Freelancing offers many benefits, from flexible working hours to the ability to choose your projects. However, with these freedoms come responsibilities, particularly when it comes to managing taxes. For freelancers, handling tax obligations can be a daunting task. Errors can be costly, leading to penalties, fines, or even investigations by HMRC.
To help you avoid these pitfalls, we’ve highlighted some common tax issues freelancers face and explained how working with a specialist accountant can make all the difference.
Keeping accurate records
One of the most common challenges freelancers face is keeping accurate financial records. HMRC requires that you maintain detailed records of all income and expenses related to your freelance work. These records must be kept for at least five years after the 31 January submission deadline of the relevant tax year.
This means storing receipts, invoices, bank statements, and other documents proving your income and expenditure. Many freelancers struggle to stay on top of this, especially when they’re busy with client work. Misplaced receipts or forgotten expenses can lead to errors in your tax return, potentially resulting in underpayment or overpayment of tax.
Working with an HMRC specialist accountant can help you stay organised. We can guide you on the best practices for record-keeping, recommend accounting software to streamline the process, and even manage your records on your behalf. This ensures you have a complete and accurate picture of your finances when it’s time to file your tax return.
Filing self assessment returns
Filing a self assessment tax return is another area where freelancers often encounter issues. The self assessment system requires you to accurately report your income and calculate your tax liability. Mistakes, such as omitting income or claiming incorrect expenses, can lead to penalties from HMRC.
Deadlines are also critical. The deadline for online self assessment returns is 31 January each year, while the deadline for paper returns is 31 October. Missing these deadlines results in an immediate £100 fine, with additional penalties added over time.
We understand that completing a tax return can be overwhelming for many freelancers, particularly those new to the self assessment system. We’re here to make sure you submit accurate returns on time, reducing the risk of penalties. Our expertise can identify any allowable expenses you might have missed, ensuring you don’t pay more tax than necessary.
Understanding allowable expenses
One of the most significant advantages of freelancing is the ability to claim business expenses against your income. However, understanding what counts as an allowable expense isn’t always straightforward. Common allowable expenses include office supplies, travel costs, and a proportion of your home utility bills if you work from home. However, claiming personal expenses as business expenses, even by mistake, can trigger an HMRC investigation.
Freelancers must be careful to differentiate between personal and business expenses. For example, the cost of a laptop used solely for work is an allowable expense, but if you use it for personal purposes, you can only claim a proportion of the cost. Misjudgment of these expenses can lead to problems with HMRC.
We can help you correctly identify and claim allowable expenses, ensuring your tax return is accurate and compliant. By working with us, you can have peace of mind that you’re claiming the right expenses and maximising your tax efficiency.
Dealing with tax investigations
No freelancer wants to be the subject of an HMRC investigation, but it can happen, especially if there are discrepancies in your tax return. An investigation can be stressful, time-consuming, and expensive if errors are found. HMRC has the power to look into your financial records and demand explanations for any irregularities. If they find mistakes, you could face fines or even legal action.
The best way to avoid an investigation is to ensure your tax affairs are in order from the start. This means accurate record-keeping, correct expense claims, and timely tax returns. However, if you are selected for an investigation, having an HMRC specialist accountant on your side can make a significant difference.
We can represent you during the investigation, liaising with HMRC on your behalf and ensuring your rights are protected. We will review your records to identify any potential issues before HMRC does, and we’ll work with you to resolve any problems quickly and efficiently.
Planning for tax liabilities
Another common issue for freelancers is planning for tax liabilities. Unlike employees whose tax is automatically deducted through PAYE, freelancers need to set aside funds to cover their tax bills. It’s easy to fall short without proper planning when payment deadlines approach.
This is particularly important for freelancers who are required to make payments on account. These are advance payments towards your next tax bill, calculated based on your previous year’s tax liability. Many freelancers are caught up in these payments, leading to cash flow problems.
We can help you forecast your tax liabilities, ensuring you’re always prepared when it’s time to pay. By working with us, you can set aside the right amount of money throughout the year, avoiding any last-minute scrambles to find the funds.
Consult a professional
Freelancing offers tremendous freedom but also requires careful attention to tax obligations. From keeping accurate records to understanding allowable expenses and planning for tax liabilities, there’s a lot to manage. That’s where we come in.
As specialist accountants experienced in dealing with HMRC, we can handle your tax compliance, giving you the freedom to concentrate on growing your freelance business.
At FMA, we’re committed to helping freelancers navigate their tax obligations smoothly and efficiently.
Contact us today to learn how we can help you manage your tax affairs.
