self employed losses against employed earnings.

SHIFT_IT

If you are employed full time and are trying to build up a sole trader self employed business in your spare time before breaking the ties of employment are you able to set losses in the self employment against earnings in employment.

I have been using my hard earned (taxed) money from 9 to 5-ing to pay for kit and space to carry on...

i'll be filling in the employment and self employment portions of the SA100
It seems it can be filed that way in the self assesment form so does that mean it's allowed...or is it down to me not to fill it in that way...eeesh

please help before I make a boo boo...

CIS

Your doing it correct

When HMRC calculate your tax , they will total any income from employment and add any self employment income and then deduct your Self employed expenses, the resultant figgure is the taxable earnings.

Justin_Credit

Just a point about expenditure here.

Any single item of expenditure on kit etc. costing more than £100, I believe, is usually counted as Capital Expenditure, so the full cost cannot be claimed on it in the year it was purchased. Usually 40% in the first year then 25% of remaining value after that.

I think that's all correct but I'm sure somebody will correct me if I'm wrong.

HTH

Regards JC

pchelpman

Justin_Credit wrote:

Just a point about expenditure here.

Any single item of expenditure on kit etc. costing more than £100, I believe, is usually counted as Capital Expenditure, so the full cost cannot be claimed on it in the year it was purchased. Usually 40% in the first year then 25% of remaining value after that.

I think that's all correct but I'm sure somebody will correct me if I'm wrong.

HTH

Regards JC

Not quite, JC, nearly. It's not £100 or any other monetary amount that differentiates between revenue and capital expenses. it's what the item actually IS that decides.

Expenses can be deducted if they are "wholly and exclusively" for the trade being conducted.

If the expense is on "non enduring" items such as phone calls, stationery, postage, motor running costs, public transport/taxi/couriers etc. - then these are classified as "revenue" costs. They are deductible as straightforward expeses from any trading income.

On the other hand, expenditure on "enduring" assets for the business - cars, computers, electrical power tools and so on - do NOT qualify for a full claim. These are "capital" items which qualify for a special tax depreciation allowance called "capital allowances". Depending on the nature of the item involved there are differing rates of capital allowances claimable.

Next ... deduct the resulting total capital allowance claims from the trading profits.

What you are left with at this point is either an overall profit or, most likely in your case, a loss. As CIS says you can claim this loss against your other taxed income of the same tax year and claim a refund.

If you paid tax at, say, 22% that year you will get a refund probably of 22% of the loss figure.

If you were a higher rate taxpayer in earlier tax years you have the option to carry the loss backwards 3 years and have it set against taxed income of that earlier year. In such a case you may achieve a refund at 40%.

This can be a minefield so seek professional advice from someone who knows about tax relief for loss claims. There are several options and you need to choose which is the best one for your circumstances.

All the best.

Justin_Credit

Thanks for that pchelpman, I did realise that any capital expenditure had to be on enduring assets but I certainly didn't make that clear in my earlier post.

I don't know where I got the figure if £100 pounds from, but am sure I have read it somewhere.

Anyway, that leads me on to another question. During the current tax year I have bought several items, although not of great value, mainly hand tools. I have so far recorded these as revenue expenditure, should I class these as capital expenditure as they should last for many years? One item for example was a spirit level costing £14.

Regards JC

pchelpman

Hi JC

should I class these as capital expenditure as they should last for many years?

No ... my view centres on what the item actually IS.

Ask yourself this ... are you likely to be able to sell those things and get some decent return on them?

I think not in the case of general hand tools and things like that spirit level. They don't usually have any "enduring monetary value" to anyone except you.

If I were you I'd carry on claiming those as revenue expenses ... maybe under the heading "loose tools & materials". That's a common name.

cosmokramer2004

Apologies if I'm being thick, but if I could continue the discussion above with a couple of similar questions:

I registered as self-employed on January 20th 2006. I received a £1000 startup grant in early February. To prepare for self-employment I purchased several items in November 2005 including PC's, stationery and computer software before I registered as self-employed and before I began trading. I made no taxable income from my ventures for the tax year ending April 5th 2006 (not counting the grant). I also make voluntary class-2 NIC's.

The questions I have are:

Do the purchases I made count as capital expenditure/overheads even though they were before my trading date?

If they do count, can I offset them against any income I make in the 2006-2007 tax year instead of/aswell as this year?

Also, I read that the £1000 startup grant does not count as taxable income and does not need to be included in profit/loss accounts?

To put a hefty spanner in the works I just started full time employment at the beginning of March although I have not been paid yet (first payment will be 15th April). So will I have to declare this employment on the Self Assesment Tax Return for 2005-2006 and also, will I still be required to make class-2 NIC's for my self-employment on top of any NIC's I make through PAYE?

Yikes, that's a lot of questions!

Cook_County

1. The first question related to losses offsetting against employment income. The losses can indeed be set against current years earnings, but usually it is beneficial to carry these back against prior years earnings. In choosing one's accounting year-end start-up losses are often an important part of the choice. I would take advice on this. Do not forget that for Class 4 NIC purposes losses remain to be carried forward even if set against other income for tax.

2. Almost all business must compute income and expenditure on an accruals basis (as against a cash basis). This may need to be accounted for in figuring losses.

3. Pre-trading expenses are indeed allowable. Capital costs would of course qualify for capital allowances, but these may themselves need to be pro-rated depending on your basis period.

4. Deferment of Class 2 NIC is often sensible in the start-up phase.

I agree 100% with pchelpman that there is no substitute for good advice.