- Opening a Bank Account
- Register your business with HMRC
- Register for VAT
- Setting Up Your Accounting Records
- Accounting Year-End
- Pupillage Awards
- When do I pay my tax?
- What expenses can I claim
- How will my income be taxed?
- Can I employ my spouse as a secretary?
You may find the idea of becoming self employed a daunting task after spending so much time studying. We understand how important it is to properly plan the new business and to make sure that everything is done correctly from the beginning. Don’t worry; we will be with you every step of the way.
Here are some of the things we will have to consider:
1. Opening a Bank Account
You will need to open a business bank account into which you will bank the fees that you receive. Any payments, standing orders, or direct debits associated with your practice should be paid out of this account. You should make transfers from this account to your personal account to fund your personal spending.
We would advise that you also open a tax savings account, which should be interest bearing. You should set aside a proportion of your income each month to save for the payment of VAT, Income Tax and National Insurance. We can help you decide how much to set aside each month.
We recognise that there is a time delay from the point you start to give opinions until the payment of your fees. Depending on the nature of the case you are involved with this may take several months. If you need to arrange short term finance then let us know and we will approach a lender with you.
Internet banking should also be considered as its speed and accessibility may improve the control that you have over your finances.
2. Register your business with HMRC
You must inform HM Revenue & Customs (HMRC) that you are now self-employed. We will help you complete form CWF1 which notifies HMRC that you are starting in business. The form should be submitted within three months from commencing to trade otherwise HMRC may charge a penalty.
As a self-employed barrister you will be liable to pay class 2 and class 4 National Insurance.
Class 2 National Insurance is charged at a weekly flat rate. For 2009/10 the rate is £2.40 per week, payable if earnings exceed £5,075 per annum. Class 2 NIC is paid either by direct debit or on invoice:
- If you pay by direct debit you will pay monthly, normally on the second Friday of the month. The amount of the monthly payment represents either four or five weeks' contributions, depending on the number of Sundays in the previous tax month.
- If you pay on invoice you will be sent a bill quarterly in January, April, July and October.
We recommend that you complete the direct debit mandate, which makes up part of the CWF1form, so that payment is taken from your bank account automatically each month.
Class 4 National Insurance is based on the net profit from your practice and is paid over at the same time as you pay your income tax. For 2009/10 there is no charge if your profits are less that £5,715. Profits between £5,715 and £43,875 are charged at a rate of 8% and any excess profit above £43,875 is charged at 1%, without any upper limit.
3. Register for VAT
It is important that the decision to register for VAT is made at the right time. Although you do not need to register for VAT until you reach the stage where your fees have exceeded the annual VAT threshold, or are likely to within the next 30 days, we recommend that you register for VAT immediately.
We will complete your VAT registration online and recommend that you submit your VAT return and associated payment of VAT by internet. This process is far simpler than completing a paper application.
It is possible for you to prepare your VAT using an optional flat rate scheme. Under this scheme you calculate your VAT payment as a fixed percentage of your total fees. We can advise you whether you will be eligible for the scheme and also whether you are likely to pay less VAT if you join the scheme.
4. Setting Up Your Accounting Records
You may find that your Chambers will keep a record of your debtors for you and ensure their ledger is updated each month. You should also receive a summary of the fees that have received. It is important that you carry out monthly checks to determine whether the fee notes that you have raised have been paid and that the fees are included on the aged debtors list. Any discrepancies should be investigated.
Your fee notes and the fees you have received will be the basis of the preparation of your VAT return and the year-end professional accounts.
It is also important to keep all of the invoices and receipts which relate to your business expenditure. You must be able to provide evidence for the money you have spent. We can set up a simple spreadsheet for you to use to record your expenditure.
You may decide that you would prefer us to deal with all of this. If this is the case, we can set up a system whereby you send us your income and expenditure records and we will prepare your VAT returns and year-end professional accounts.
5. Accounting Year-End
It is important that you choose the right year-end because that will determine which year your income is taxed. You are taxed on what is termed the current year basis of assessment. This means income is assessed to tax in the tax year in which your accounts year-end falls.
Typically the choice of year-end falls on either 31 March or 30 April.
As a 31 March year-end closely shadows the tax year, you will pay tax very much on a “pay as you go” basis.
With a 30 April year-end, income is effectively pushed into the next tax year, meaning that you may pay less tax as you go along, as income rises.
It is important to note that whatever year-end you choose, you are still taxed on all your earnings in full over the whole of the period that you are in practice. Your year-end affects only the timing of earnings being taxed.
6. Pupillage Awards
Pupillage awards from the Inns are treated much like scholarships and are exempt from income tax.
Pupillage awards received from the Chambers are fully taxable. However, if the awards from the Chambers are received within the first six months of pupillage, they will normally be exempt from tax.
7. When do I pay my tax?
The income tax year runs from 6 April to 5 April. Your liability to income tax and class 4 National Insurance for a tax year is normally paid by two equal installments on 31 January, before the end of the tax year, and 31 July, following the end of the tax year. If this does not settle the tax liability in full, then a balancing payment is due on the following 31 January.
The payments on account are based on your liability for the previous year. If the actual liability turns out to be higher than that of the previous year, a balancing payment arises and will need to be paid on the following 31 January. Conversely, if the liability is less than the previous year then you will receive a tax repayment, together with interest.
If you are able to anticipate a fall in income, you can apply to HM Revenue & Customs to reduce the payments on account. We can help you make the application for a reduction in the payments on account you need to make.
In the first period of your business there will be no previous year on which to base the payments on account. So you may find that on the 31 January, following the end of the relevant tax year, you have to pay your tax in full for the year and also a payment on account for the following year. It is vital that you make proper provisions for this and set aside enough money to make these payments.
Also, as income rises in the early years of your profession, you will experience a pattern of large January payments and lower July payments because of the doubling up effect of balancing and payments on account on 31 January. If your income rises steeply, this doubling up effect can be quite dramatic. Again, it is essential that you make proper provision for your tax as you go along.
8. What expenses can I claim?
You are entitled to employ people to help you run your practice. Provided the employee’s costs are incurred wholly and exclusively for practice purposes then the costs can be allowable for tax purposes.
Any capital expenditure such as the cost of your computer and car is treated differently and relief is given in the form of capital allowances.
Typical expenses include:
- Chambers’ expenses
- Subscriptions, books and journals
- Postage and stationery
- Upkeep of wig and gown, collars, bands and studs
- Professional indemnity insurance
- Light and heat (if you use your home as an office)
- Motor expenses and travel expenses
- Accountancy fees
- Bank charges and interest
In the case of telephone, motor expenses and the lighting and heating of a home office, you must work out the proportion of those expenses that are applicable to your practice. We will give you guidance with the calculation. In the case of motor expenses, you should keep a mileage log for a representative sample period in order to demonstrate your typical pattern of motoring.
9. How will my income be taxed?
The normal basis for preparing accounts is to include income earned and expenditure incurred in the accounting period, whether or not the income has actually been received or the expenditure paid. This is known as the Earnings Basis.
With the earnings basis of accounting, you are effectively paying tax on income you haven’t actually received. It is well established that barristers often have to wait a considerable time to be paid and HM Revenue & Customs (HMRC) recognises barristers as a special case in the early years of practice. A concession from HMRC allows barristers to prepare accounts on a Cash Basis for the first seven years of practice. This means that you only bring into your accounts fees actually received and payments made.
After the end of the seven years there is a method of phasing in the earnings basis and this is known as the catch up charge.
After seven years you must prepare your accounts on the normal basis, which means you should include income earned and expenditure incurred. These accounts must also show a “true and fair view” which means that, for most barristers, jobs completed or partially completed must be included as revenue earned.
The change in the basis of assessment would give rise to a significant increase in taxable income in the eighth year. This is primarily because the addition of fees outstanding at the end of the year would fall to be taxed in addition to the fees actually received during that year. The catch up adjustment has the effect of smoothing the transition from the Cash Basis to the Earnings Basis.
In the year of change, the catch up adjustment is calculated by preparing accounts on both the Cash Basis and the Earnings Basis. The difference between the two is the catch up adjustment. This catch up adjustment is charged to tax by being added to profits over a period of up to ten years, normally 10% per annum.
In the year of transition, it is particularly important to calculate correctly the amounts to include for jobs completed and partially completed; also to make correct adjustment for amounts billed that may not be received in full.
10. Can I employ my spouse as a secretary?
You are entitled to employ people to help you run your practice. Provided the employees costs are incurred wholly and exclusively for practice purposes then the costs can be allowable for tax purposes.
It is important that you actually pay the remuneration. If you don’t pay it then you can’t claim it. Setting up a monthly standing order for the costs is a simple solution.
You may have to set up a PAYE scheme depending on the amount of remuneration you will be paying your employee. We can do this for you and set up the scheme so that it can be managed using the internet.
We can also discuss with you the possibility of making pension scheme contributions on behalf of your spouse, which can be very tax efficient. Please contact us for more information.