Chapter 4Classification and survey of types of business organisationbased on the profits of the business for the year ended
30 September 2004.
Payment of tax – method of assessment
This is based upon a tax return, which will be received
by the sole trader in April of each year. The return
requires the trader to give all the information required
to calculate income tax and capital gains tax (see below)
due for the year. Under the system of self-assessment,
the trader can calculate what is due and there are ex-
planatory notes on the return to assist in this. However,
the trader may supply the relevant figures and ask Her
Majesty’s Revenue & Customs (HMRC) to calculate the
tax bill or, alternatively, if the trader has an accountant,
the accountant may do it. The method is entirely a mat-
ter for the trader. The tax return also explains how to
calculate any national insurance contributions (see below)
that may be due. These are paid to the Collector at the
same time as the income tax.
The trader will then be required to make the two pay-
ments towards the tax bill: one on 31 January and the
other on 31 July (but see below).
If the business makes a loss, this may be set against
any other taxable income or may be carried forward to
offset profits in subsequent years.
Payment of tax – timing
In an attempt to bring the self-employed more into line
with the PAYE system for employed persons, HMRC
has devised a system of payment that involves estimating
the income of the self-employed. An illustration appears
below:
Where accounts are prepared
An accountant should normally be employed to draw
up the business accounts. Nevertheless, the trader is still
responsible for the accuracy of the records on which they
are based and therefore for the accuracy of the accounts
and for correctly declaring the amount of profit.
Under the rules of self-assessment it is not necessary
to send the accounts with the tax return. The relevant
information can instead be included as indicated in
the tax return. However, it should be borne in mind
that HMRC can ask to see the accounts (if any) and the
business records in order to check the figures given in
the return. These powers will be used more often and
include random checks because where the trader or his
accountant computes the tax payable there must be a
more rigorous check on records and computation.Employing labour
If the trader employs someone for the first time, the
local Office of HMRC must be informed. The employee’s
Office may not be the same as the trader’s but the trader’s
local Office will send the information to the correct office.
The Office will send the trader a New Employer’s Starter
Pack which includes the necessary instructions, tables
and forms.
The trader will then be responsible for deducting
income tax and Class 1 national insurance contributions
from the employee’s pay in accordance with the ‘Pay
As You Earn’ system (PAYE). The tax and NIC which
the trader has deducted must be sent to the HMRC
Accounts Office. All employees have the right to receive
an itemised pay statement from their employer every
time they are paid. The statement must show all the
deductions which have been made including income tax
and national insurance contributions. If the employer
fails to comply, the employee may take the matter to
an employment tribunal which can award the employee
compensation if deductions have been made without the91John is a freelance journalist. His payment
position is:
Tax year 2004/05: The year ends on 5 April 2005 and
John’s tax liability from earnings and, e.g. interest and
income from investments is calculated as £10,000. His
tax bill for 2004/05 is payable in two instalments of
£5,000, the first on or before 31 January 2006 and the
second on or before 31 July 2006.
However, this is not the end of the matter. With John’s
first payment on 31 January 2006 HMRC will require
one-half of the tax John will owe for the tax year 2005/06
that ends on 5 April 2006. This is estimated on John’s
earnings during the 2004/05 tax year, i.e. a liability of
£10,000. Therefore, the payment on 31 January 2006 willbe £10,000 and the payment on 31 July £5,000 as
before.
If when the actual figures for the tax year 2005/06are
available John has not earned enough to require pay-
ment of £15,000 in tax, he will get a refund. If he has
earned more, a third payment will be required before
31 January 2007.