In conjunction with the article ‘limited company – common myths’, we thought it may be useful to highlight some of the myths of self employment, many originating from speaking to someone ‘down the pub’!
If you’re self employed, you can claim for much more than an employee
There is an element of this, which can be squared with the risks that the self employed take by being self employed in the first place. However, the test for a cost being allowable for tax purposes is “wholly and exclusively for the purposes of running the trade”. Therefore, not everything automatically qualifies.
You don’t pay any tax in your first year of trading
Whilst this is technically true, you would be very unwise to believe it! Tax is paid in arrears, just over 9 months after the end of the tax year, 31 January. However, there are two things which are going to spoil this. Firstly, if your tax liability is over £1,000, you also have to make ‘payments on account’, which is 50% of the tax liability at the end of January and 50% at the end of July. Secondly, when you finish trading, your final tax return will apply in the same way as all tax returns. In other words, there will be final tax payment just over 9 months after the end of the final tax year, well after you’d finished self employment.
Your shop is a gold mine
Contrary to popular opinion, having a shop – which has customers – does not necessarily constitute a gold mine. Bear in mind that most shops have fixed costs like rent and rates to pay before they even open the door. Closely following these two costs are light and heat and staff wages. Even the most basic shop therefore can have considerable costs to absorb, which partly explains the success of online shopping and specifically Ebay, where you may purchase goods from a vendor who doesn’t have these costs to pay.
Claiming for use of home will result in capital gains tax
If you are self employed and use your home for running your business from, you can claim a portion of your running costs as an allowable expense. However, stories get told about how this then brings your house into capital gains tax when you sell it. The truth is, unless you’re using your home in a major way to run a business, such as converting your front room into a shop, it is unlikely you will be caught.
Finally, we hear many stories of what other people claim that they receive tax relief on. However, just because someone claims it, it doesn’t necessarily mean that it is right! As always, if in doubt, it is better to get professional advice.