Self Assessment Tax Guides – Business Income Calculation

Self Assessment Tax Guides

What you should know when calculating Your Business Income?

If you run a business, you are basically self-employed. While preparing a Self Assessment tax return seems fairly easy, you might be unsure of what to indicate as your business income on the box designated. This is why you must calculate beforehand your business income.

Ideally, you must have an accountant draw up a set of formal accounts. If this is not the case, you need to record details of all your purchases and expenses and your entire turnover. Your taxable profit is basically the remaining amount of turnover after all your business expenses have been deducted. For small businesses, the entire process can get complicated because of the adjustments that have to be made, so that the bottom line for tax purposes will be reached. This is why hiring an accountancy service is highly recommended.

What Common Business Expenses Can Be Claimed?

It would also help if you know common business expenses that you can claim that will include accountancy and professional fees; advertising; business bank, PayPal and credit card charges; car, van and travel expenses; and irrecoverable debts. 

With these details in mind it is time to get down to the nitty-gritty.

  • Make sure that the business accounts you prepare match the date of the tax year.
    Whatever you earned within the year that you are filing a tax return for must be included in your calculation. For the 2019/20 tax period, for example, you must take note of the income earned between 6 April 2019 and 5 April 2020.
  • Calculate only the income you made from your business.
    Whatever money you put into the business, inheritance, or bank interest that your bank account earned must not be included in your calculation. In a Self  Assessment tax return, there are separate pages for different sources of income that must not be confused as a business income. For example, whatever rent you received for a personal property must be declared on the property page of a tax return, and should not be calculated with the rest of your business income.
  • Declare income not yet received in the tax year that you earned it, and not the tax year that you received it.
    To illustrate, if you issued an invoice for work done in February 2020, you must include it as income for the 5 April 2020 tax year, even if the client paid for it after the end of a tax period.
  • Declare income not yet invoiced on the year that you carried out the task.
    If you are a service provider, your income should be based on when a job is carried out and completed. Even if you issued an invoice after 5 April 2020, income for the said service must be included for the 2019/20 tax year. In the event that there is still some work that needs to be done after April, you only need to calculate whatever work was completed before 5 April.
  • Do not include VAT in your calculation.
    If your business is VAT registered, your trading income is based on your sales exclusive of VAT, so there is no point in including it in your calculation. The only exception is when you pay a fixed rate of VAT over to HMRC. It is best to consult with an accountant or tax advisor to determine if the flat rate scheme is right for you.

To discuss the matter further or if you have any questions on the subject or anything else tax related contact our self assessment tax agents here.

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