Sole trader doing two different activities – Tax question.
Discussion
Fred Bloggs sets up as a sole trader describing his activities as ‘multimedia’ and splits his working time between freelance graphic design and electronic music production.
In Year 1…
In Year 1…
- Fred spends £5k on a Mac and graphic design software and then makes £40k from graphic design work. Profit/Loss = +£35k.
- Fred spends £35k on recording studio gear and makes £0 from electronic music as he’s composing new material to be released at a later date. Profit/Loss = –£35k.
- Fred spends £40k.
- Fred makes £40k.
- Fred's profit/Loss = £0.
- A: Sole trader Fred Bloggs has made £0 overall, therefore has not made any taxable profit, or
- B: Fred Bloggs, graphic designer, has made £35k of profit which is taxable regardless of what Fred Bloggs, electronic music producer, might have spent on music gear?
A sole trader can have two or more separate sole trader activities. The accounting of the disimilar trades should be kept separate as well as the associated tax computations and claims for capital allowances and loss reliefs.
Obviously, trading losses can be utilised quite flexibly but that does not mean that the calculation of such losses can be muddled up.
It has been upheld in a tax tribunal case that two separate fish and chip shops operated by the same individual were two separate and distinct trades.
I presume you have an accountant?
Obviously, trading losses can be utilised quite flexibly but that does not mean that the calculation of such losses can be muddled up.
It has been upheld in a tax tribunal case that two separate fish and chip shops operated by the same individual were two separate and distinct trades.
I presume you have an accountant?
Basically keep the figures separate, but the trader would essential not pay tax as the whole is £40k made, £40k spent.
After 5 years of loss, HMRC will advise you that you cannot offset losses from loss making business against profit, but can be offset against future profit from the currently loss making business.
That's what my accountant said.
After 5 years of loss, HMRC will advise you that you cannot offset losses from loss making business against profit, but can be offset against future profit from the currently loss making business.
That's what my accountant said.
Eric Mc said:
AIt has been upheld in a tax tribunal case that two separate fish and chip shops operated by the same individual were two separate and distinct trades.
?
I'm gobsmacked at that. Even though unaffected I feel really angry on behalf of sole traders. I assume from the way that is phrase that the 'victim' in that case had to pay full tax on the profitable shop??
WHat is the logic in that case?
Shows my ignorance, but I thought the rules for sole traders were no different to Ltd companies in this kind of thing
The rules aren't different.
It is not always blindingly clear whether two trades are entirely separate or aspects of the same activity. Sometimes it takes a tribunal or a judge to make a decision.
Just because a shop keeper has two shops does not mean that both businesses can be treated as one - especially if, for whatever reasons, the trader has done his/her best to keep them separate. At the end of the day whether two businesses should be treated as separate or combined will be down to the unique factors that surround each case.
And the exact same goes for limited companies too - there is no difference in the concept.
It is not always blindingly clear whether two trades are entirely separate or aspects of the same activity. Sometimes it takes a tribunal or a judge to make a decision.
Just because a shop keeper has two shops does not mean that both businesses can be treated as one - especially if, for whatever reasons, the trader has done his/her best to keep them separate. At the end of the day whether two businesses should be treated as separate or combined will be down to the unique factors that surround each case.
And the exact same goes for limited companies too - there is no difference in the concept.
Eric Mc said:
I presume you have an accountant?
Not yet - I'm asking hypothetically to forearm myself so I don’t come unstuck if I do decide to pursue this avenue – I was just asking initially to see if it’s even worth bothering.I looked at this once before and I recall we even spoke on the phone about me trying to sell music while remaining in full-time employment, but at the time it wasn’t going to work for me as I couldn’t find enough time. Now, however, I have quite a few people who could give me freelance graphic design work at a rate far higher than my employment pays, so I’d have time to develop the music side as I wouldn’t have to work as many hours. I have to stress though that the music wouldn’t make money for the foreseeable future but would require investment, so I have to be able to offset the cost for it to be worthwhile. I’m currently employed and doing music as a hobby.
sinizter said:
After 5 years of loss, HMRC will advise you that you cannot offset losses from loss making business against profit, but can be offset against future profit from the currently loss making business.
That’s reasonable enough. I doubt that the status quo which I’ve described would last for more than two years.Eric Mc said:
It is not always blindingly clear whether two trades are entirely separate or aspects of the same activity.
This forms the critical part of my question. Does the IR see two things: ‘Graphic Design’ and ‘Music’, or does it see one thing: ‘Multimedia’. It’s not uncommon to find creative agencies offering print design, digital design, video, music and all sorts of other things together under one corporate banner. Would such a company have to keep separate accounts for each activity?MitchT said:
This forms the critical part of my question. Does the IR see two things: ‘Graphic Design’ and ‘Music’, or does it see one thing: ‘Multimedia’. It’s not uncommon to find creative agencies offering print design, digital design, video, music and all sorts of other things together under one corporate banner. Would such a company have to keep separate accounts for each activity?
I'm sure you can run it whichever way suits you. If HMRC disagree, they wil let you know.blindswelledrat said:
I'm gobsmacked at that. Even though unaffected I feel really angry on behalf of sole traders. I assume from the way that is phrase that the 'victim' in that case had to pay full tax on the profitable shop?
WHat is the logic in that case?
Shows my ignorance, but I thought the rules for sole traders were no different to Ltd companies in this kind of thing
tha'ts not a bad thing WHat is the logic in that case?
Shows my ignorance, but I thought the rules for sole traders were no different to Ltd companies in this kind of thing
2 seperate VAT limit requirements- you can therefore keep 2 shops under the limt and save yourself 25k!
PugwasHDJ80 said:
blindswelledrat said:
I'm gobsmacked at that. Even though unaffected I feel really angry on behalf of sole traders. I assume from the way that is phrase that the 'victim' in that case had to pay full tax on the profitable shop?
WHat is the logic in that case?
Shows my ignorance, but I thought the rules for sole traders were no different to Ltd companies in this kind of thing
tha'ts not a bad thing WHat is the logic in that case?
Shows my ignorance, but I thought the rules for sole traders were no different to Ltd companies in this kind of thing
2 seperate VAT limit requirements- you can therefore keep 2 shops under the limt and save yourself 25k!
When a sole trader registers for VAT it is the individual who registers, not the business. If the trader runs a business selling hats which turns over £40,000 and another activity running a pie and eel shop with a turnover of £40,000, the combined turnovers exceed the current VAT Registration Threshold of £73,000 and he MUST therefore register for VAT - even though the two businesses are completely separate - and would definitely be looked an as being separate for Income Tax purposes.
If you promoted the business as "complete software soliutions" or something vague, advertised all the services you provide as one business and, if possible, offered the various serrvice you provide to all your customers, then it would be very difficult for HMRC to argue that the activities were distinct and separate.
Using one trade name and using the same style and numbers invoices from the one operation would also as would making sure you operated everything from one business premises (unlike our fish and chip shop man).
Ignore what the other poster said about VAT, it is essentially wrong and a red herring.
Using one trade name and using the same style and numbers invoices from the one operation would also as would making sure you operated everything from one business premises (unlike our fish and chip shop man).
Ignore what the other poster said about VAT, it is essentially wrong and a red herring.
sinizter said:
MitchT said:
sinizter said:
If HMRC disagree, they wil let you know.
Indeed, I'm sure they will. Hence the thread as I'd prefer not get into a disagreement with HMRC in the first place!Eric Mc said:
If you promoted the business as "complete software soliutions" or something vague, advertised all the services you provide as one business and, if possible, offered the various serrvice you provide to all your customers, then it would be very difficult for HMRC to argue that the activities were distinct and separate.
Using one trade name and using the same style and numbers invoices from the one operation would also as would making sure you operated everything from one business premises (unlike our fish and chip shop man).
Ignore what the other poster said about VAT, it is essentially wrong and a red herring.
This is the kind of clarity that I’m seeking. Essentially it could be called, for example, ‘Mitch T Creative Media’*, and would be based in a studio containing one Mac running graphic design and music production software and other peripheral hardware, such as a printer, mixing desk, synthesizers, etc. There would be one set of stationery, again, bearing a ‘Mitch T Creative Media’ logo and maybe a list of the activities undertaken. Anyone who wanted could avail themselves of one, more than one, or all of the services offered if they so wished.Using one trade name and using the same style and numbers invoices from the one operation would also as would making sure you operated everything from one business premises (unlike our fish and chip shop man).
Ignore what the other poster said about VAT, it is essentially wrong and a red herring.
* ‘Mitch T’ being the proprietor, ‘Creative’ being self explanatory and ‘Media’ being the plural (therefore suggestive of more than one) of medium – i.e., a material and/or method of production employed in creating a work of art.
Rather then start a new thread i just wanted to ask a question on the same lines...
Why do HMRC seem to consider my full-time employment and sole trading as 1?
Talking with NICS after a bill came though they told me that i didnt need to pay the bill as i didnt earn enough from sole trading and i paid enough via PAYE but HMRC still want to charge me TAX on income from sole trading as combined puts me over the small earnings threshold?
or have i got it wrong somewhere?
Why do HMRC seem to consider my full-time employment and sole trading as 1?
Talking with NICS after a bill came though they told me that i didnt need to pay the bill as i didnt earn enough from sole trading and i paid enough via PAYE but HMRC still want to charge me TAX on income from sole trading as combined puts me over the small earnings threshold?
or have i got it wrong somewhere?
Eric Mc said:
Except the VAT man examines things in a different way.
When a sole trader registers for VAT it is the individual who registers, not the business. If the trader runs a business selling hats which turns over £40,000 and another activity running a pie and eel shop with a turnover of £40,000, the combined turnovers exceed the current VAT Registration Threshold of £73,000 and he MUST therefore register for VAT - even though the two businesses are completely separate - and would definitely be looked an as being separate for Income Tax purposes.
Hi Eric - what if the OP set up 2 Ltd. companies (as both are clearly completely different businesses) - wouldn't the VAT limit then be separate for each entity?When a sole trader registers for VAT it is the individual who registers, not the business. If the trader runs a business selling hats which turns over £40,000 and another activity running a pie and eel shop with a turnover of £40,000, the combined turnovers exceed the current VAT Registration Threshold of £73,000 and he MUST therefore register for VAT - even though the two businesses are completely separate - and would definitely be looked an as being separate for Income Tax purposes.
Edit: Assuming that none of the same equipment was used etc.
MitchT said:
* Fred spends £35k on recording studio gear and makes £0 from electronic music as he’s composing new material to be released at a later date. Profit/Loss = –£35k.
Surely that only works if he can claim 100% capital allowance in the first year? Can he do that with recording gear?Gassing Station | Business | Top of Page | What's New | My Stuff