Self-Employed Accounting vs. Self-Assessment Tax Returns

by Vidit Agarwal NOMISMA - Excellent Small Business Accounting Soft

Self-employed

If an individual begins to work for himself/herself, then he/she is categorised as a sole trader or self-employed. An individual is usually classified as a sole trader if:

He/she operates a business themselves and takes accountability for the success or failure of the business
He/she has the ownership to choose when, where, and how to work
He/she can hire or employee other people and pay them salaries for the work they have performed
He/she provides the office staff with all the major equipment required to perform the business task
He/she is in-charge for concluding any unacceptable work to meet the client requirement
He/she decides the quotation of payment with the client
He/she is involved in the following activities:

Produces items to sell to earn profit
Regularly sells products or services to earn profit for meeting personal needs
Sells his/her products or services through online channels or via classified advertisements
Receives commission by selling services or goods for other people
Receives payment for the service provided to customers

An individual can be both self-employed and employed at the same time. For instance, an individual works as an employee during the day and runs his/her own business in the evening or vice-versa

Self-assessment

Any individual who is self-employed and operating a business in the United Kingdom is required to list the business with HMRC within 3 months from the date of starting the self-employed business. Self-assessment is a scheme used by HMRC to collect income tax. Self-employed individuals need to register for Class 2 National Insurance (NI) and self-assessment. The 10-digit Unique Taxpayer Reference (UTR) will be required for self-assessment and if a self-employed individual has signed up for the service online, he/she will be required to use the similar account details to file a tax return.

A self-employed individual is required to register for self-assessment if either of the below mentioned apply:

Earning in excess of £1,000 from self-employment during the period 6-Apr-2017 to 5-Apr-2018
If an individual is required to prove that he/she is self-employed, for instance, to claim Tax-Free Childcare
If an individual needs to make voluntary Class 2 NI payments to qualify for benefits

Requirements of a self-employed accounting software

SME or small businesses can used a cloud-based accounting software or an excel spreadsheet to records all financial transactions. Accounting software are easier to use and requires little or no accounting knowledge. There are numerous accounting software available in the market and they can be customised to meet the exact requirements of the business depending upon the size and number of employees. Nowadays, most accounting software not only assist in preparing self-employed business accounts but also generate returns to be submitted to HM Revenue and Customs. Accounting software automates VAT returns, manage payroll etc. thereby, reducing paper work and simplifies the self-assessment process. Accounting applications can automate the calculation process and offer the self-employed individual an automated self-assessment tax return. The automation process which an accounting software can do, costs only a portion of the price a book keeper might charge for a similar service. Accounting software usually prepares the self-assessment tax return as the end product for a self-employed individual.