Sole trader business accounting questions
Discussion
Hi all,
I've been trying to get my head around small business accounting today, as I've now officially registered as a sole trader. To be clear, this is done as I now invoice advertising deals on my website (see profile) and HMRC require it.
The site income will fall below and £4xxx threshold for class 4 NI, and as my costs are quite high there will be very little profit. I will probably be applying for the Small Earnings Exception.
I do however have a couple of questions.
1) As I'm a sole trader I'm taxed on profits only. Given I'm in full time work too, does the rate I'm taxed take into account that income? IE do I still get the £6035 tax free income from my tyre site?
2) As I'm paying NI via PAYEE, it says I "might" be able to defer class 2 NI until the end of the year. Does this mean I don't have to pay it?
3) I currently get invoices paid into my main current account. I've kept track of business income and business expenditure, but any profit so far has just been spent like it was my money (ie not relating to the business). Is it wise to get a separate account, and if so how do I "pay" myself money on the balance sheet?
4) How crafty can I be with expenses? For example, given it is a tyre review site, could I write off a set of tyres against profit if I wrote about them? Or I use my home computer to publish the site, so could a new monitor go against profits?
5) As my current employer pays my PAYEE tax for me, and I will also fill out a self assessment form, is there likely to be issues?
6) Am I over thinking this as I'm a tiny little business? I have a habbit of trying to do everything properly!
Thanks for any help. I'm sure I'll get my head around this eventually, there's just a lot of new rules to understand!
I've been trying to get my head around small business accounting today, as I've now officially registered as a sole trader. To be clear, this is done as I now invoice advertising deals on my website (see profile) and HMRC require it.
The site income will fall below and £4xxx threshold for class 4 NI, and as my costs are quite high there will be very little profit. I will probably be applying for the Small Earnings Exception.
I do however have a couple of questions.
1) As I'm a sole trader I'm taxed on profits only. Given I'm in full time work too, does the rate I'm taxed take into account that income? IE do I still get the £6035 tax free income from my tyre site?
2) As I'm paying NI via PAYEE, it says I "might" be able to defer class 2 NI until the end of the year. Does this mean I don't have to pay it?
3) I currently get invoices paid into my main current account. I've kept track of business income and business expenditure, but any profit so far has just been spent like it was my money (ie not relating to the business). Is it wise to get a separate account, and if so how do I "pay" myself money on the balance sheet?
4) How crafty can I be with expenses? For example, given it is a tyre review site, could I write off a set of tyres against profit if I wrote about them? Or I use my home computer to publish the site, so could a new monitor go against profits?
5) As my current employer pays my PAYEE tax for me, and I will also fill out a self assessment form, is there likely to be issues?
6) Am I over thinking this as I'm a tiny little business? I have a habbit of trying to do everything properly!
Thanks for any help. I'm sure I'll get my head around this eventually, there's just a lot of new rules to understand!
jon- said:
Hi all,
I've been trying to get my head around small business accounting today, as I've now officially registered as a sole trader. To be clear, this is done as I now invoice advertising deals on my website (see profile) and HMRC require it.
The site income will fall below and £4xxx threshold for class 4 NI, and as my costs are quite high there will be very little profit. I will probably be applying for the Small Earnings Exception.
I do however have a couple of questions.
1) As I'm a sole trader I'm taxed on profits only. Given I'm in full time work too, does the rate I'm taxed take into account that income? IE do I still get the £6035 tax free income from my tyre site?
YES - YOU ONLY HAVE ONE TAX ALLOWANCE WHICH IS ALLOCATED AGAINST ALL YOUR INCOME FROM ALL SOURCES.
2) As I'm paying NI via PAYEE, it says I "might" be able to defer class 2 NI until the end of the year. Does this mean I don't have to pay it?
YOU CAN DEFER PAYING CLASS 2 IF YOU ARE ALREADY PAYING THE MAXIMUM YOU CAN PAY UNDER CLASS 1 (EMPLOYMENT). IF YOU HAVEN'T REACHED THAT THRESHOLD, YOU WILL STILL NEED TO PAY THE CLASS 2. HOWEVER, IT SEEMS THAT YOU WILL BE ABLE TO ESCAPE CLASS 2 BECAUSE YOUR PROFITS ARE BELOW THE SMALL EARNINGS EXCEPTION LIMITS.
3) I currently get invoices paid into my main current account. I've kept track of business income and business expenditure, but any profit so far has just been spent like it was my money (ie not relating to the business). Is it wise to get a separate account, and if so how do I "pay" myself money on the balance sheet?
[b]THERE IS NO LEGAL OR TAX REQUIREMENT TO HAVE A SEPARATE BUSINESS BANK ACCOUNT. AT THIS EARLY STAGE THERE IS PROBABLY NO POINT IN SETTING ONE UP. HOWEVER, IF TRADE TAKES OFF, YOU MAY FIND IT BETTER FROM A "CONTROL" POINT OF VIEW TO HAVE A SEPARATE BUSINESS BANK ACCOUNT.
YOU ARE NOT ACTUALLY TAXED ON WHAT YOU "DRAW" FROM THE BUSINESS, BUT ON THE PROFIT GENERATED[/b]
4) How crafty can I be with expenses? For example, given it is a tyre review site, could I write off a set of tyres against profit if I wrote about them? Or I use my home computer to publish the site, so could a new monitor go against profits?
[b]THE TAX RULES STATE THAT YOU CAN OFFSET COSTS INCURRED "WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE TRADE" AGAINST YOUR BUSINESS PROFITS.
BUYING EQUIPMENT FOR USE IN THE BUSINESS IS PERFECTLY ALLOWABLE - ALTHOUGH YOU WOULD OFFSET THESE COSTS AGAINST PROFITS USING THE CAPITAL ALLOWANCES RULES RATHER THAN DESIGNATING THE COST AS A SIMPLE "EXPENSE".[/b]
5) As my current employer pays my PAYEE tax for me, and I will also fill out a self assessment form, is there likely to be issues?
DON@T KNOW WHAT YOU MEAN BY "ISSUES". YOUR INCOME FROM YOUR EMPLOYMENT AND YOUR INCOME FROM "SELF EMPLOYMENT" WILL BOTH GO ON YOUR SELF ASSESSMENT TAX RETURN AND YOUR TAX LIABILITY WILL BE CALCULATED ACCORDINGLY.
6) Am I over thinking this as I'm a tiny little business? I have a habbit of trying to do everything properly!
NO, ALL YOUR QUESTIONS ARE COMPLETELY LEGIT AND YOU WILL NEED TO BE AWARE OF WHAT YOU NEED TO DO WHEN THE SELF ASSESSMENT RETURN FORM NEEDS COMPLETING
Thanks for any help. I'm sure I'll get my head around this eventually, there's just a lot of new rules to understand!
I've been trying to get my head around small business accounting today, as I've now officially registered as a sole trader. To be clear, this is done as I now invoice advertising deals on my website (see profile) and HMRC require it.
The site income will fall below and £4xxx threshold for class 4 NI, and as my costs are quite high there will be very little profit. I will probably be applying for the Small Earnings Exception.
I do however have a couple of questions.
1) As I'm a sole trader I'm taxed on profits only. Given I'm in full time work too, does the rate I'm taxed take into account that income? IE do I still get the £6035 tax free income from my tyre site?
YES - YOU ONLY HAVE ONE TAX ALLOWANCE WHICH IS ALLOCATED AGAINST ALL YOUR INCOME FROM ALL SOURCES.
2) As I'm paying NI via PAYEE, it says I "might" be able to defer class 2 NI until the end of the year. Does this mean I don't have to pay it?
YOU CAN DEFER PAYING CLASS 2 IF YOU ARE ALREADY PAYING THE MAXIMUM YOU CAN PAY UNDER CLASS 1 (EMPLOYMENT). IF YOU HAVEN'T REACHED THAT THRESHOLD, YOU WILL STILL NEED TO PAY THE CLASS 2. HOWEVER, IT SEEMS THAT YOU WILL BE ABLE TO ESCAPE CLASS 2 BECAUSE YOUR PROFITS ARE BELOW THE SMALL EARNINGS EXCEPTION LIMITS.
3) I currently get invoices paid into my main current account. I've kept track of business income and business expenditure, but any profit so far has just been spent like it was my money (ie not relating to the business). Is it wise to get a separate account, and if so how do I "pay" myself money on the balance sheet?
[b]THERE IS NO LEGAL OR TAX REQUIREMENT TO HAVE A SEPARATE BUSINESS BANK ACCOUNT. AT THIS EARLY STAGE THERE IS PROBABLY NO POINT IN SETTING ONE UP. HOWEVER, IF TRADE TAKES OFF, YOU MAY FIND IT BETTER FROM A "CONTROL" POINT OF VIEW TO HAVE A SEPARATE BUSINESS BANK ACCOUNT.
YOU ARE NOT ACTUALLY TAXED ON WHAT YOU "DRAW" FROM THE BUSINESS, BUT ON THE PROFIT GENERATED[/b]
4) How crafty can I be with expenses? For example, given it is a tyre review site, could I write off a set of tyres against profit if I wrote about them? Or I use my home computer to publish the site, so could a new monitor go against profits?
[b]THE TAX RULES STATE THAT YOU CAN OFFSET COSTS INCURRED "WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE TRADE" AGAINST YOUR BUSINESS PROFITS.
BUYING EQUIPMENT FOR USE IN THE BUSINESS IS PERFECTLY ALLOWABLE - ALTHOUGH YOU WOULD OFFSET THESE COSTS AGAINST PROFITS USING THE CAPITAL ALLOWANCES RULES RATHER THAN DESIGNATING THE COST AS A SIMPLE "EXPENSE".[/b]
5) As my current employer pays my PAYEE tax for me, and I will also fill out a self assessment form, is there likely to be issues?
DON@T KNOW WHAT YOU MEAN BY "ISSUES". YOUR INCOME FROM YOUR EMPLOYMENT AND YOUR INCOME FROM "SELF EMPLOYMENT" WILL BOTH GO ON YOUR SELF ASSESSMENT TAX RETURN AND YOUR TAX LIABILITY WILL BE CALCULATED ACCORDINGLY.
6) Am I over thinking this as I'm a tiny little business? I have a habbit of trying to do everything properly!
NO, ALL YOUR QUESTIONS ARE COMPLETELY LEGIT AND YOU WILL NEED TO BE AWARE OF WHAT YOU NEED TO DO WHEN THE SELF ASSESSMENT RETURN FORM NEEDS COMPLETING
Thanks for any help. I'm sure I'll get my head around this eventually, there's just a lot of new rules to understand!
Thanks Eric, I was hoping you'd turn up 
Ok, everything seems a lot clearer now, your advise is always good. Just 2 points I'm a little confused one.
My other question was regarding the self assessment form. Will I have to notify my current employer?
Ok, everything seems a lot clearer now, your advise is always good. Just 2 points I'm a little confused one.
eric said:
THE TAX RULES STATE THAT YOU CAN OFFSET COSTS INCURRED "WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE TRADE" AGAINST YOUR BUSINESS PROFITS.
BUYING EQUIPMENT FOR USE IN THE BUSINESS IS PERFECTLY ALLOWABLE - ALTHOUGH YOU WOULD OFFSET THESE COSTS AGAINST PROFITS USING THE CAPITAL ALLOWANCES RULES RATHER THAN DESIGNATING THE COST AS A SIMPLE "EXPENSE".
I will go off and research capital allowances rules, thanks. I have one question about "creativity" (i can't think of a better term). Items like website hosting is of course a business expense as it is used "WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE TRADE", however items like tyres i buy to review, while are on the car for the "business" i will also get personal benefits out of them. Does this make them void from offsetting? If not, I guess they would go on the balance sheet as a depreciating item and I'd use a straight-line depreciation method over their expected life?BUYING EQUIPMENT FOR USE IN THE BUSINESS IS PERFECTLY ALLOWABLE - ALTHOUGH YOU WOULD OFFSET THESE COSTS AGAINST PROFITS USING THE CAPITAL ALLOWANCES RULES RATHER THAN DESIGNATING THE COST AS A SIMPLE "EXPENSE".
My other question was regarding the self assessment form. Will I have to notify my current employer?
When running a business, it is not uncommon to come across expenses which have a dual nature to them i.e. they are part business related and part private. The Revenue will allow you to offset the business related element of these costs. The tricky part is trying to work out a fair and reasonable method of apportionment.
Regarding your tyres, I would look on them as virtually all business and write them off as "materials" or "purchases".
Regarding what happens if a business makes a trading loss, you may be surprised to learn that the Revenue say a big fat YES to offsetting trading losses against other income (such as PAYE earnings). However, there are some restrictions.
A trading loss can be offset against other income from other sources in the same tax year in which the loss was oncurred.
A trading loss can also be carried back against other income for the three preceding years.
In both these scenarios, tax already paid on the other income can be therefore partially or fully recovered.
Trading losses can also be carried forward against future trading profits from the samre trade only (in other words, not against other income).
Trading profits and Losses need to be calculated in accordance with Generally Agreed Accounting Principles (GAAP) and in accordance with the tax regulations where they differ from GAAP (which they do in some important areas, such as Fixed Asset epreciation and the treatment of leased assets).
Regarding your tyres, I would look on them as virtually all business and write them off as "materials" or "purchases".
Regarding what happens if a business makes a trading loss, you may be surprised to learn that the Revenue say a big fat YES to offsetting trading losses against other income (such as PAYE earnings). However, there are some restrictions.
A trading loss can be offset against other income from other sources in the same tax year in which the loss was oncurred.
A trading loss can also be carried back against other income for the three preceding years.
In both these scenarios, tax already paid on the other income can be therefore partially or fully recovered.
Trading losses can also be carried forward against future trading profits from the samre trade only (in other words, not against other income).
Trading profits and Losses need to be calculated in accordance with Generally Agreed Accounting Principles (GAAP) and in accordance with the tax regulations where they differ from GAAP (which they do in some important areas, such as Fixed Asset epreciation and the treatment of leased assets).
That is interesting, and very surprising Eric!! With a little creativity I could effectively reduce my PAYE tax bill legitimately as items I do for pleasure (buy tyres, track days etc) could be written off against the tyre site, which certainly won't earn enough to cover all these.
I think I'm going to need an accountant then!
I will keep a spreadsheet of all income and expenses that could possibly relate to the business, plus 40% of the income then work it out at the end of the year.
Why do I still get the feeling this site is going to continue to be a working loss for me
I think I'm going to need an accountant then!
I will keep a spreadsheet of all income and expenses that could possibly relate to the business, plus 40% of the income then work it out at the end of the year.
Why do I still get the feeling this site is going to continue to be a working loss for me
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