Sarah Preece: tax returns for artists
Sarah Preece, Executive Director at Battersea Arts Centre and founder of Making Space, suggests a step by step approach to filling in your tax return and looks at how getting to grips with the numbers can give you more freedom and control over your practice.
The Return of the Tax Return
Yes, it’s that time again; the dreaded tax return is due at the end of the month. It’s ironic that the first deadline for completing what many people feel to be the soulless task of filling it in – if you want your tax calculated for you by the revenue – falls on All Souls’ Eve.
Now the obvious thing to say is if you are familiar with the tax return and the process is customary to you, and you have done the regular exercise of monthly reconciliations of your bank statements, entered your receipts faithfully into a spreadsheet and logged all your income, then not only might you be feeling rather chipper at this moment – well done you – but you are probably better off using your time elsewhere.
For those of you suddenly surrounded by a years worth of work to do and what feels like a mountain to climb to the 31st October then this is a few words of encouragement. Whether you submit a paper return in October or an electronic one in January, take this opportunity to at least get your records up to date. If you have time enough to complete the task by the end of the month, then all well and good, if not, then it will make the January job that much easier by the time you get to it. So get started.
The tax return itself is as straight forward as your income and expenditure is. For most freelancers and small businesses it should present you with few, if any problems. Those with more complex finances or lucky enough to have investments such as rented out property, will find themselves with added layers of complexity. However, it is still all manageable, unless your finances are sophisticated enough to warrant you offsetting losses from some areas against profits in others. If that’s the case you probably don’t need to read this stuff.
Getting an accountant is always an option, particularly if your affairs are complicated. They are very expert at minimising tax payable by ensuring you are effectively setting costs against the tax you owe. However, they can be costly. Your tax bill may be sufficient to warrant an accountant, or you may just feel the need of their technical knowhow, but you can keep costs down by spending time preparing the basics efficiently – for example by keeping a simple account of all monthly income and expenditure and creating a reliable system of date ordered receipts. But if you are doing it yourself, then take your courage in your hands. I teach finance for non-financial people working in the arts. My advice to them when approaching finance is – you don’t have to be a maths whizz, nor do you need a maths qualification, of any kind. However, there are some things that will make it all easier and in my next blog I’ll detail these and hopefully bust a few common myths at the same time.
Managing your money is, for the most part, not about maths, but about order. Book-keeping in its simplest form is a tracking system, creating a trail which can be followed systematically. Logging information in a way that means you can trace back from your sums to the original paperwork is critical. This is not the time for a fag packet reconciliation where you tot up receipt totals on a calculator and only note down the overall result, you need to be organised and systematic.
If you are not a natural or don’t have those maths exams, one thing you are going to need more of is time. Everything will probably take you longer than you think. If you do calculations and write things up in longhand – or, if you use excel – checking your work – takes time. Allow for it, expect it and don’t be disheartened by it. Familiarity and experience will get you to an end point quicker, but you can get to the same end point, just not as fast.
You also need to be able to be honest with yourself so that when you hit an area that is so beyond your experience or ability, or you feel yourself so unable to deal with it, that you find someone to talk to who might be able help you. The professional and personal network is a wonderful thing and making contact by saying “I’m stuck!” is a good start. Asking someone who works on projects and has that practical understanding of finance or project budgets would be ideal, but equally valuable might be someone you know who may not know about the ins and outs of finance in detail, but who loves numbers, or who is great with their own money, someone who can help you with calculations, or give you moral support. There is always a way through and if the person you approach can’t help you directly, two heads are better than one to work out the best route forward.
The technical language that is used in finance scares a lot of people. But those words stand for something very tangible. Most of it is not stuff we need day to day which is why it can be hard to remember, but much of it, if explained properly, is totally graspable. Classification terms used in forms often throw people; but it’s income, right? And expenditure? And you will have either made some money or made a loss when you subtract one from the other. At the end of the day it’s no more complicated than that, and all you have to do is itemise that information and put it onto the tax return.
The online and phone advice from the Revenue and Customs is there to help you – don’t be afraid to call them. My experience of the phone support reassured me they are geared up to guide you, not to trip you up.
The best advice I can offer is to take small steps towards it. I divide up the tasks and systematically tackle then one at a time, task by task, returning to it over a number of days, often spanning a couple of weeks, but using small steps until I’m there.
So what are those steps? I always start with the easy bit – ordering all my receipts chronologically, by date, clipping them together and putting them into 12 plastic envelopes – one for each month. That seems to get me going and reduces my anxiety levels, as I feel I am underway.
I then prepare myself to open the tax return itself, and with a deep breath read the categories, reminding myself of line entries I need to complete so I can plan what bits of information I am going to need. I often also strike a light pencil mark through the bits I don’t need to answer which takes some of the panic away.
Having made sense of the mountain of expenditure receipts, I then check my bank statements against my transaction receipts. In accounting terms, the bank statement is the base-line against which you need to reconcile your information, so while this may be an extra layer of work that many freelancers won’t want to bother with, it is worth checking that the bank entries are correct and complete. The exercise, though painstaking, has the added benefit of letting you see if all payments you are owed have actually been made against invoices you have issued.
Once I am happy with all the bank entries, I find it easier to reconcile my income, and go back to log the interest (if there is any) shown on my bank statements, my income invoices and finally transferring income noted in a small book I keep for cash sales.
It then becomes just a matter of transferring numbers from each area of my records to the tax return, which by this point feels quite easy as I have familiarised myself with my financial records sufficiently to feel more confident about tackling the form.
Breaking it down into small steps and chipping away at it makes it feel so much more manageable, and the sense of achievement as I complete each stage acts as a reward, boosting my confidence for the way ahead.
You can take the sweat out of the whole task by introducing regular effort.
The more you do throughout the year, the easier year-end becomes. Don’t worry if you can’t manage full scale regular monthly reconciliations of income and expenditure, even the smallest amount of ordering of the information as you go will make all the difference. For every transaction going forward – try to find a system that will ensure as a minimum three simple things:
- Receipts are kept in date order;
- Income is logged simply in a small book;
- Bank statements get their own file and are looked at and filed when they are received.
Date ordering your receipts is easiest if done as you collect them. Your records tell a story and that story will only be as good as the information you enter into them. There is a saying in accountancy – “garbage in, garbage out”. Start being more methodical, it can be hard to recall what some activities were in the year in hand let alone for longer periods, but these records need to be kept for six years so detail at this stage is critical. Put notes on receipts if the receipt is not clear, use a highlighter on the receipt as you go along, flagging the date, the amount, and what the receipt is for, so that when you come to log them the critical information is easy and quick to find. Make notes on deposit receipts as well, to log not only how much you banked, but for what purpose.
If you can, log everything, item by item, onto Excel – or Numbers if you use a MAC. Excel is a great tool for creating a simple set of accounts and doesn’t need to be complicated or technical. If you haven’t already, it is worth getting to grips with the basics of a spreadsheet. There are only four functions you need to use – addition, subtraction, division and multiplication, and one that will be handy – the Sum Total. Few people can’t pick this up if shown and it will, quite literally, change your life for this task.
Once some of these basics of book-keeping are under your belt, then there is the opportunity to play – to plan, to create scenarios, to consider different possibilities, to do some ‘what ifs’ and look at how you might be able to vary what you are currently doing.
This is when the power of finance suddenly becomes clear – understanding brings a sense of control and possibility. The great thing about numbers is that they tell a story, they tell us about our choices, our priorities, our successes and our mistakes. The thing to do is not to shy away from them and think that you can’t understand them – rather make them work for you.
If you are now well underway but interested in understanding your resistance to tackling the task, or if you are still struggling to get started, you could order a little book called One Small Step Can Change Your Life by Robert Maurer. It’s a quick read, and while it won’t tell you how to complete your tax return, it will explain why you might be one of the ones struggling to get yours done in time for that deadline of the 31st October. Maurer’s insights into how to use small steps to tackle difficult tasks might just help you make completing your tax return a far more customary exercise in future.
© Sarah Preece 2011