rules, which are 19%, 20%, 21%, 41%, and 46%.
Wales started this idea of a Welsh Tax resident from tax year 2019/20 and they follow the same rules based on where you reside. At the moment, they have the same income rates and tax rates as England and Northern Ireland.
So there you go. That is how you determine if you are a Scottish taxpayer. There is already a button to press to tell HMRC where you are tax resident, and when you start the 19/20 tax return, Wales will be an additional option.
Hi guys. Well, no doubt you have seen all these adverts for accounting systems saying the way we report numbers to HMRC is changing and it has to be digital & online every quarter. They want to sell their “MTD” accounting systems to you, but they don’t actually say what is changing or how their system can help. If you don’t know what you are doing, these systems can really hinder you, so please don’t rash buy.
So – what’s it all about Alfie?
You will hear the acronym MTD being brandished about all the time – and that stands for “Making Tax Difficult”, oh no sorry, “making tax digital”. It was decided a few years ago tat everybody should file all their taxes online from accounting software or possibly spreadsheets with links enabled, so there will be no human contact and provide better information to HMRC. As we know rubbish in rubbish out. This will eventually cover on a quarterly basis income tax & national insurance, corporation tax and VAT
Where HMRC are starting from April 2019 is with VAT. If you are VAT registered with a vatable turnover of more than £85000, then you will need to comply with the new rules with your first VAT return period starting on/after 1st April 2019. There are lots of things that have to happen, and I will be publishing all the steps by the end of May 2019 in order that people affected by their 1st VAT period 1 April to 30 June can be ready, and it is these people that need to think about software and how to use it. Those VAT registered people/companies less than £85K turnover may have to come into the programme from April 2020 – watch this space.
For people that are not VAT registered, then this new quarterly digital reporting does not affect you and you do not need to panic or worry about it yet. Nothing will change for you before 2021 at the earliest according to an announcement in the Spring Statement 2019, so please do not go into a meltdown, so not buy software if you don’t need it or want it yet. I do encourage you to consider some form of digital / online accounting system whether that is Xero, Clearbooks, 1Tap etc, but it cannot be a half hearted decision. If you decide to go this route, you need to keep it up and be consistent with it, otherwise it is not going to help you with the business side of being a musician, actor, VO artist, dancer, teacher etc.
If you are VAT registered:
In the meantime, if you are VAT registered and with a turnover (fee income) of over £85000, then you will have to comply with the new reporting rules. If you are not VAT registered, then keep it in the back of your mind that things are changing , and consider if you want to go part of the way to be compliant and fully ready when it kicks in for quarterly digital reporting.
I am more than happy to answer questions on it all, and if there is enough demand, set up a zoom conference call for people to join in (probably a Wednesday afternoon) and we can go through what the systems are, their pitfalls from where I stand as an accountant, and just do an open discussion. Comment below if you think this will be useful or not.
Of course, if you would like to read more on MTD yourself, please refer to to the government pages by clicking >>> HERE <<< but as I say, don’t panic yet.
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 accrual 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.
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.
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.
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/
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
A list of tax deductible expenses with regards to your employment – e.g. professional subscriptions, uniform cleaning, travel expenses etc
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.
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.
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.
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.
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
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
Payments in to a personal pension (not employer pension)
Payments made – dates, amounts, policy details
Payments made into an annuity
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.
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 new tax allowance was introduced from April 2017 (called small trader relief) 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, or evening 2018/2019 as it still exists – I know, jumping ahead, but you will need to keep appropriate records. What is this new allowance? I hear you say. Listen up
Transcript of the Video
Great news. From the new tax year, on the 6th of April, 2017, there is something called a small trader relief of £1,000. There’s also a £1,000 property income relief.
Trade can be buying and selling things on eBay. Or simply just a bit of self employment. Property income might be the odd nights of Airbnb, or the odd lodger popping in and out.
What does this mean?
So if you only had a turnover of £1,000 in that tax year, you don’t have to declare it on your tax return. You just tick the box to say you’ve had £1,000 of income, and that’s it, nothing else needs to be done.
So, why is that good news?
Well, the odd bit of PA work you might want to do. The odd bit of filming that you might think about running some videos through for somebody. A little tiny bit of trading on eBay won’t hurt anybody. Well, that’s the view of HMRC as well. Why do they want to chase down small amounts when there’s bigger fish to fry? Now there is a slight problem with that, in that you might have £1,000 worth of income, but how much does it cost you to generate that income? Did you buy and sell on eBay, but you sold at a loss. If so, this does not allow you to offset any costs, and therefore create losses. So you’ll have to think about, was it just income, and there was no costs incurred? Or should I really declare this as a kind of self employed business.
You could earn more than £1,000 but have very little costs. So what you can do then, you can elect to have that £1,000 allowance. Offset it on your more than £1,000 income, and just pay tax on the difference.
There’s an example below this video on how this works, where I’ve assumed somebody has rented their driveway space, or their parking space for Wimbledon. See how it works, and how much tax they could save if they used that election.
The Woo Hoo moment
So, £1,000 of self employed odd income. £1,000 of odd property income. No declaration, keep it tax free, and laugh your way to the bank.
Want to know more?
If you want to wade through a chunk of HMRC/Gov details, you can find it by clicking >>> HERE <<<.
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.