Sent to tax us
THE JULY meeting of London Freelance Branch was entertained by Eric Longley, who described himself as "an ex-Inspector of Taxes aiming to go straight". How can we freelances be sure that we pay just as much tax as we have to? We also heard from financial advisor Ion Tsakalis on how managing what's left (a report of Ion's talk is here.)
Eric Longley, "an ex-Inspector of Taxes aiming to go straight"
Parliament is still arguing over the idea that freelances should claim expenses at a flat rate, rather than keeping all our invoices and claiming actual expenses, says Eric.
This is not unconnected with the government having since 2005 got rid of 37,000 of the Her Majesty's Revenue and Customs (HMRC) officers who decide whether what you claim is reasonable.
What is reasonable? You can claim as a deduction everything that is "wholly and exclusively for the purposes of" your trade.
Eric gave as an example the case of draughtsman Harry Prince, who also played guitar professionally. He claimed the cost of repairing a finger he'd cut sharpening a pencil. The Revenue barrister asked him: "do you enjoy playing the guitar"? Oh yes. "It's not exclusively for the purposes of your trade, then."
Be careful if you claim the use of your home for work, especially if it's your main residence. If you own your house, you can claim only a share of the cost of repairs - not mortgage capital or interest. But if you then say you use this particular room for writing, then if you sell your home, the proceeds of that room will be subject to Capital Gains Tax.
If you write in the morning in the kitchen and in the afternoon elsewhere, and pay rent, then you can "claim 30 per cent - and be prepared for the Revenue to argue it down to 20 per cent".
Most journalists Eric knows "have no friends, so it must be the case that 90 per cent of their phone expenditure is for business." He sees no reason that journalists shouldn't claim part the cost of a television to inform their work. Books used to be a capital allowance, and can now be claimed as expenses.
Claiming for meals when you go to interview people? Eric says HMRC may "think you're only eating to stay alive, it's nothing to do with your job"; HMRC may allow you a sandwich if you leave home at 6am and won't be back until 8pm.
And if you incorporate - form a limited company - it can claim entertainment expenses for you. But that's not worth doing unless you're earning well over £50,000.
HMRC staff cuts will mean fewer investigations, but they will be more in-depth, and their investigation of you can go back 10 years. Hiring an accountant to rebut their claim is often costlier than what you save.
They can come into your home if they believe someone works there, and they have the right to inspect documents there, although this doesn't count as a "search". This rule treats your place of work the same as the offices of Goldman Sachs, with its 20 lawyers hired to rebut the Revenue's claims.