Many a freelancer has been caught by the monster known as tax. Dom Hall explains how to make sure it never happens to you
Life as a freelance designer can be great - you get to be your own boss, you set your own hours, pick your own projects and answer to no one but your clients and the bank manager. But, as anyone who has braved life in the freelance jungle will tell you, there's many a designer who has come a cropper through failing to get one of the essentials of the freelance life right - keeping on top of your taxes.
Tax probably isn't the sexiest of topics, but in terms of running a successful freelance business, it's one of the most important. So, assuming everything else in your freelance empire is running smoothly, how do you keep ahead and avoid that tax bill that could see you pawning your Mac?
If you are making your living as a freelance graphic designer in the UK and working for yourself rather than being employed by a company, you'll have to be registered as self-employed with HM Revenue and Customs. Registering with the HMRC is, therefore, pretty important and you need to do this straight away by filling in a load of forms; in this case a CWF1 from the HMRC website.
When you're self-employed in the UK you're liable to pay two types of National Insurance: Class 2 contributions and Class 4 contributions. You have to pay your National Insurance quarterly or monthly by bill or direct debit. If you expect your first year of income to be less than the required threshold (£4,635 in 2007-08 and £4,825 in 2008-09) you can apply to be 'exempt' from Class 2 contributions because you haven't earned enough. If this is the case, the HMRC will give you a form called a 'Certificate of Small Earnings Exception' to confirm you don't have to pay.
Your Income Tax needs to be paid six months after the end of the tax year in which you register for self-employment. Once you've registered, the National Insurance department sends your details to the Tax Office. The following April, you will be sent a Self Assessment Tax Return to complete - a lengthy form that you can either fill in yourself, complete online or ask a friendly accountant to help you with. Your Class 4 National Insurance contributions are payable at the same time.
Of course, tax rules vary from country to country, so if you're based in Northern Ireland, Europe or the US, the best thing to do is to check how things work with your local tax office, or with the IRS in the US.
Remember that penalties are due if you're late with any tax payments, so keeping on top of this basic payment schedule is crucial. For experienced freelance designer Neil Duerden, it's one of the most important things he's learnt during his career. "Keep on top of your tax money and set up a separate account. Don't go into this even when it has built up to a huge amount, as when you need to pay the taxman, you need to pay him," Duerden advises. "Usually there will be some left over after deductions and expenses, as you should have put too much into this account, so spend this as a bonus to soften the blow of paying all this cash out."
As long as you're doing all of this, you've got nothing to worry about in terms of nasty surprises. But there are ways you can be smart about dealing with your tax. According to Russell Smith (www. accountsforartists.co.uk), a chartered accountant who specialises in tax advice for the media and creative sectors, people in Britain generally spend £7.6 billion in unnecessary tax every year. So what are the tricks of the trade?
The most basic thing you can do to avoid paying too much to the HMRC is to be organised; send your tax return in on time and pay your tax on time. "Last year, a million tax returns were late and incurred fines of £100 each," Russell says. "Remember, you have at least 10 months to file by 31 January. If you are really up against the deadline, you can file a draft return and then file an amended return at a later date," he says.
The same goes for paying your tax - pay it on time and you avoid paying interest on outstanding payments, and a nasty 5 per cent surcharge after February. If your tax for the year is over £500, your dates in the diary will be 31 July and 31 January. Make sure you know what you need to pay and pay it on time to avoid the unnecessary interest charges.
The other thing you need to think about is the money you spend in the course of running your freelance business. There are misconceptions about what you can and can't claim against tax but, according to Smith, the rule of thumb is: 'if in doubt, keep the receipt'. "You need to ask yourself this question," Smith says. "'Is this expense wholly, necessarily and exclusively for my business?' If the answer is yes, make sure you include the expense when calculating your profit. If you don't, you will be paying more tax than you need to," he advises.
While some areas are off-limits, typical things freelance designers often forget to claim for include magazine subscriptions, travel to clients' offices, inspirational trips to museums and art galleries that can be claimed as research, IT costs, and studio and premises rental. If you work from home, rather than a rented studio, there are other things you can claim for - any business calls on your landline and mobile, your internet connection, the heating and lighting of your office as a proportion of your house, stationery and furniture for your office.
Sydney Levinson is a chartered accountant at Rhodes & Rhodes, and specialises in working with freelancers in the creative industries. "Particular care must be taken where expenses have some duality of purpose - both business and personal use, such as motoring costs," he says. He suggests you keep a log of business miles travelled in your car, so you can claim the correct proportion of fuel and other running costs.
Finally, if you are self-employed, you really don't need to set up a business banking account - a current account will be much cheaper and far less trouble. If the money really starts rolling in and you're thinking of taking on more help, you may want to investigate setting yourself up as a limited company, but for most freelancers, that's very much the next step.
One thing you may want to look at, though, is taking on an accountant, just to make sure you stay on top of things. "It's a good idea to find an accountant who's on the same wavelength as you," Duerden advises. "When you're busy you may send him spreadsheets that have been rushed and full of mistakes, so you need to be able to trust he'll go through them and pull you up on your errors," he says.
"I would always advise that you do your own book-keeping when you start working for yourself," Levinson says. "If you understand the basics, then even if you employ a book-keeper later on, you'll know whether what they're doing is sensible." He believes the most successful business people always have a rough idea of the balance in their bank account and which invoices are awaiting payment.
Life as a freelance designer can be great, but it's best to make everything as easy for yourself as you can. Take care of the tax and the creative side of things should become much easier.