Sole Trader Accounting

Hi there I am photographer and about to register as a sole trader, I was just wondering if anyone would be willing to give advice on expenses.

  1. If you claim expenses, does that mean HMRC Give you money back ?

  2. HMRC gives reduces your tax bill?

  3. HMRC Give you money ?

Also how much money do I need to earn to pay tax and national insurance ?

Comment any other advice you think would be helpful

TIA

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Hi @Damien_Ross

Generally what’s meant by expenses (known as ‘Allowable Expenses’) is approved categories of costs that you can use in your business that will reduce your profit.

For example, of your turnover was £40,000 and you had allowable expenses of £10,000, your taxable profit is only £30,000 - you would only need to pay tax on this.

I’m not an accountant, so it’s always worth checking what is allowable and what isn’t, but HMRC has a useful guide here that’s worth checking out.

I hope that helps!

Being self-employed (or a sole trader) means you can earn up to £10,600 in this current tax year (2015/16), free of income tax. If your income goes beyond that you will be liable for tax on the amount above this threshold.

There a large number of expenses that can be classed as allowable (according to hmrc). HMRC say that ‘costs you pay with the sole purpose of earning business profits are allowable expenses’. There is a very useful guide - www.gov.uk/government/uploads/system/uploads/attachment_data/file/367279/expenses-allowances.pdf

Basically, allowable expenses can be deducted from your taxable net profit. Simple example: your income stands at £9000 and you purchase some materials for the business costing £500. Putting this through the books will reduce your net profit by the £500. It’s only when you come to do your self-assessment return that the tax man will determine whether you owe any tax, but keeping accurate records will enable you to work this out anyway.

Again, a useful guide here regarding national insurance etc
https://www.gov.uk/self-employed-national-insurance-rates

Hope this helps!

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Thank you very much :smiley:

@gardenman_2803

I really dont think ill earn 10600 in a year so what do i do ? also what is this tax year ? I started trading on the 9th of this month so what do i do ?

Have you registered your sole trader business with hmrc? Assuming you have, when we go past the end of this current tax year (6th April 2015 to 5th April 2016), hmrc will almost certainly write to advise of a need to submit a self-assessment return. Provided you have records of income and allowable expenditure and the net profit for taxation falls under this £10,600 threshold, you will not be liable to pay any tax. Indeed, when you do the return, you can do an ‘amended return’, rather than go through the whole process. You will have till the end of Jan 2017 to file this online.

Okay Thank you,

Ive found an online take home pay calculator on an accounting website and I put in £500 monthly income and it says I pay no tax on that, could you confirm that @gardenman_2803

For a sole trader business the “take home pay” is irrelevant, you are taxed on the total book profits of the business (income minus allowable expenses).

@ian_roberts hi could you explain this more

Hi @Damien_Ross

You have 2 main figures - gross profit and net profit.

Gross profit is your turnover (income) minus your cost of goods (things such as production, raw material etc).

Net profit is your gross profit minus the rest of your allowable expenses. Allowable expenses are what HMRC defines as suitable for a business. For example, rent and broadband are allowable, whereas a 6 week leisure holiday in the sun may not be.

As a sole trader, it’s your net profit that the tax man takes are your income and this is what you would be taxed on.

@QFSupport tell me if this doesnt sound good,

What I am planning on doing is any money a client gives me subtract 30% away from it and put it in a sperate bank account, 30% will cover my taxes. The rest of the money is for me to spend.

If I buy anything for the business classed as an expense, ill keep note of it using QF and upload a receipt.

Then when it comes to paying HMRC I pay him what I have in the seperate bank account and then they can repay me anything I have over paid ?

Thanks

Hi @Damien_Ross

Keeping a note of your purchases is great. You should keep an accurate record including any original documents (uploading them to the receipt is fine providing they’re clear and complete).

As for your bank account set up and putting money aside, I think you’d be better speaking to an accountant or business adviser. There are some on this community forum but you may be better asking on sites such as accounting web

Yeah thats great @QFSupport although, you dont sound to sure about my accounts…

I can’t advise on any set up unfortunately, which is why I would suggest speaking to someone more qualified than me (like an accountant).

But as I said, there are some on these forums, so you may find someone will come back with a suggestion or comments.

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@QFSupport Thats great thanks

I would turn that question around and ask - ‘What does your Cash Flow forecast say?’ as that should give you a good grounding in terms of what you should be thinking in terms of tax planning etc.


In basic terms:

1]

  • What are your predicted (forecast) costs of running the business for the next 12mths?
  • What is your predicted turnover (sales) for the next 12mths?

2]

Take the 1st figure away from the second. This should give you a new figure (as QF Support outlined) which is termed as your ‘Gross Profit’. Simply the total sales - the direct costs of the goods you sold.

3]

  • Add up your total indirect costs which could be things such as trade association membership, training, advertisement etc.

4]

  • Take this figure away from the amount in 2] (your Gross Profit). This will give you a 3rd amount and this figure is termed as your ‘Net Profit’.

5]

Looking at this last Net Profit figure is it > £10,600?

If yes - you will be required to pay tax at the associated rate on the amount that falls above this threshold.
If no - you will not be liable for any income tax for the period.

What is deemed allowable (and therefore should be recorded in Quickfile) as a direct and indirect cost (i.e. a expense to you in running the business) is documented and driven by HMRC and there are also subtle differences/expectations of what is expected depending upon the nature of the business. The guides linked by Gardenman previously should give you a good steer.

As a photographer for example I would think things such as printing costs, camera lenses, and travel expenses to venues would all fall into direct and indirect costs for the business, but the purchase of a 12 acre beach house property in the Bahamas would sadly not! :smirk:

A cash flow forecast should give you a good indication of what your Tax Liability is likely to be and also what level of investment you may require for the next 12mths - it is entirely feasible (and quite likely for new businesses) that the Net Profit figures are actually negative values. I.e. it will cost you more to trade for the first 12mths than you actually expect to generate in sales.

You can create a forecast using a basic spreadsheet and there are many example templates available online.

If you think you will struggle to complete one and/or if you have some very specialist costs that you aren’t sure where to include I would echo the suggestions of getting professional help, such as from a Business Adviser before you go any further.

Hope this is helpful.

1 Like

@Scruffies That has help ALOOOOTTTTT :smiley: Thank you very much. [quote=“Scruffies, post:16, topic:10330”]
3]

Add up your total indirect costs which could be things such as trade association membership, training, advertisement etc.
[/quote][quote=“Scruffies, post:16, topic:10330”]
as a direct and indirect cost (i.e. a expense to you in running the business)
[/quote]

Refering to the quotes above (in bold) what is the difference between “indirect and direct” ? I have already purchased a domain name for 2 years and also top up on QF for snail mail.

Thanks
Damien

Your most welcome - happy to help :grinning:

Direct Cost

Put simply - what are the costs required to your business, each time you generate a sale.

For businesses that produce a physical product, it is the costs of the raw materials to manufacture the item.
E.g. a sandwhich shop would list bread, cheese, ham, mayonaisse etc. as direct costs as these are the raw materials that go into making their goods.

Indirect Costs

Simply everything else that doesn’t fit in the above category. I.e. the supportive items that underpin the business to help generate those sales.

Taking the sandwhich shop analogy again - banking fees, website costs, buiness rates and advert leaflets could all be examples of indirect costs.

The reason for splitting them out this way is to better understand and control your costs & profits.

For example say I can buy a widget for £10 and resell it for £100 - I would be making £90 per sale (90% margin/900% gross profit)

This looks great but without the associated business costs it is pretty meaningless - for example if it cost £70 to ship the widget from deepest, darkest Peru, my net profit would be: (£100 - £70 - £10)
+£20 (50%margin /100% net profit)


At the end of the day the idea is to simply help you to better plan for the next 12mths so what you include & how you class each of the costs is pretty much up to you, but having just completed our first 12mths of trading, I can say its definately best to over estimate the costs and try to be as realistic as possible.

  • How many hours will you be able to realisically work?
  • Do you already have approved work/bookings in the pipeline?
  • How much will it cost for travel, insurances, accomodation etc.
  • What is a realistic price for my product/service?
  • How long will it take to build up the business?

On this last point as an example, in our forecast we had predicted a 3mth build up and then a steady increase in sales/customers from then on. In reality it was nearer 6mths before things started to get going which meant we had to hit our reserves pretty hard to cover our indirect costs (rent, power, insurances etc.) which all still needed paying despite the lack of customers.

Once you’ve completed the report it should give you a good indcation of what you’re likely to expect over the coming 12mths, what level of investment (cash) you’ll need, how this will flow month to month and in a broad sense wether you’ll likely make a profit or loss come year end.

The final piece of advice I would say is to keep going back to this every few months and comparing your forecast to your actual costs.

If you create a duplicate of the template once you’ve finished, and then empty all the values, you can go back every few months and populate this blank template with your actual figures - I.e your actual sales, actual travel costs etc.

Then ask yourself:

  • How does this compare to my forecast?
  • Are there big one off costs/sales I hadn’t planned for?
  • Do I need to adjust my forecast for the next period?
  • How is my cash flow (bank balance) - do I have sufficient funds to cover the next period?
  • What is my likely Tax Liability?

This last point (your original question) is fairly straight forward. If say after Q1 you have retained a profit of £3k and costs have all been in line with what you forecast, you can extrapulate that you will likely have a profit of £12k by the end of the year.

This would roughly mean that you would be required to pay Income Tax as follows:

  • Net Profit: £12,000
  • Personal Allowance: £10,600
  • Taxable amount: £12,000 - £10,600 = £1,400
  • Income Tax payment 2016: £1,400 x 20% = £280

These are very very loose figures just for an illustration obviously - I am not a trained accountant or a tax specialist.
Also the amount you pay HMRC and how could also be different depending on your personal circumstances.

Please ensure you are 100% comfortable with the basic principles before you push forward. If in doubt spending some extra time and money now on getting some professional advice, may save you many hours of headaches and financial strife/penalties in the future.

Best of luck! :wink:

John.

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Hi, thank you this has helped a lot.