Self Assessment - Made a Loss, Owe Tax ?
Discussion
Hi.
I've been filling in my first ever self assessment (online) for year 06/04/2016 to 05/04/2017.
I am in full time employment - PAYE, and not a very large wage.
In March 2017 I also set up as a sole trader (part time car sales).
Between setting up and the end of the tax year (05/04/2017) all I did was purchase trade insurance and trade number plates.
It wasn't until after the next tax year started that I purchased my first car to trade.
Which means in that time I made a loss, o expenses, of roughly £1,200.
However, when I got to the stage where I could submit my self assessment it says I owe them roughly £400 in tax!
Surely this can't be right..?
Any advice or suggestions on where I could have gone wrong would be greatly appreciated.
Thanks,
Martin.
I've been filling in my first ever self assessment (online) for year 06/04/2016 to 05/04/2017.
I am in full time employment - PAYE, and not a very large wage.
In March 2017 I also set up as a sole trader (part time car sales).
Between setting up and the end of the tax year (05/04/2017) all I did was purchase trade insurance and trade number plates.
It wasn't until after the next tax year started that I purchased my first car to trade.
Which means in that time I made a loss, o expenses, of roughly £1,200.
However, when I got to the stage where I could submit my self assessment it says I owe them roughly £400 in tax!
Surely this can't be right..?
Any advice or suggestions on where I could have gone wrong would be greatly appreciated.
Thanks,
Martin.
Hi.
Yes, I have my most recent P60 so got the figures from that.
Aah, but thanks for that as looking around that section again has, I think, led me to the issue.
In the 'Tips and other payments not on your P60' section, I've added my employer's pension contribution, which it seems I shouldn't have, as it is on my P60 (it was very late and I was quite tired filling it in last night).
It's now come out at the sum of my voluntary Class 2 NICs, so I think that's right.
Thanks!
Yes, I have my most recent P60 so got the figures from that.
Aah, but thanks for that as looking around that section again has, I think, led me to the issue.
In the 'Tips and other payments not on your P60' section, I've added my employer's pension contribution, which it seems I shouldn't have, as it is on my P60 (it was very late and I was quite tired filling it in last night).
It's now come out at the sum of my voluntary Class 2 NICs, so I think that's right.
Thanks!
Firstly, have you REALLY made a loss? I'll get back to that later.
HMRC allows a sole trader to do a number of things with a genuine trading loss.
a) you can offset the loss against other taxable income in THE SAME TAX YEAR. So, if you are carrying on a trade and have a salary elsewhere on which you already suffered PAYE, you can offset the allowable trading loss incurred against the salaried income. This, of course, reduces the salaried income which would normally imply that you have paid too much PAYE.
You can make the claim for the offset of the loss on the relevant Self Assessment tax return and HMRC will (hopefully) refund you some tax. They sometimes hang on to the overpaid tax and use it to offset against tax liabilities in future years. They may also give you the refund through the PAYE system. They do this by adjusting your PAYE Code so that the PAYE calculated on your salary is reduced until the refund is fully extinguished.
You may not want these messier solutions to getting your tax back so watch out for how they deal with the overpaid tax.
b) you can carry the loss forward to the next tax year but if you do that you can only offset the loss against profits from the same business. So carrying losses forward is a more restrictive form of relief. Sometimes, it is the only option so it has its place.
c) there is also an option to carry a loss back to the previous tax year for offset against previous trading profits. That is obviously not applicable in the first year of trade.
As for whether you made a genuine loss or not, if you buy the product in year 1 but for whatever reason you don't sell it until year 2, that does not mean you have made a loss in year 1. What you have done is bought stock for resale in year 1. The unsold stock is not claimed as an expense in year 1. It is carried forward to year 2 and added to year 2 purchases. Hopefully, the item(s) included in the opening stock will be actually sold in year 2. This means you offset the actual cost of the item against the actual sale proceeds of the item in the year the sale actually happens. This is called the "matching concept" and is pretty fundamental to accounting.
You don't have to pay Class 2 for 2016/17 if your trading profits are lower than £6,025. As you state you made a trading loss, why do you have a Class 2 liability?
HMRC allows a sole trader to do a number of things with a genuine trading loss.
a) you can offset the loss against other taxable income in THE SAME TAX YEAR. So, if you are carrying on a trade and have a salary elsewhere on which you already suffered PAYE, you can offset the allowable trading loss incurred against the salaried income. This, of course, reduces the salaried income which would normally imply that you have paid too much PAYE.
You can make the claim for the offset of the loss on the relevant Self Assessment tax return and HMRC will (hopefully) refund you some tax. They sometimes hang on to the overpaid tax and use it to offset against tax liabilities in future years. They may also give you the refund through the PAYE system. They do this by adjusting your PAYE Code so that the PAYE calculated on your salary is reduced until the refund is fully extinguished.
You may not want these messier solutions to getting your tax back so watch out for how they deal with the overpaid tax.
b) you can carry the loss forward to the next tax year but if you do that you can only offset the loss against profits from the same business. So carrying losses forward is a more restrictive form of relief. Sometimes, it is the only option so it has its place.
c) there is also an option to carry a loss back to the previous tax year for offset against previous trading profits. That is obviously not applicable in the first year of trade.
As for whether you made a genuine loss or not, if you buy the product in year 1 but for whatever reason you don't sell it until year 2, that does not mean you have made a loss in year 1. What you have done is bought stock for resale in year 1. The unsold stock is not claimed as an expense in year 1. It is carried forward to year 2 and added to year 2 purchases. Hopefully, the item(s) included in the opening stock will be actually sold in year 2. This means you offset the actual cost of the item against the actual sale proceeds of the item in the year the sale actually happens. This is called the "matching concept" and is pretty fundamental to accounting.
You don't have to pay Class 2 for 2016/17 if your trading profits are lower than £6,025. As you state you made a trading loss, why do you have a Class 2 liability?
Thanks for that Eric, much apreciated.
I'm sure you've already gathered, I'm no accountant, and haven't done anything like this before.
I'll have a look into some of the points you've pointed out when I get home tonight (I've not submitted the assessment yet).
One thing, though, I didn't actually buy stock in this period, it was purely setting up costs. I bought the first car for stock after the end of the tax year.
I am aiming to become fully self-employed at some stage (the future of my day job is a bit up in the air
at the moment) so I will want to pay voluntary Class 2 then, maybe I'm jumping the gun a bit here.
Thanks!
I'm sure you've already gathered, I'm no accountant, and haven't done anything like this before.
I'll have a look into some of the points you've pointed out when I get home tonight (I've not submitted the assessment yet).
One thing, though, I didn't actually buy stock in this period, it was purely setting up costs. I bought the first car for stock after the end of the tax year.
I am aiming to become fully self-employed at some stage (the future of my day job is a bit up in the air
at the moment) so I will want to pay voluntary Class 2 then, maybe I'm jumping the gun a bit here.
Thanks!
No such thing as "Voluntary Class 2 NI". If you want to pay NI voluntarily, you are supposed to do so under the Class 3 NI provisions.
Class 2 is payable when your taxable trading profits exceed £5,965 for tax year 2016/17 and £6,095 for 2017/18.
If you already have employment income, I expect you are currently paying Class 1 NI as a deduction on your salary, so there is no need to pay Class 2 or Class 3. as you are already making NI contributions.
If you have initial set up costs in 2016/17, then most of those can be claimed and contribute to a trading loss for 2016/17. That implies you have no profit for 2016/17 and therefore no Class 2 NI liability. If the software is calculating a Class 2 NI, you will need to check that you are entering the trading details properly.
If you have made a loss for 2016/17, you can offset that loss against your other income for 2016/17 and get back some of the PAYE you suffered in 2016/17.
There are some limits in reclaiming "set up" costs. Tax rules specifically prohibit claiming what are known as "Formation Expenses". These tend to be more common when setting up a limited company so don't generally apply to sole traders.
Class 2 is payable when your taxable trading profits exceed £5,965 for tax year 2016/17 and £6,095 for 2017/18.
If you already have employment income, I expect you are currently paying Class 1 NI as a deduction on your salary, so there is no need to pay Class 2 or Class 3. as you are already making NI contributions.
If you have initial set up costs in 2016/17, then most of those can be claimed and contribute to a trading loss for 2016/17. That implies you have no profit for 2016/17 and therefore no Class 2 NI liability. If the software is calculating a Class 2 NI, you will need to check that you are entering the trading details properly.
If you have made a loss for 2016/17, you can offset that loss against your other income for 2016/17 and get back some of the PAYE you suffered in 2016/17.
There are some limits in reclaiming "set up" costs. Tax rules specifically prohibit claiming what are known as "Formation Expenses". These tend to be more common when setting up a limited company so don't generally apply to sole traders.
superlightr said:
perhaps you need to use/appoint an accountant.....
As things have since been moving along with stock coming and going, I think next year I will!I am finding it quite interesting, though, so I'm not regretting giving it a go this time.
Edited by Martin350 on Tuesday 17th October 13:07
Martin350 said:
superlightr said:
perhaps you need to use/appoint an accountant.....
As things have been moving along with stock coming and going, I think next year I will!
Hope the enterprise works well for you.
I'm trying to fight the feeling that you're absolutely right! 
The thing with me is, as it's my own (very small) business I want to be aware of and understand everything that is happening with it as much as possible.
Partly because I find it interesting and partly because I feel I should know.
And thank you!
The thing with me is, as it's my own (very small) business I want to be aware of and understand everything that is happening with it as much as possible.
Partly because I find it interesting and partly because I feel I should know.
And thank you!
There is nothing wrong in finding out the tax and accounting rules that apply to your business. The problem is that there are so many. Accountants don't spend four plus years getting their heads around all this, and then the rest of their lives keeping up with the constant changes for nothing.
I find it hard - and I've been in this game for 40 plus years.
I find it hard - and I've been in this game for 40 plus years.
Yeah, I understand that.
I guess I naively thought that as I had virtually nothing going on in the last tax year it would be quite a simple process.
Of course, it isn't quite as simple as I'd hoped.
I thought lots of people do their own self assessments, so I thought (insert Clarkson voice) how hard can it be?
I wonder how many people doing it would be better off have an accountant do it..?
I guess I naively thought that as I had virtually nothing going on in the last tax year it would be quite a simple process.
Of course, it isn't quite as simple as I'd hoped.
I thought lots of people do their own self assessments, so I thought (insert Clarkson voice) how hard can it be?
I wonder how many people doing it would be better off have an accountant do it..?
Eric Mc said:
No such thing as "Voluntary Class 2 NI". If you want to pay NI voluntarily, you are supposed to do so under the Class 3 NI provisions.
Sorry, Eric, that's not correct (albeit Class 3 may be due in this particular situation):https://www.gov.uk/voluntary-national-insurance-co...
OK, I have seen people pay Class 2 when they shouldn't really have.
And HMRC never really does anything about it.
And the plan is to abolish Class 2 anyway because it is pretty pathetic.
They want sole traders to get their entitlements through their much larger Class 4 contributions which, up to now, have not been taken into account for entitlement purposes.
But why pay a type of National Insurance when you are already paying and getting your entitlement through your Class 1 contributions?
The legislation around NI is a gigantic mess. Hammond tried to resolve some of it in the March budget and got into so much trouble over it, he had to reverse his proposals.
And HMRC never really does anything about it.
And the plan is to abolish Class 2 anyway because it is pretty pathetic.
They want sole traders to get their entitlements through their much larger Class 4 contributions which, up to now, have not been taken into account for entitlement purposes.
But why pay a type of National Insurance when you are already paying and getting your entitlement through your Class 1 contributions?
The legislation around NI is a gigantic mess. Hammond tried to resolve some of it in the March budget and got into so much trouble over it, he had to reverse his proposals.
Eric Mc said:
If you have initial set up costs in 2016/17, then most of those can be claimed and contribute to a trading loss for 2016/17. That implies you have no profit for 2016/17 and therefore no Class 2 NI liability. If the software is calculating a Class 2 NI, you will need to check that you are entering the trading details properly.
If you have made a loss for 2016/17, you can offset that loss against your other income for 2016/17 and get back some of the PAYE you suffered in 2016/17.
There are some limits in reclaiming "set up" costs. Tax rules specifically prohibit claiming what are known as "Formation Expenses". These tend to be more common when setting up a limited company so don't generally apply to sole traders.
How is there a loss in 16/17 if the trade didn't start until 17/18? Expenses incurred in 16/17 would generally be classed as pre-trading expenses, and treated as if they were incurred on the date trade actually started, ie during 17/18. If you have made a loss for 2016/17, you can offset that loss against your other income for 2016/17 and get back some of the PAYE you suffered in 2016/17.
There are some limits in reclaiming "set up" costs. Tax rules specifically prohibit claiming what are known as "Formation Expenses". These tend to be more common when setting up a limited company so don't generally apply to sole traders.
It depends on what the costs were about. HMRC has no hard definition as to when trading actually starts. A number of actions can be taken as an indication that trading has started -
opening a business bank account
launching an advertising campaign
incurring rental costs on a trade premises
entering into business contracts
taking on staff
making a sale
opening a business bank account
launching an advertising campaign
incurring rental costs on a trade premises
entering into business contracts
taking on staff
making a sale
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