EMPLOY YOURSELF

Self-employment can be attractive in later life. But what is the moment when the hobby you enjoy becomes a job?

More than four million people employ themselves. And the number is growing – up by 5% over the last two years.

Older people may choose self-employment to supplement a pension or because they feel they still have much to offer. Perhaps they had to retire too young or a hobby has turned into a job. Book-keeping, coach driving, playing in a band, counselling, consultancy, teaching children, even mystery shopping are all popular. Buying and selling things on the internet or at car boot sales is also common. Selling your own things is not self-employment – but buying them to sell definitely is.

HM Revenue & Customs says that if you do any activity to earn money on our own account then that is self-employment. It doesn’t matter if you earn very little or even make a loss, you are still self-employed and must register with HMRC. You can do that up to October 5^th after the tax year you first become self-employed. So if you start this week you have until October 5^th, 2014 to register – if you don’t you can be fined £100. HMRC trawls through small ads, supermarket boards and websites to find sole traders who have not registered. You will also have to keep accurate accounts and pay tax on your profits through self-assessment. More at https://www.gov.uk/register-for-self-assessment

Expenses
Your profit is the money you take in from self-employment minus all the costs of your business. The profit is taxable.

Purchases: Anything you buy for use in your business such as stationery, equipment, information, online services and anything you buy to sell can all be deducted in full. Computers and larger capital items are treated separately but at the moment capital expenses of up to £250,000 a year are allowed in full.

Travel: Get receipts or keep tickets for buses, trains, car parking, taxis, hotels or any business travel. That can include travelling to premises where you provide a service. If you use your own car then measure the mileage you do for business and private use and charge that proportion of fuel, servicing, repairs, breakdown service, insurance – and interest on a loan to buy a vehicle.

Telecoms: Your telephone, mobile, or broadband will probably be shared between business and personal. Work out how much of the cost is a business expense. There is no need to split it exactly every month – just work out the proportion over a period and use that share of each bill.

Office: The full cost of an office or storage space for the business is an allowable expense. If you use one room of your home as an office and you have four rooms then a quarter of your household expenses such as energy, insurance and council tax – and rent or mortgage interest if you pay it – can be counted as a business expense. Alternatively you can deduct a monthly amount but it must be reasonable.

Professional services: If you pay someone for advice or help such as an agent, an adviser, a lawyer, an internet designer, or a PR person then their fees are allowable as a business expense. So are the services of an accountant – except for the cost of preparing a tax return. Interest paid on business loans or cards is allowable.

All these costs have to be incurred ‘wholly and exclusively’ for your business. The cost of buying or cleaning clothing cannot normally be claimed unless it is a distinctive outfit – perhaps you are a clown at children’s parties or need decorator’s overalls. But a smart suit or skirt and top will not count even if you would only ever wear it for work. The cost of client entertainment is not allowable.

Your self-assessment form will have to be done online and will take account of any other income and your tax allowances and pension contributions and work out what tax is due. If your affairs are simple and your turnover below £77,000 you can use the simpler short self-assessment pages SA103(S).

National Insurance
Self-employed people can pay two sorts of National Insurance. Class 2 contributions are £2.70 a week whatever you earn. However, you can apply not to pay Class 2 if you earn less than £5,725 a year (£110 a week). However, Class 2 counts towards the state pension and at £2.70 a week they are a bargain if you will be short of the 35 years’ contributions you will need for full state pension if you reach pension age from 6 April 2016. If you are older than that you need just 30 years. Once you reach state pension age Class 2 contributions should stop; the last Class 2 contribution is due the week before the day you reach pension age. Class 2 contributions count for every whole tax year you pay them. Class 2 does not give entitlement to benefits if you are sick or unemployed.

If you earn more than £7,755 in a year (£149 a week) you will also have to pay another sort of National Insurance contribution called Class 4. It is 9% of your earnings between £7,755 and £41,450 and 2% of any earnings above £41,450. (These are 2013/14 figures so if you are doing your tax return for 2012/13 check the correct amounts). Class 4 also stops after pension age. But you have to pay it for the whole tax year in which you reach that age but not the following year. Class 4 is collected through self-assessment.

Self-employed people pay more in National Insurance than employed people on earnings up to about £12,400 a year but less on earnings above that. You can be both employed in one job and self-employed as well. You pay National Insurance contributions on both up to a limit.

Self-employed or employed?
Some employers like to treat temporary workers as if they were self-employed rather than employees. That means they do not have to operate a PAYE system or pay employer’s National Insurance or pension contributions. Self-employed people have no rights to paid holidays or time off. If you have several clients, you tend to work with your own equipment or on your own premises, and you decide when you work then you are probably self-employed. If you have one client, you travel to their premises, use their equipment and do what you are told then you are probably an employee. But there is no hard and fast rule. HMRC guidance www.hmrc.gov.uk/employment-status

VAT
If your turnover – not profit – exceeds £79,000 a year you have to register for VAT and charge it on your fees or sales to your clients. You can reclaim the VAT you pay on all your business expenses. But if your turnover is going to be less than £150,000 it is much easier to can use the flat-rate scheme which means you charge 20% but pay a smaller percentage to the Revenue. Details here http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

If your business is buying and selling second-hand goods then the VAT position is a lot more complex and uses what is called a margin scheme - http://www.hmrc.gov.uk/vat/start/schemes/margin.htm. Books attract no VAT.

e-mail Paul Lewis on paul@paullewis.co.uk