REPEATED DISCLAIMER: I am not an accountant or tax specialist! Tax laws change from country to country and year by year. In this post I’m talking about general principles rather than the letter of the law. I’m based in the UK, and although I run my own business, I have an accountant who does all the complicated stuff for me.
The Basics of Getting Taxed.
At a very basic level your annual accounts can be divided into three things, your turnover (or total sales), expenses (sometimes called “cost of sales”), and profit (or loss, in a bad year!). Turnover should be the largest of these figures, and it represents the total amount of all invoices issued within that accounting period (usually a year). From this figure you then deduct all the expenses that you are allowed as a business, such as film and processing, most travel, office costs, any advertising etc. You should then be left with your profit, or if your expenses have exceeded your turnover, a loss. It is this amount that you are taxed on.
For example let’s imagine you have a turnover in one year of £20,000, and expenses of £8000
Within this profit you are allotted a personal allowance which varies from year to year (currently around £4000) this is the amount of profit you are allowed to make before you start getting taxed. So if we remove this from the profit we come to £8000. This will be taxed at approximately 20%, although rates can vary from year to year. So from that turnover of £20 000 with £8000 expenses you can expect to be paying £1600 tax.
Under the current system you pay tax at the end of January and the end of July, but you also pay tax on account for the year to come. The Inland Revenue assume that you will trade at least as well next year as you did this year, and so they demand payment on account based on this years figures. Using the above example you would receive a bill in January for £1600 for the year in question, plus you would be expected to pay half of next year’s tax on account, (£800) so your total bill for January would be £2400. At the end of July you would then pay the remaining half of next year’s tax so your bill would be £800. Where this system assists the self-employed is when you have a less profitable year, as it is not uncommon for the Inland Revenue to owe you money on tax you have overpaid.
Get an Accountant.
This is a very simplified version of what happens, there are different types of expenses, as well as different types of profit, but essentially the principle is as outlined above. It is well worth finding a good accountant, who will fill in your tax return for you and prepare your end of year accounts. A full set of accounts are not always legally required for sole traders, but they not only help in completing the tax return accurately and hopefully in your favour, but they also function as useful milestones for the business, and can be very handy if you need to borrow money from a bank or similar. All accountants will work slightly differently, but as a rule the fee you pay them should be more than made up for in the tax they save you. For a sole trader with a turnover of between 10 and 40 thousand, expect to pay somewhere between £350 and £450 a year in accounting fees. You can help to keep this figure down by keeping your end of things organised, as the more work your accountant has to do to unravel the mess of invoices and receipts, the more you’ll be charged for their work.
If you are serious about being self-employed, then the first thing you need to do is get form CWF1 from your tax office or online at the Inland Revenue and fill it in. This is a very simple form that states what sort of work you will be doing, and once it is processed you will be given a “schedule D” number, and it’s this that other businesses need to identify you as self-employed so that they can pay you. You will also now be liable for Class 2 National Insurance contributions, which usually amount to a few pounds a month. The gap between applying for and receiving a Schedule D no is about 6 weeks, and you may find that some photographers (if you’re assisting), and certainly most large companies won’t pay an invoice unless this number accompanies it. As a rule, businesses can’t just hand out money to random members of the public; all payments have to be related to an invoice, and usually payable to another business entity of sorts.
The main reasons for registering are long term ones, as although it is actually possible to trade without a number indefinitely, I would not recommend it for a number of reasons. Registration brings extra administration and obviously a tax return at the end of the year, but as already discussed you may find you can’t be paid for some of the work you have done until you have the necessary number. You’ll also find that if you apply for a loan or overdraft from the bank in the future, a nice neat set of accounts with everything transparent and above board will get a better response than a handful of scribbled invoices, and a trading history that seems to have large gaps in.
The real reason to get registered is that sooner or later you’ll have to, as it’ll become impossible to trade without being legitimate and above board. If you wait for ages to register, and then in future years you’re unlucky enough to attract the attention of the taxman for whatever reason, he’s going to wonder what you were doing for the years when you were neither in full time employment and paying him tax that way, nor were you in business for yourself and paying him through your earnings from that source. Call me cynical, but he might even be suspicious, and a suspicious tax man is always a bad thing.
VAT. Another good idea we can thank the French for.
Cor, now stuff get’s really exciting. VAT is just about the most rip-roaring, buttock clenchingly fun thing about being self-employed. Or not. Your mileage may vary.
Most countries now have some form of VAT, since Maurice Laure kindly thought it up for us. As a consumer you’ll rightfully hate it, but if you’re in business it can actually be your friend, albeit not one you’d take down the pub. God, what a night that would be.
If you’re in business, and trading with other businesses, being VAT registered is pretty much win/win. Your clients don’t care if the invoices you give them have got VAT slapped on them, as they’ll claim it back, and if you’re VAT registered you can claim back the VAT on stuff you buy. It’s almost as simple as that. I would class any editorial/commercial/advertising photographers in the above group, as the only photographers who regularly invoice people who aren’t VAT registered are wedding/social photographers, and even if such people were it would be very tricky trying to explain why they’d tried to claim their wedding photos as a “work expense”.
Right, enough attempts at humour, here’s how it works. If your turnover exceeds £49,000 in a year (subject to change obviously), you must register for VAT. You can voluntarily register at any time as well, and it may be in your interest to, as it could save you money. Once registered, every invoice you issue must have VAT added onto it. Every 3 months you will be sent a VAT return, and here’s where the fun begins. You now need to add up your total turnover, then the amount of VAT you’ve charged, and finally (the good bit) all the VAT you’ve been charged by other people. Usually, unless you’ve been out and bought a new car or something, you’ll have charged more VAT than you were charged, and you simply pay the taxman the difference. Thereby becoming a taxman in your own right. Bugger.
Of course, it can work the other way, and sometimes the VAT man will pay you back if you’ve been spending money like water, but not invoicing very much. Adding all this up can take a while, even with a well-organised accounting system, as even computerised ones that can spit the answers out quickly still have to have all the data stuffed into them first. As a nice bonus, when you first register you’re allowed to “back date” your VAT payments, and I recall I got about a grand from the taxman by claiming back the VAT on stuff I’d bought for the business in the past few years.
Flat rate vs Old-Fashioned.
This bit’s pretty much UK only, but anyway. A few years ago the Customs and Excise (VAT) lot came up with a new idea: flat-rate VAT. What this meant was that rather than paying the VAT man 20% on top of all your invoices, and claiming back from him all the VAT you’d paid, you simply paid him a fixed percentage of your turnover. This percentage was arrived at from years of study and investigation (I presume), and is different for each type of business. Currently the percentage for photographer’s is 11%.
You can use the flat rate scheme if you ask to, as long as your turnover is less than about £150 000 p.a. (as always, this figure might change.) From my experience it’s bloody brilliant. Looking back at my accounts, I’m paying about the same, but more importantly, what used to take me a half day per month, then another half day per quarter, now takes me about 20 minutes every quarter. If you factor in my day rate, it’s pretty clear that this is a good idea, as I can spend more time earning money, and less time fannying about with taxes. So, a quick VAT summary:
If you’re trading with other businesses, don’t worry about the 17.5% added to your invoices – they’ll almost certainly be VAT registered, and so effectively won’t pay it. In fact, since the compulsory tunrover threshold is £49 000, if they see you’re not VAT registered, they might think you’re not playing with the big boys.
Being VAT registered means you don’t pay VAT on business purchases, and you may even get a golden handshake in the form of a big payback when you start.
Flat rate is really, really simple to do, and will save you loads of time – if you’re able to take this option, I heartily recommend it.
If, however you deal directly with the general public, I’d avoid it as long as you legally can, since it’ll add a healthy chunk to your prices. Plus whichever version you pick, there’s the extra admin.
And as a last word, heed this warning. Once upon a time, in the UK there were 2 different tax agencies – the Inland Revenue, who dealt with Income Tax, and Customs and Excise, who dealt with VAT. Inland Revenue were usually fairly harmless, and if you crossed them you’d get a fine, and only end up in prison if you’d done something really heinous. Customs and Excise however, were a different bunch of bananas. They had the power to move in with very little warning, and close you down, seize assets, send you to Guantanamo Bay, the whole kit and kaboodle. A couple of years ago these 2 agencies merged. And you can bet your bum they kept the best bits from each agency, at least as far as they’re concerned. All I’m saying is, don’t muck about with these people. Check your details before you do anything, and don’t think you can pull the wool over their eyes. This post is obviously only a rough guide – go and read stuff in depth before you jump in, and if at all possible, speak to an accountant. And possibly a priest. Or a psychologist.