Call me John ‘geek’ Robins, but I love doing my tax return.
Stand-up comedy’s small gain may well have been accountancy’s great loss. It appeals to the part of my brain that likes neatness and order.
I love making everything add up, I love its rules and quirks.
In a job where success or failure hangs in the balance, I’m safe in the knowledge that I can claim 45p per mile for petrol whether the audience laugh or not.
But I also understand that many people find tax confusing.
The good news is there’s plenty of help available. All you need are the right tools for the job, and your neighbourhood tax enthusiast John Robins to translate troublesome tax terms into plain English.
Here’s what I cover in this article:
Making Tax Digital (MTD)
My VAT return used to take me weeks to sort. I had spreadsheets and notebooks all over the place.
Tracing steps back to a mistake, or finding out why two numbers didn’t add up was a nightmare. If I lost a receipt, well, I could kiss that night’s sleep goodbye.
Making Tax Digital is a government initiative to make the process of maintaining and submitting your tax information easier, and crucially, quicker.
Since 1 April 2022, all VAT registered businesses are required to maintain a digital record that updates and stores all your financial data in one place.
And if the idea of a ‘digital record’ sounds vague and complicated, that’s what accounting software is there for: just enter your transactions and let the tech do the rest for you.
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)
What on earth is ITSA?
Well, ITS-A not as confusing as it might sound (superb humour there).
The best way to relieve that tax stress is to keep up to date with your records and be plugged in to how your business is doing in real time.
If you’re a self-employed business owner or landlord with a total income of over £10,000 a year, from April 2024, you’ll need to submit quarterly updates about your business income and expenses as part of MTD for ITSA.
“What?” I hear you cry, “Four returns a year?”
Fear not.
When you’re set up with the right accounting software, that entire process boils down to just a few clicks of a button every quarter, rather than one heavy, stressful lift at the end of the year.
Phew!
It may also mean one quick email to your accountant every quarter, as opposed to one big email and bags full of receipts at the end of the year.
My accountant is well used to getting daily emails from me about the latest trends in taxation—it’s his cross, and he bares it with quiet dignity.
Agent authorisation
Part of MTD for ITSA, you can authorise someone else to deal with HMRC for you, such as an accountant, friend or relative.
It’s quick and easy to do—just send them a link via the HMRC website and once they’ve completed the authorisation steps, they can act on your behalf.
Think of it as an online handshake, a bit of digital delegation.
EOPS
Could this be a Yorkshireman greeting you in the morning? Possibly, but not on this occasion.
EOPS stands for End of Period Statement, and this is the document that finalises the profit and loss of your business, or businesses, over your accounting period. If you’re a landlord, you also need to make a statement for any property rental income.
And, you guessed it, the EOPS is another MTD for ITSA process.
Within the EOPS, you or your accountant can make adjustments to allowances or expense claims before putting the final cherry on top of the cake.
And that cherry is a Final Declaration.
Final Declaration
What is a present without a fancy bow? Well, it wouldn’t be a satisfying year of online accounting without being able to sign off the whole thing, punching the air.
And that’s what you can do when you submit your Final Declaration, which is also part of MTD for ITSA.
It brings together all the information about your income, expenses, and reliefs into one final hurrah. If that sounds a little intimidating, don’t worry.
That accounting software we talked about earlier does all that.
So if you’re already set up, it’s just another click of a button and a job well done. All you have left to do is party like it’s 6th April.
Some tax terms and what they mean (in plain English)
Value Added Tax (VAT)
VAT is a tax added to most products and services sold by VAT registered businesses.
It is literally a tax on value. But the rates and things it applies to vary, so your lunchtime meal deal has no VAT, but your tank of petrol does (20%).
Your train ticket has no VAT, but the gas you use to heat your home does (5%). Believe it or not, the pasty you buy from your local deli has been through five tests to see if it meets the criteria for VAT, so that’ll vary depending on how it’s cooked, stored, advertised and served.
You don’t need to know the intimate history of every pasty you buy, but the receipt must tell you how much VAT has been charged.
Once that info is in your accounting software, it’ll help you do the rest.
Pay As You Earn (PAYE)
This is the bit of your monthly payslip that puts a grimace on your face.
Six months into being self-employed, I would yearn for those calculations to be made by some accounting whizz.
PAYE is basically an automatic deduction made from your wages before they get to you. It stands for Pay As You Earn, and means the money you earn that is owed for income tax, National Insurance, and student loan repayments.
In other words, the money that doesn’t make it into your pocket before it’s passed on.
And while this may seem annoying, it saves you doing a tax return every year and, crucially, protects you from the awful realisation you’ve spent all that money when the bill comes—a lesson hard learned in my case.
People who don’t have tax deducted through PAYE tend to be self-employed and are responsible for calculating what they owe themselves.
But this doesn’t have to be stressful with the help of good software and a trusted accountant by your side.
Tax year
Why does the UK tax year run from 6 April?
It’s actually quite interesting—if you find tax years interesting. For that, I’m guilty as charged.
In the Middle Ages, our tax year used to run from Lady Day, a religious festival that takes place on 25 March. In 1752, it moved to 5 April when we changed from the Julian to the Gregorian calendar. But it had to be moved to the 6th in 1800 because the leap years didn’t quite add up.
That said, the UK is a bit of an exception having the tax year start on 6 April. In fact, we’re the only country in the world that uses these dates.
So, if you find it frustrating or unusual, you’re not alone.
Most countries’ tax years follow the calendar year, which seems simpler. But I’m not sure the ‘New Year’s Eve Tax Return Party’ would really catch on here.
Gross and net income
Let’s say you’re making some delicious jam tarts for your family because if you’re being honest, they’re easy and you’ve run out of ideas. But not every grain of flour and bit of raspberry will end up on their dessert plates.
When you came back from the supermarket with all the shopping, you had the gross ingredients. But when you made the jam tarts, some flour might have spilled out of the bowl.
You didn’t use all the jam. And there was some leftover dough. What comes out of the oven is the net profit of those gross ingredients.
It’s the same with your earnings and income.
Your business might have lots of income streams, invoices paid, products sold, interest, capital gains, even tips. These are the ingredients. When you add all these up, it’s your gross income, or turnover.
But if you were taxed just on that, it wouldn’t be fair, because providing those products and services costs you money. Things like petrol, packaging, utilities, and the subscription to your accounting software.
Working out what costs can and can’t be claimed back is something an accountant can help you with. The figure left over when you’ve removed all the costs from your gross income is your net income, and that’s the figure you pay tax on.
Final thoughts
Your taxes don’t have to be taxing. Using a few expert tips and some slick accounting software, you can save time and more importantly, cut some stress out of your life.
And that’s my kind of punchline.