For individuals in the UK, you are currently required to file your personal paper tax return by 31 October each year.  If, like many people you use the internet to file your return, then you have until 31 January.

Should you file your paper return after 31 October or your online return after 31 January you will automatically be fined £100.

However, if you do not owe any tax then your penalty will be reduced down to £NIL.  Or if you tax liability is say only £50 then the maximum your late filing penalty can be is £50.

Also, if you have a reasonable excuse (it has to be pretty good though) then it is worth attempting to appeal against any penalty in writing.  This should be done as soon as you receive the penalty.

 If you are late paying your Income Tax liability then you will be charged interest on the late amount and for very late payments you will also be charged a surcharge based on the amount of tax owed and how late the payment is.

To create a new nominal code on Sage, firstly you need to select the ‘Company’ module.  This can normally be found on the left hand side, under ‘links’.

 Once you have the ‘nominal ledger’ screen in front of you, select the ‘new’ button at the top left hand corner of the list.

You will then open the set up ‘wizard’.  This wizard will then guide you through the set up process.  You will have to decide the type of code you require, whether it is a new sales code or maybe an expense code.

 If you are using the ‘Profit & Loss’ function of Sage to extract monthly or quarterly profit figures you will need to ensure that this report includes the new nominal code you have created.  To do this, go to ‘COA’ (Chart of Accounts).  This button is found along the same list as the ‘new’ button earlier.

Select the chart of accounts you normally use, then click ‘check’.  This will then highlight any nominal codes in Sage that are not currently included in your Profit and Loss account report. 

 The COA is a way of grouping different types of income and expenditure and letting Sage know which code should go where.

Why is completeness important?  Well the reports would be inaccurate if any of the nominal codes we omitted and the figures become useless!

Once a purchase or sales invoice has been entered on SAGE, there are a number of ways of storing these.  Some like to file these in alphabetical order, some just in month order and other business owners like to throw them into a large carrier bag in no particular order!

 However the best and most logical order I have found is as follows:  Once you have entered the invoice into SAGE, simply file the invoice onto a lever arch file in transaction number order.  The transaction number is a unique sequential number given to each transaction by SAGE.  Immediately after entering an invoice, write the transaction number (eg.    T/N 1214  ) on the top right hand corner of the invoice.  The transaction number can be found at the bottom right hand corner of the screen.  Once you have written the transaction number on the invoice, file it on the lever arch file.  A lever arch file should be kept for each different VAT quarter, this way if and when you have a VAT office visit, you can easily find all the invoices that were entered onto any particular VAT return.

This system works because if you ever need to find an invoice, you simply use Sage to locate the transaction and then find the number that relates to the invoice.  This system is far superior to an alphabetic system as it is surprising how many people struggle to file things alphabetically!

If you offer your customers a discount if they pay you either early or promptly then it could be difficult to ensure the correct VAT is charged.  The method HMRC decided upon is to assume that where a prompt payment discount is offered, a business is to assume that ALL customers will take up this discount.

So if a five percent discount were offered for payment within 7 days rather than say 30 days, on an invoice of £100 then VAT is calculated as follows: £100 less 5% = £95 x 15% = £14.25 VAT.

The invoice total would correctly show £114.25 instead of £115.00.

Often using an accounting package can be straight forward, until you make a mistake.  Once you realise the error has been made, the next step is to work out what adjustments you need to make to correct the situation.

Sage has a built in section for correcting errors called ‘File Maintenance’, however if used carelessly you can quite quickly mess up the whole thing, so tread carefully!

To find file maintenance, go to ‘File’ then select ‘Maintenance’.  Now select ‘Corrections’.  You must now find the erroneous transaction by pressing the ‘Find’ button.  The quickest way of finding the transaction is by entering the transaction number, however searches can be made using the date, net amount, reference and details.  Once you have found the transaction you can edit and save any of the original details.

When using ‘File maintenance’ all other pages of Sage (ie. Bank or Customers) must be closed.  Also if your business has more than one user of Sage, all other users must exit Sage before you can make changes in ‘File Maintenance’.

When you become self employed you enjoy a nice long tax holiday compared to those in regular employment who have tax deducted from their wages each week or month.

If you were to begin self employment on say 1 June 2009 then it would be best to prepare your first set of business accounts for the period from 1 June 2009 to 5 April 2010 (or 31 March 2010 if you prefer).

 If you manage to make a profit then the tax and class 4 national insurance that is due will be payable by 31 January 2011.  Be warned though, if your tax and NI liability is over £1,000 then you will need to start making payments on account every six months.

 Say your tax liability for the period from 1 June 2009 to 5 April 2010 was £2,300.  Then by 31 January 2011 you must pay the £2,300 for the current year plus half again, £1,150.  The total payable by 31 January 2011 would therefore be £3,450.

 The second payment on account of £1,150 would then be payable by 31 July 2011.

The tax system aims to ensure that your tax payments become fairly consistent with a payment of tax being made every six months.

 Let’s now imagine that your profits for the year ended 5 April 2011 had soared and the tax payable had increased to say £4,000.  Then the total tax due for the year of £4,000 would be due for payment by 31 January 2012, less the payments you made on account, £1,150 in January 2011 plus the £1,150 in July 2011.   You would therefore need to pay the balance of tax of £1,700 plus £2,000 payment on account (half of the £4,000) by 31 January 2012.

 I hope the above explains this clearly, if not please let me know! Sometimes it’s easier to explain things with a time line drawing! Or sometimes it’s best to just pay the tax-man when your accountant reminds you to!

When you prepare your VAT return, there are a number of different transactions that you should not include in boxes 6 and 7.

 The following transactions are outside the scope of VAT and should therefore be ignored when completing box 6, the net sales box and box 7, the net inputs box:

 Remember to exclude from Box 6 and 7 the following:

The payment of VAT to HM Revenue and Customs (HMRC)

Wages and salaries

Payments to HMRC for Tax, National Insurance contributions

Money drawn by you from the business or money paid into the business

Insurance claims received by you

Business rates and water rates

Loans repayments and loan advances

The cost of the MOT test

If you are a company you must exclude the dividends paid to shareholders

Road tax paid on vehicles

Many VAT registered business owners forget the above list and therefore I find it is really helpful to print out and keep the above simple list as a reminder.

If you are in business then you must have a system for recording your business income and expenditure accurately.

This often involves a simple Excel spreadsheet or a cashbook and each item is entered on a fairly regular basis, ok sometimes once a year just before your tax return is due!

Well the Sage software is really a solid robust accounts package that does everything your Excel spreadsheet or cashbook can do, but then much more as well.

There are many different accounting packages out there, however Sage is one of the main leaders, many accountants prefer it for a number of reasons.  I think Sage is an excellent package, it is robust, logical and it does a great job of small and medium sized businesses accounts.  Some think that it is expensive but this is no longer the case, Sage instant can currently be purchased for less than £150.

However, be warned, you’ve heard the saying, ‘rubbish in rubbish out’ well this is definitely true when it comes to computerised accounting software.  If you don’t know your sales invoice from your bank payment, then buying an accounting package is not going to change that.  Be warned if you don’t obtain some initial training on Sage then you could end up paying MORE to the dreaded accountant than less as it can take a lot more time unravelling a messy set of computerised records than simply flicking through a scruffy cashbook!

Sage can be used as a simple in and out system, or it is excellent for keeping track of which customer owes you money and which suppliers you still haven’t paid!

It will give you monthly or quarterly profit and loss figures which are a real aid to keeping a close eye on how your business is progressing.  Some criticise Sage and say that it is a package designed by accountants for accountants.  Well I’m glad accountants HAVE designed it, this means it actually works properly and ok you do need a bit of training, but it’s definitely money and time well invested!

Firstly what is meant by incorporate?  Well simply put, if a business incorporates, it changes its legal form.  For instance, imagine you are an electrician and you work for yourself.  You are self employed and each year you submit an Income Tax return to HMRC.  You would pay national insurance at 8% and income tax at 20% on earnings over a certain amount.

 However, you have heard from ‘Big Steve’ in the pub that he has ‘incorporated’ and is now paying much less tax.  So what does it mean to ‘incorporate’ and should you do it?

 Incorporation involves setting up a limited company.  You would become a shareholder and a director of the new company.  You need to select a unique name that no other company currently uses.

 Advantages of incorporation

 Instead of paying income tax and national insurance on your self employed profits, the company pays ‘corporation tax’, this is currently 21%. 

 If you decide to sell part or all of your business or retire it can be easier to sell the shares in the company.

 Some may view a limited company as being more reputable and therefore some may be more inclined to use your business.

 The owner enjoys ‘limited liability’.  This means that if the company should fail and become insolvent, then the shareholders home and personal belongings are normally not at risk.

 Disadvantages of incorporation

 More paperwork! There are far more rules and regulations to comply with than for the self employed.

 Your accounts must be filed at Companies House, and the public can gain access to this information.  You can send in very abbreviated information if you prefer, most smaller companies do and this reduces the amount of information that your competitors can see.

 If you decide to finish trading then there are far more rules to abide by.

 Most of the tax savings are enjoyed on the route INTO becoming a limited company, on the way out the tax savings are very few, in fact the can be tax costs to consider.

 If you do decide to incorporate then you would be wise to obtain the help of a qualified accountant as it’s definitely not a DIY job!

So lets imagine that you and your wife run a local business. You both work in the business and are both directors.  What is the best way to take your money out of the company, reduce your tax bill and keep as much of your earnings as possible?

Firstly, for the year to 5 April 2010, you should both pay yourself a wage of between £95 and £110 per week.  At this level neither you or your company pay any national insurance and you do not pay any tax.

Why between £95 and £110? Well at this rate your earnings count towards your state pension, I know it’s a long way off, but really, we need to think about these things!

Ok so now what? Well next you can each draw a dividend based on the shares you own in the company.  Warning, a dividend can only be taken from profits, so you can’t take a £200,000 dividend if your business only made after tax profits of £120,000!

So let’s consider how dividends work.  A dividend paid by cheque to you of £9,000 is actually a total dividend of £10,000 less a notional (imaginary) 10% tax credit deducted.  So what does that mean?

It means that the tax has already been paid on the dividend drawn at a rate of 10%. So if you are a basic rate tax payer, there is no more tax due. You keep the £9,000 and no personal tax is due.  If your earnings exceed the basic rate limits, then you WILL have extra tax to pay on the dividends.

So show me the numbers……..Well assuming you pay yourself a wage of £5,720 (52 wks x £110) then you can pay youself an actual dividend of up to £34,339 during the 2009/10 and not pay any personal tax, not bad hey!

There are a number of other ways to extract your hard earned profits, including rental payments and also interest.