Saturday, 24 May 2008

When Do I Have To Tell The Tax Man About My Business?

Many of us will have started out on a part time basis, whilst still holding down a full time job, until we are ready to ‘take the plunge’ into a full time business.

Often this will either be in the same line of work as our main employment, or it could be the development of a personal hobby or interest.

So, if it’s just a little income on the side, when do we have to register as a ‘proper’ business, with the Inland Revenue etc? Unfortunately, the ever benevolent Tax Man now requires us to register immediately, as soon as we have undertaken our first piece of self employed work.

A few years ago, we were able to notify the Inland Revenue at the end of the first year’s trading, on submission of the first year’s accounts and tax returns. This is no longer an option, and we are now all obliged to advise H M Revenue & Customs, by completion of a Form CFW1, within 3 months of undertaking our first piece of self employed work. Failure to do so will now result in an automatic fine of £100.

Once registered, you will now be classified as self employed, and you will be sent a Self Assessment Tax Return to be completed annually, showing your income and expenses from your self employment as well as details of your employment. You will be subject to tax and national insurance on any profits you make, but the good news is that any losses incurred (which is quite common in the first year or two) can be offset against your employed income, which will usually then result in a tax rebate.

So. There is no such thing as ‘casual part time income’ from self employment. You must register immediately, or face financial penalties. As the business continues to grow, you will then need to consider the tax advantages offered by the setting up of a small limited company.