1 Dec 2013
Riz Akhtar
Job Title
• There is an unprecedented shift in the responsibility of taxation affairs when someone decides to change his or her employment status from employed to self-employed, explains the author.
AS AN EMPLOYED vet, your employer deducts tax and National Insurance contributions (NICs) according to the appropriate tax rate and passes them on your behalf to HM Revenue and Customs (HMRC). So when you receive your net pay at the end of every month, you are able to spend the money you receive in any way you desire. However, as a self-employed vet, you receive the gross income, and it is your responsibility to pay the correct tax and NICs. This makes it vital you understand the taxation implications of self-employment.
When employed, you can claim tax relief for certain expenses incurred “wholly, exclusively and necessarily” for the purpose of your vocation. This includes the costs of subscription to your regulatory body, replacing surgical equipment, laptop and protective/specialist clothing that your employer does not provide, CPD courses and any charitable donations you make.
HMRC can issue you with a self-assessment tax return if it classifies you as a high earner. Your allowable expenses can then be claimed through its submission. For those who do not receive selfassessment returns, they can claim expenses by writing a tax claim letter, which must list the amounts, along with their PAYE reference and NI number. The letter should be addressed to the employer’s HMRC, PAYE office.
Going self-employed means being your own boss in respect of personal taxes. You are obliged to notify HMRC within 90 days of establishing yourself as self-employed.
Failure to do so will result in penalties. As a self-employed vet, the income you receive is exclusive of tax and NIC deductions. Under the selfassessment regime, you are responsible for calculating your trading profit and paying the correct income tax and NIC to HMRC. It also means part of your income must be saved to meet your tax liability.
Essentially, there are two types of business structures you can adopt – either sole trader or partnership (for two or more individuals) and limited company. By adopting a limited liability partnership (LLP) structure, you may get the best of both worlds, as an individual partner’s liability can be limited in contrast to general partnership, where partners are jointly and severally liable to business debts.
As a sole trader, you own the business assets personally and are also liable for all of its debts. So, for example, if you do not pay suppliers or HMRC, they can go after your personal possessions.
A partnership is an extension of a sole trader. A group of two or more people come together to share skills and ideas. Partners will agree to share the joint profits according to predetermined percentages – it’s clearly advisable to draw up a partnership agreement. Individual partners are taxed in the same way as sole traders, but only on their own share of the partnership profits. However, they are jointly and severally liable for the partnership debts.
From a tax point of view, all partners should be registered individually with HMRC for their personal self-assessment. Individual partners in a partnership are also treated as self-employed and are responsible for filing their tax returns for payment of their taxes. The partnership itself is an entity in its own right and needs to be registered with the tax office and is required to file its own tax return.
The rules surrounding companies are very different to those of a sole trader. All companies have to be registered with Companies House. Companies are also individual entities in their own right, which are governed by the Companies Act and are required to register themselves with HMRC for Corporation Tax. Directors are responsible for conducting the affairs of the company in a lawful manner and are paid salaries like any other staff member. A payroll system needs to be operated.
Being self-employed means collating a set of accounts – a summary of income and expenses, generally for a period of 12 months. As you are responsible for selecting your accounting year, you must fully consider the impact of self-assessment tax rules. Preparing your accounts is somewhat a technical task that requires up-to-date knowledge of accounting rules. Therefore, it makes sense to seek assistance from a qualified accountant who specialises in veterinary medicine.
Not all expenses are allowed relief against income and, by definition, all expenses must be incurred “wholly, exclusively and necessarily” for the purpose of trade. Your income and expenses summary is declared to HMRC on your tax return after the end of your accounting period.
Each tax year runs from April 6 to the following April 5. Once you’re in the self-assessment system, you’ll have to note each January 31; this is when you file your tax return for the tax year ending on the previous April 5 and you will also be settling your tax bill relating to the previous year. At the same time, you’ll make your first payment on account for the forthcoming year. The second instalment of payment on account will be made the following July 31. If you do not pay tax bills or file returns on time, you may incur penalties, interests or surcharges.
Sole traders below the age of 65 are entitled to receive tax-free income (for the tax year 2013/14) of £9,440. However, you are also liable to pay both class two and class four of your NICs, which count towards your entitlement of state retirement pension, incapacity benefit and basic maternity allowance.
Allowable expenses are the same as those while you were employed, as well as professional indemnity insurance, cleaning and laundry, accountancy fees, stationary and books, postage, use of home as office, staff wages and course fees (in some cases).
There are also partial allowable expenses you can claim, at an appropriate percentage or reduced amount in certain circumstances, to account for private use. These include motor running costs, telephone, hire purchase (leasing) interest and loan interest. The allowances will be claimed by your accountant when submitting your tax return to HMRC.
Under certain circumstances, as a locum vet you can become a VATregistered trader and it could be financially rewarding to use a VAT flat rate scheme. You should seek advice from an accountant who understands this area first though.
It is recommended you open a separate savings account to hold aside funds for tax bills. Generally, it is advisable to keep aside around 35 per cent of your net earnings for tax, as you never know when your circumstances may change. You could have exceedingly high income during your first year, but by the time you come to pay your tax, you may be in a different situation and not have enough funds to pay. Once your accounts have been prepared, your accountant will be able to give you an indication of tax payments due for the next 12 to 18 months.
If you have other sources of income, such as dividends, bank interest or rental income, you will also need to disclose these on your tax return, as tax has to be paid on them. Tax is highly complicated and the completion of a tax return and calculation of tax due is naturally a complex matter. Guidance should be sought from a qualified accountant who should be able to save you enough tax to justify his or her fee.
Of course, to produce full and proper accounts, records should be kept of all business income and expenditure. You should endeavour to retain all receipts and invoices relating to all business expenses as HMRC has the power to enquire into your affairs and may ask for evidence to support any claims you make.
As a business person, it is your job to create wealth by being passionate about your profession. However, it is also your duty to preserve wealth and to not lose it by paying unnecessary taxes. So, act like a vet, but think like someone in business.
