As accountants, sometimes we get carried away with using technical tax terms at almost every turn. Without even realising it, our use of jargon can alienate the very audience we want to attract – clients. In this blog, we run through some finance basics so that, when you next open your tax return, you’ll be on the same page as your accountant.
Like death, paying your taxes isn’t something you can avoid, so understanding tax terminology is a must.
Whether you’re a superstar sole trader or a stand-out Limited Company director, you need to be able to get to grips with your tax return. Consider this guide a helping hand.
1. Allowable expenses
Every year, HMRC gives you the green light to claim tax relief. This involves you being able to deduct some of your business expenses from your annual turnover before working out your tax bill – a process that ultimately lowers your tax payment. But you can’t claim tax relief for all your business expenses – only allowable ones. Examples of allowable expenses include:
- Telephone charges.
- Travel costs.
- Business software licence fees.
So, let’s say your turnover is £50,000 and you claim £8,000 in allowable expenses. This means you’ll only pay tax on the balance of £42,000 (rather than the full £50,000). This is called your taxable profit. Typically, you’ll need to keep hold of your receipts to claim allowable expenses and different rules apply for sole traders and Limited Company directors.
Your assets come in two forms:
- Fixed: these are assets that hold long-term value to your business, such as property and equipment.
- Current: these are assets that will, in all likelihood, be converted into cash within 12 months – for instance, stock.
3. Capital allowances
Most businesses need some kind of capital to function and yours is probably no exception.
Perhaps you’re a handyman and need a car to get from one customer to the next? Or maybe you’re an IT geek and need a laptop on standby? Either way, the idea behind capital allowances is to allow you to deduct the cost of your capital assets (such as a car or a laptop) before you pay tax on your income.
4. Cash basis accounting
If you’re a sole trader with an income of £83,000 (or less) a year, you can use cash basis accounting instead of traditional accounting.
It’s an easier way to work out your income and expenses for your tax return. This is because you’re only concerned with recording money you’ve actually received in a given tax year – not money you’re owed, but haven’t yet received.
So, if you invoiced a client on 15 March 2016, but only received payment on 21 April 2016, payment would be registered on your 2016/17 tax return not your 2015/16 return (as would be the case using a traditional accounting method).
5. Financial/fiscal year
Many people think the financial year and the fiscal year are one and the same thing, but this couldn’t be further from the truth.
The financial year – which is relevant for, say, Corporation Tax – starts on 1 April and runs to 31 March in the following year. The fiscal year, on the other hand, runs from 6 April to 5 April in the following year. If you’re self employed or pay personal Income Tax, it’s an important year to pay attention to.
6. Simplified expenses
As a sole trader (or a company that isn’t in partnership with a Limited Company), you can use simplified expenses to work out your expenses.
It’s a less exacting way of completing your tax return, which doesn’t call for you to claw your way through a mountain of receipts, but rather to use HMRC’s flat rate. Simplified expenses can be used for:
- Business vehicle costs.
- Home working.
- Residence in your business premises.
At DNS, we like to keep things simple
Understanding your tax return doesn’t have to be taxing.
We’ve given you a whistle-stop tour of some basic tax terminology, but there are many more tax terms that you may come across from time to time.
If you’ve no idea where to start your tax return or you’re feeling dazed and confused by your company accounts, our team of accountants is on hand and ready to help you. At DNS Associates, we offer a wide range of accounting services to freelancers, contractors and small businesses.
We also like to keep things simple. Whatever your business structure, we have an accounting solution just for you – and we promise to speak in plain English, so you can spend more time thinking about your business and less time thinking about tax terminology! Contact us today to find out how we can help your business reach the next level.