The tax year ends on 5 April and many businesses choose to draw up accounts to either 5 April or 31 March. This makes your business year
coincides with the tax year and so makes it easier to understand what to put on your tax return. However, you do not have to draw up your
accounts to coincide with the tax year. You can choose any date. You are taxed on the profit of the accounting year which ends in a
particular tax year. For example, if you make up accounts to 31 December 2003, these will give your taxable profit for the tax year 2003/04.
These accounts provide the figures which must be sent to the Inland Revenue on what is known as the self-assessment tax return. You do not
have to send the Revenue the accounts themselves. You may wish to do so if they give more detailed information about your business which
would help the Revenue to understand it.
Your annual accounts and other calculations in the self-assessment tax return will determine how much tax you pay. The tax return must be
submitted by 30 September each year if you want the Inland Revenue to calculate your tax, or 31 January if you are prepared to calculate it
yourself. Tax is payable on 31 January and 31 July each year, and it is important to keep your estimated tax liability in reserve
(preferably in another bank or savings account) so that the tax bill does not come as a terrible shock.
The tax situation is more complicated when you start up in business, and you could end up paying more than one year's tax on 31 January
after the end of your first business year. If you can afford it, you may wish to obtain some professional help in dealing with your accounts.
In the first few years of a new business the way in which the profit from your accounts is matched to a tax year is quite complicated. You
may have to pay some tax based on an estimate of your profits. This is more likely to happen if you delay preparing your accounts, or if
your first set of accounts covers more than 12 months.
Self-employed business people should also recognise that both the Inland Revenue and Customs & Excise have considerable powers to monitor
their business activities. For instance, the Inland Revenue can institute what is known as a self-assessment enquiry. This is sometimes
random and does not necessarily depend on whether there is a suspicion that you have done something wrong. However, the Inland Revenue has
the power to assess back tax, interest and penalties if they find something wrong. Some people take out insurance against the professional
costs of dealing with such a tax investigation.
If you are registered for VAT, Customs also have wide powers to investigate your business records, as well as the right to visit your
business premises and look at your books.
It is important to inform the Inland Revenue when you become self-employed. You can be fined if you do not do this.
