FAQs - Self Employment

1. Can I apply the transitional Capital Allowances rules to my own car costs at the end of this tax year, and then switch to using the FPCS rather than the actual method?
2. Do I need to keep Fuel Receipts when the transactions recorded on my bank statement are proof of purchase?
3 How do I record expenses charge to my clients (such as travel to meetings, stationery, phone charges etc.)?
4. I am employed and thinking about becoming self-employed at the same time. What are the tax implications and what tax returns will be required?
5. I am self-employed and one of my clients has asked for my Schedule D number. What is it?
6. I work from home 3-4 days a week, can I claim any allowances or reliefs?
7. I’m self employed, can I claim VAT on a new car?
8. My husband and I have been self-employed in a partnership for 15 years. We have also just set up a limited company employing one other person on a freelance basis. How will this affect our tax? How will it be calculated? We intend to use other freelance work as well.
9. On the self employed tax returns can deductions be made from the total earned, for relevant training and materials if receipts are kept. Also do I enter the total earned minus deductions before I work out my tax bill?
10. What is class 4 tax and do I have to pay it?

1. If you are genuinely self-employed and using your own car in the business, you will be entitled to claim full capital allowances, less any private use restriction for any tax year so used.

If you wish to go along the Fixed Profit Car Scheme route then that rate per mile already assumes Capital Allowances are included in the rate per mile.

2. Yes - you must keep them for five years after 31 January following the tax year to which they relate. But it will depend on how the items are recorded. If it states 'fuel', then the Inland Revenue might accept this. However, if it just mentions the garage, then probably not, as nowadays you can buy a whole range of goods other than just petrol.

3. All expenses recharged to clients should be treated as income and are liable for output VAT if you are VAT registered. It also counts towards your VAT registration threshold.

The expense incurred should also be included in your Purchase records.

4. You will need to inform the Contributions Agency that you are intending to become self-employed. They will send you booklet CW1 and ask you to complete form CWF1 at the back of the booklet. This will help them to decide whether you need to pay additional National Insurance contributions on top of the contributions paid under your employment.

They will also inform the Inland Revenue of your new status. You need to ensure the Inland Revenue are aware of your new self-employed status within six months of the end of the tax year in which the activity commences.

For the first year, any income tax payable on your self-employment will be due on the 31st January following the end of the tax year (ie 5th April). You will also need to make two payments on account for the following years tax liability, based on your previous year, on both 31st January and 31st July. Any catch up payment will be due on the following 31st January, and so on.

You will be sent a self-assessment tax return form for completion after the 5th April. This will include the employment and self-employment pages to enable completion of the form. If you require any additional pages you will need to request these.

5. Your Schedule D number is your tax reference, normally three numbers representing the tax district and then a ten digit 'self-assessment' reference, which is your own personal identification number for the Inland Revenue.

It may be advisable to ask why your client needs to know your Schedule D number as this relates to your own tax affairs.

You should be aware that the request for your Schedule D reference could be due to a review of your 'self-employment' status by a government department or by your clients accountant. If this is being challenged you will need to seek professional advice.

6. You can claim for electricity, heating, etc. for use of home as office and it is normally best to do this on a calculation based upon a proportion of the overall size of your office compared to your house. The fact that you only work 3-4 days per week from home will also need to be taken into account. You can also claim for Council Tax on the same basis but I would be careful of falling into a Business Rates charge as your room is used solely as an office and has no personal use.

These amounts would normally be charged in your accounts to ‘Use of home as office'.

7. VAT on motor cars is not allowable as Input VAT. However, if you were to purchase your vehicle by contract hire, you may be allowed a maximum of 50% of the VAT charged on the rental payments as input VAT, but remember Customs & Excise are very strict on this and any personal use may well be fully investigated in order to substantiate the claim.

If self employed, you include the whole cost of the car including VAT for capital allowances computations and can claim up to 25% of such cost against your profits (subject to a reduction for deemed or actual personal use and/or reduction in the year of purchase, depending on the date your self employment commenced.

8. You will be taxed on any salary and/or benefits plus any dividends you receive from the company - in addition to your self-employment profits. Corporation tax is payable by the company on any assessable profits/gains.

Make sure the freelancer is truly self-employed and not really an employee. Otherwise the IR can come after you for any unpaid PAYE and NIC, as it is the employer's responsibility to operate PAYE correctly. It has been known for businesses to fail when presented with a tax bill with interest and penalties on top going back 6 years.

9. Training expenses are normally allowable if the course is to update your skills. A course for new skills is likely to be capital.

You can claim for materials used in your business.

Deductions should be entered separately from income.

10. Class 4 national insurance is a tax levied on business profits of self-employed people and partnerships where profits are in excess of the single personal tax allowance.

It is charged at 7% of profits above the personal allowance, up to an upper limit.