Five common tax return pitfalls to watch out for

tax return

So if you’re one of those just embarking on the process and have still yet to file your Self Assessment return, what are the common mistakes to watch out for?

Here are some top tips for avoiding the most common tax return traps:

Leaving out some of your income

You have to include all income you’ve earned during the year on your tax return – not just what you’ve received via your business. So that means including:

If you’re a sole trader you need to include income that you’ve invoiced for, or for which you’d done the work, before 5th April 2016, but which your customers did not pay you for until after that date, unless you’re using the cash basis to prepare your accounts.

Any other source of income – such as interest on a savings account, earnings from renting property or any income from another job you have in addition to being self-employed. You’ll need the relevant paperwork for this income, such as your forms P60 and P11D from your employer and your bank interest certificates, and remember that these will all have to relate to the tax year 2015/16.

However, you don’t need to include any tax-free income – such as interest earned on an ISA – on your tax return.

Missing out important information

If you’re a sole trader, another common mistake to watch out for is forgetting to include important information about what you’ve spent on your business, in addition to income earned. Failure to include this information could result in you paying an incorrect amount of tax.

Your tax return must include:

All business costs, including anything you paid for yourself rather than from the business’s bank account. This also includes any business costs that you incurred before the business started to trade, as long as you spent the money no more than seven years before the start of your business and the cost could have been included if you had incurred it after the start of your business.

Unless you’re using the cash basis to prepare your accounts, you need to include any large pieces of equipment or capital assets that you bought for your business.  These don’t go in as day-to-day running costs but you may be able to claim capital allowances on them.

If you’re unsure whether or not you need to include a specific cost in your tax return, you can ring HM Revenue & Customs’ Self Assessment Helpline for advice.  

Using incorrect reference numbers – or not including them at all

Everyone completing a tax return must quote their unique tax reference, UTR – the 10 numerical digit-long number found on paperwork that you receive from HMRC. Without it, your tax return will not be accepted.

it’s important not to confuse your UTR with your National Insurance number – which is always in the format AA 12 34 56 B, and which HMRC sometimes puts in the “Tax Reference” field on your Notice to Complete a Tax Return.

If you don’t know your UTR, you’ll have to phone HMRC’s Self Assessment Helpline and ask them to post it to you – but remember that they won’t give it to you over the phone, so don’t leave it too late to do this!

Claiming incorrect expenses

It’s important to get all of your expenses correct so that you pay the right amount of tax – and this means ensuring you don’t try to claim tax relief on anything you’re not allowed to!

In particular, make sure you follow the correct rules around business clothing, entertaining, food & drink, business use of home and travel expenses – because there are many common mistakes that small businesses make with regard to these.

Either check HMRC’s website or look for an alternative source of small business accounting information to find out which expenses you can and can’t claim tax relief on before you tackle your tax return.  

Missing the deadline – and forgetting to pay

Your tax return needs to be submitted online by midnight on January 31st, otherwise HMRC will automatically impose a £100 fine. However, once you’ve submitted your tax return, don’t get lulled into a false sense of security. There’s still one important step left, which is to actually PAY your tax!

HMRC impose penalties on late payment, so it’s important to pay your tax as soon as you can if you want to avoid getting hit with a hefty – and growing – fine!  

Emily Coltman FCA, Chief Accountant to FreeAgent.