Small traders, prepare to panic

If you run a small business and you have waited until now to sort out your tax affairs, you are probably in a blind panic. January is a time when people who operate as sole traders (ie they don't run a limited liability company) have a double tax whammy.

First, they have to submit their personal self-assessment tax return, along with everyone else, by 31 January. But to do this they need to have completed the accounts for their business. This is because on their personal tax form they need to show the income they have received as profit from their business.

'You must have prepared the accounts for your business and identified the taxable profits from your accounts to fill out your own tax return properly,' says Patrick Stevens, tax partner at Ernst & Young. 'If you haven't started by now it is probably a good time to panic.'

This is because accountants are very busy in the weeks after Christmas when tens of thousands of other self-assessment customers will also be filing their returns. 'It is worth making a resolution for next year to build up a good relationship with your accountant and work out a sensible deadline so that all the forms are sorted out in good time,' he says.

For personal tax self-assessment purposes, the 31 January 2003 deadline is for tax on income received in the year to 5 April 2002. But if you prepare your accounts to a different date, you take the profits in the accounts that end during the year to 5 April 2002.

You may need to ask the Inland Revenue for extra sections of the tax return form to complete. If you don't use an accountant for your personal tax return, and you have missed the September deadline, you will need to work out yourself how much tax you owe. If you had returned the form by September last year, the Inland Revenue would have calculated your tax liability for you.

So what is the answer? 'It is probably time to call in the experts,' says Patrick Stevens. 'Find an accountant who is prepared to take on your case as soon as possible. You could ask for recommendations from friends or colleagues. Bear in mind that the best accountants are likely to be very busy in January.'

One of the problems small traders often find is that they have not set aside enough money to cover their tax bill. They will also probably have to pay tax on account (ie in advance) for their forecast earnings for the following year.

The first deadline is 31January 2003, when you need to pay an estimate of half your tax liability for the year to 5 April 2003 based on the previous year's earnings. You need to pay a further installment of the remaining half by 31 July 2003.By 31 January 2004 you need to have calculated the full and final liability for the tax year, and pay the remainder - or claim an overpayment.

One way to prepare for a tax bill is to set aside a portion of your earnings every month to ensure you don't spend all your profits. Many self-employed people and small businessmen and women use high-interest savings accounts and transfer money from their business account. But with interest rates at a 40-year low, you are not always getting the best return on your cash.

An alternative is to use a flexible or current account mortgage so that your surplus cash is paying off your mortgage debt on a daily basis. These work by encouraging you to hold both a mortgage and savings or current account so that your credit balance is offset against your mortgage liability.

David Hollingworth of Bath-based broker London & Country mortgages says building up savings is an effective way of managing your cashflow. 'It can be very useful for the self-employed. Some lenders, such as Britannic Money, have worked with IT contractors to design suitable products.'

He also suggests Intelligent Finance or Standard Life, which offer the combination of a savings account and offset mortgage.

When flexible accounts were first available a few years ago, their mortgage interest rates tended to be higher than other products, making them less attractive. With the entry of high street lenders such as the Halifax and Woolwich into the market, the flexible mortgage has become more mainstream.

You can now find competitive deals - for example Newcastle Building Society has a tracker mortgage that is 0.1 per cent below the base rate for six months, and then guarantees to be no more than 0.5 per cent above base rate for life.