Small side business, benefits of sole trader

[MrChips]

I know it's quite a common topic but the searches i've done seem to concentrate on people going full time into a new business.

I'm looking at setting up a small business (expected turnover less than 5k, profit around 3.5k depending on the cost of insurance) by renting out my car detailing studio/equipment, as well as doing some full car detailing myself. It would be based at home (garage is now converted to a decent studio standard). The aim is to provide a useful small regular income that I can spend, rather than build up a bigger business.

I have a full time PAYE job that i'll be keeping, and already do self assessment due to our rented BTL, which just tips me into the higher rate bracket at the moment. Due to the low figures involved I believe the simplest option is to just register as a sole trader, and declare the profits.

I believe I can offset losses against the income, however I don't believe I could offset anything that i've already spent, i.e. garage work and products?
If not, are there any other benefits to the sole trader option over looking to set up a ltd company?

p.s. I'll be seeing a local accountant to talk through in detail so a lot of this is just initial musings at the mo!

[Eric Mc]

Most business related costs (there are some restrictions) incurred in establishing the business can be offset against the business income, including in some cases, costs incurred before the business actually started trading.

Not all of these costs can be simply deducted against the business income in full. For example, if the costs are of a "capital" nature i.e. equipment, office furniture, vehicles etc, then these care claimed through the Capital Allowance claim system. In this case, rather than offset the full cost, a percentage of the cost is claimed each year. The percentage claimed depends on the rate applicable to the type of asset.

The good news is that, at the moment, most ordinary business plant and machinery and equipment can claim Capital Allowances at 100%.

If a trading activity generates a loss, it can either carry the loss forward for offset against future trading profits or it can carry the loss sideways for offset against any other income in the tax year the loss was incurred. This means that if you have other income on which tax has been paid (such as a salary taxed under PAYE), offsetting the business loss against "Other Income" can mean you cioyuld reclaim some of the PAYE already deducted.

An accountant should put you straight on all these matters.

[markpro]

If your garage is being used for business might be classifiable as an expense.

Best to speak to an accountant before doing anything.

[TooMany2cvs]

MrChips said:

I'm looking at setting up a small business (expected turnover less than 5k, profit around 3.5k depending on the cost of insurance) by renting out my car detailing studio/equipment, as well as doing some full car detailing myself. It would be based at home (garage is now converted to a decent studio standard).

So you'd be renting your home garage out for commercial use?

I can see problems in that...

[dartissimus]

TooMany2cvs said:

MrChips said:

I'm looking at setting up a small business (expected turnover less than 5k, profit around 3.5k depending on the cost of insurance) by renting out my car detailing studio/equipment, as well as doing some full car detailing myself. It would be based at home (garage is now converted to a decent studio standard).

So you'd be renting your home garage out for commercial use?

I can see problems in that...

Planning permission for change of use, in practical terms, not strictly necessary unless there's a problem/complaint about comings and goings.
Given the relatively small scale you should be OK.
Easiest to stay below the radar and rent/lend out informally; isn't that how the real world works. (no judgement implied)
Also isn't there an amount one can earn before being termed a business?

[TooMany2cvs]

dartissimus said:

Also isn't there an amount one can earn before being termed a business?

Not really. Have a read about what HMRC deem "badges of trade".

[Eric Mc]

Renting a property you own to your own business is a bit pointless.

Yes, the business can claim the rental costs as an expense.

But the individual also has to declare the rental income as "Income" - and pay the appropriate tax on that income.

So it kind of cancels itself out.

[MrChips]

VitzzViperzz said:

How are you managing the BTL? I hear it a pretty tough market.

Oddly been ok so far except for some difficulties remortgaging due to the change in stress test criteria. We're not experienced landlords but so far 3 decent sets of tenants and decent enough rent.

TooMany2cvs said:

So you'd be renting your home garage out for commercial use?
I can see problems in that...

Ok, care to elaborate on what problems you foresee?

If say the use of the space by someone else is around 5% compared to 95% my own use, then a change of use seems overkill. There is no material change to the building, nor issues around access/parking etc so from a planning side i'm happy so long as my neighbours are. We're not talking cars/people coming and going every day of the week, it's single figures per month.

My main concerns were around the income tax side of things, and insurance inc public liability. I've spoken to a few insurers who would cover in general but i'd need to be either a sole trader or a ltd company. Clearly i don't want to do anything criminal inc avoiding the tax side of things but do appreciate the general replies esp you Eric

[KevinCamaroSS]

MrChips said:

TooMany2cvs said:

So you'd be renting your home garage out for commercial use?
I can see problems in that...

Ok, care to elaborate on what problems you foresee?

If say the use of the space by someone else is around 5% compared to 95% my own use, then a change of use seems overkill. There is no material change to the building, nor issues around access/parking etc so from a planning side i'm happy so long as my neighbours are. We're not talking cars/people coming and going every day of the week, it's single figures per month.

If you are using your garage for a commercial operation you may very well need change of use from the authorities. Does not matter whether it is you, or somebody else using it.