Self-Employment

Record-keeping

Detailed records backing up the information contained in a set of financial statements and the accompanying tax return must be retained by the taxpayer for a minimum of 5 years from the 31^st January following the year of assessment.

What type of records should be kept?

The types of record that should be kept are:

• All business receipts, e.g. sales, fees etc. when they arise.
  
  
• All payments made for stock purchases and day to day business expenditure.
  
  
• All purchases and sales of equipment and other assets used wholly or partly for the business.
  
  
• All bank statements etc.
  
  
• All amounts taken from cash receipts or the business bank account for personal expenditure.
  
  
• All personal funds used for meeting business expenses, or paid into the business bank account.
  
  
• All goods taken from the business for personal use.
  
  
• Business and personal mileage in any vehicle used for business purposes. If a car, not owned by the business, is used for business purposes, details of amounts spent on servicing, repairs, fuel etc should be kept. A proportion of these costs should be allowed as a deduction.

Expenses

Various adjustments are made to the income of the trade, in respect of expenses. These expenses must be "wholly and exclusively for the purpose of the trade" to enable a deduction to be made.

This is another area where case law supports a lot of the decisions as to whether a type of expenditure qualifies for a deduction against a trading profit.

Examples of allowable expenditure

Below are some examples of allowable expenditure, if used for the purpose of the trade:

• Revenue expenditure incurred in the seven years before commencing to trade.
  
  
• Interest.
  
  
• Specific bad debts written off.
  
  
• Business portion of trader's council tax.
  
  
• Staff entertaining.
  
  
• Incidental costs of obtaining loan finance.
  

Examples of non-allowable expenditure

Below are some examples of non-allowable expenditure:

• Expenditure not wholly and exclusively for the purpose of the trade.
  
  
• Interest on overdue tax, and VAT interest and penalties etc.
  
  
• Entertaining.
  
  
• Gifts to customers (over £10)
  
  
• Capital expenditure.
  

Assets

Business expenditure on items such as motor vehicles and plant & machinery is regarded as a capital item rather than revenue. The expense will not appear on the profit and loss statement and will form part of the balance sheet, if one is used.

To claim relief for the capital expense, a deduction appears in the profit and loss account, known as depreciation. This is the annual amount that the asset depreciates by which means the cost is written off over the life of the asset.

However, for tax purposes, this deduction is added back in the computation and replaced by a deduction known as a capital allowance.

Rate of capital allowances

For expenditure on plant and machinery, capital allowances are deducted from the balance of the asset at 25% pa.

The rates are 4% of cost pa on expenditure falling within the categories of either industrial buildings or agricultural buildings.

First year allowance

For capital expenditure incurred from 2^nd July 1998, the writing down allowance on the cost of the new asset can be replaced for one year by the First Year Allowance, which is at 40%.

Retirement Relief

Retirement relief is available for a material disposal of business assets by an individual who at the time of making the disposal is either aged:

• Over 50
  
• Under 50 and retiring because of ill-health (evidence required by the Inland Revenue).
  

The maximum relief is the full lower limit plus half of the gain between the upper and lower limit. (i.e. for 1999/00 the maximum relief would be £200,000 plus 50% of the gain between £200,000 and £800,000).

Retirement relief	Lower Limit £	Upper Limit £
1999/00	200,000	800,000
2000/01	150,000	600,000
2001/02	100,000	400,000
2002/03	50,000	200,000

From 2003/04 retirement relief is abolished.

Taper relief applies after retirement relief.