PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Business accounts

Self-employed - running a business and paying tax

To work out your profit and your tax, you need to prepare accounts for your business. These are a list of your income and expenses in the business (profit and loss account). If you have an accountant, your accountant will probably prepare a balance sheet as well. This lists your business assets and liabilities.

Apart from the year you start and the year you finish being in business, business accounts normally cover 12 months. Special rules apply if you chose to use the cash basis of accounting (see next section).

The tax year runs from 6 April in one year to 5 April in the next, but you don’t have to make your business accounts up to 5 April. You may make up your business accounts to any month end but once the decision has been made, it is difficult to change so it is important make the best decision for your business.

If you want to keep things simple, it makes sense to make you business accounts up to 5 April. HMRC will accept accounts to 31 March as if they covered the period to 5 April.

Matching tax years and accounting years

The rule to match your business accounts to a tax year is this: Your business accounting year which ends in the tax year will be taxed in that tax year.

Example: Julian prepares business accounts to 30 June. His business accounts for the 12 months to 30 June 2015 fall in the tax year which runs from 6 April 2015 to 5 April 2016. So his tax bills for the tax year to 5 April 2016 will be based on his accounts to 30 June 2015. (He will actually pay the tax for the tax year to 5 April 2016 like this: part by 31 January 2016, part by 31 July 2016 and any additional tax (or adjustment) by 31 January 2017).

Profits and tax bills

Your tax bill is based on your business profit. The business profit is the difference between your business income and your business expenses. You may need to make adjustments to the figures to reflect the tax rules. This is considered in the sections on income and expenses below.