self employ newbie question

daxu

Hello,

Not sure if it is the right place to ask, but I did not find a better forum.

Now I am employed by a company but the pay is not good. To make bit for money, I started to do direct sales last month. I sold 400£ worth goods last month and made 100£ profit. I am confident to make similar sells every month, so yearly I expect to get 1200£ from it.

The direct sales company said that I should become self employed for this. My questions are:
1. For this kind of money, do I need to register VAT for it? What is the benefit of register one?
2. As it is only 1200£ and I do not want to pay income tax for it, I am thinking of claim expenses (e.g. travel, elec, water,gas, tele, broadband, house (as I use my living room to do it) etc) to make my profit 0£. Is my idea right?
3. If I do want to put the 1200£ into my own pocket, how much tax I need to pay (I am a basic rate tax payer)?

Can someone guide me through this?

Many Thanks

Jerry

CIS

On that income , its well below the VAT threshold (around £5k p/m) and probably not worth the time and hassle of registering.

Any profit will be added on to your employed income and taxed by whatever bands the income falls in to, this will need to be done by way of an annual tax return.

Remember that any expenses have to be justifiable and entirely for business use, otherwise you'll leave yourself in a spot if HMRC decide to come asking. I would have thought that having expenses way out of proportion to income will make it more likely that they would select you for a spot check.

Debt_Free_Chick

daxu wrote:

Hello,

Not sure if it is the right place to ask, but I did not find a better forum.

Now I am employed by a company but the pay is not good. To make bit for money, I started to do direct sales last month. I sold 400£ worth goods last month and made 100£ profit. I am confident to make similar sells every month, so yearly I expect to get 1200£ from it.

The direct sales company said that I should become self employed for this. My questions are:
1. For this kind of money, do I need to register VAT for it? What is the benefit of register one?

No requirement to register for VAT, but some VAT schemes are optional. Personally, I wouldn't bother at that level.

2. As it is only 1200£ and I do not want to pay income tax for it, I am thinking of claim expenses (e.g. travel, elec, water,gas, tele, broadband, house (as I use my living room to do it) etc) to make my profit 0£. Is my idea right?

Yes, but only if you want to go to prison for tax evasion

you can claim for the legitimate expenses of running the business, but you can't make expenses up or inflate the amounts to get a profit of nil. Your expenses must be "real" and supported by receipts or other paperwork.

3. If I do want to put the 1200£ into my own pocket, how much tax I need to pay (I am a basic rate tax payer)?

You don't pay tax as you go along. You need to take some of your income and put it in a savings account to pay the tax bill when you get it. It works like this ... you do your accounts for the last year and then use figures from your accounts to go on to you tax return for the year ending 5 April 2006. Inland Revenue will then send you a bill for the tax you owe and add on half that amount as an on account payment for this year's tax. Next year, you'll pay the remainder of this year's tax together with an on account payment for next year's tax.

Also .. you might currently be a basic rate tax-payer, but you need to check whether this income pushes you into the higher rate tax bracket. You need to add your profit to your employed income and look at the total - this determines the tax you pay.

Assuming that your profit from this self employed work does not take you over the basic rate band, then you will pay 22% tax on your profit. Note, that your profit is what you call income, but with the allowable expenses deducted.

I would urge you to book an appointment with the small business adviser at your local tax office and also have a look at your local Business Link - both will help you with accounting & tax records.

HTH

daxu

I am planning my yearly expenses like this:
1. broadband: 120£
2. telephone: 120£ for line rental
3. gas, electric, water: total bill is around 800£
4. travel: 100£ for public transports purly for this
5. Training: I am thinking of learning driving as it can be quite far for good delivery. easily 500£ for pass a driving test.
6. Other small expenses: 50-100£ per year

The total utility cost for me is around 1000£. As I only work 4-5 hours for this. I am thinking of claiming 250£ for utilities. Plus travel and small expenses, it would be like 400£.
To pass driving test, total cost will be 600£. I am thinking of add all the cost in, as this business really needs driving.
So totally it comes like 1000£ expenses.

Is my calculation right or stupid?

Thanks

Jerry

Debt_Free_Chick

daxu wrote:

I am planning my yearly expenses like this:
1. broadband: 120£
2. telephone: 120£ for line rental
3. gas, electric, water: total bill is around 800£
4. travel: 100£ for public transports purly for this
5. Training: I am thinking of learning driving as it can be quite far for good delivery. easily 500£ for pass a driving test.
6. Other small expenses: 50-100£ per year

The total utility cost for me is around 1000£. As I only work 4-5 hours for this. I am thinking of claiming 250£ for utilities. Plus travel and small expenses, it would be like 400£.
To pass driving test, total cost will be 600£. I am thinking of add all the cost in, as this business really needs driving.
So totally it comes like 1000£ expenses.

Is my calculation right or stupid?

Thanks

Jerry

I'm not convinced that the cost of passing your driving test is an expense "wholly and exclusively" for business purposes. Your business is running at the moment without you making the deliveries. And the end result would have personal advantages as well as business advantages.

The rule of thumb for utilities is firstly to charge 1/y of the household cost. y is the total number of rooms in the house and assumes that you have one of those rooms as a home office.

Both the broadband & the telephone ought to be dedicated business lines - otherwise, you can only charge a proportion.

Even if you could claim for the driving test (and I don't think you can) this would still only give you expenses of £1,000 in this year. After that, you would be down to just the normal running expenses, so would generate a taxable profit in future years.

At the very least, you should book an appointment with your local tax office and talk this through.

daxu

Hi Thanks "Debt_Free_Chick". You are a star!

I certainly will talk to tax office, but I just want to have some basic ideas before I do that.
About the broadband and telephone, I will share my business use and non-business use. Do you know what proportion can I claim back?

Also for the driving, can't I claim it as a training cost or something? If I can't claim all of them, Do you know what proportion can I claim back?

I read some books and googled a lot yesterday but got totally confused. Today I feel like that I learned quite a lot within 1-2 hours. Thanks.

Debt_Free_Chick

daxu wrote:

Hi Thanks "Debt_Free_Chick". You are a star!

I certainly will talk to tax office, but I just want to have some basic ideas before I do that.
About the broadband and telephone, I will share my business use and non-business use. Do you know what proportion can I claim back?

No hard and fast rules, but if you are working one day a week and you do that every week for 52 weeks (unusual, as you would surely have some holiday?), then over the year I would put in a claim for 52/365 of the cost.

Also for the driving, can't I claim it as a training cost or something? If I can't claim all of them, Do you know what proportion can I claim back?

The problem is that it doesn't seem absolutely necessary for you to drive to do your job - so the Inland Revenue would say that this expense is not absolutely necessary for business purposes. But ask the local tax office.

I read some books and googled a lot yesterday but got totally confused. Today I feel like that I learned quite a lot within 1-2 hours. Thanks.

Very flattered and a little embarrassed but thank you

Aark

daxu wrote:

Also for the driving, can't I claim it as a training cost or something? If I can't claim all of them, Do you know what proportion can I claim back?

The problem is that no part of the costs of learning to drive is wholly and exclusively for the purposes of the trade. Therefore there is no allowable expense.

daxu

Thanks for everyone's reply.

Then how about the cost of buying a car? My work is very close to the place I live, so business usage, e.g. delivery goods, meet customers etc will be very high for the car (like 75% maybe).

I read some books yesterday and seems that I can calim the business mileage for it. But can I put the cost of buying the car as a business expenses, expecially if I buy it second hand (my friend is selling a quite nice ford focus ;-) )?

If I can claim, then suppose I bought it for 3000£,annually I earn 1200£ from the part time business and my salary from the employer is 20000£. Does it mean that I should just pay tax on 18200£ (20000+1200-3000=18200) for the first year?

tyllwyd

Debt_Free_Chick wrote:

The rule of thumb for utilities is firstly to charge 1/y of the household cost. y is the total number of rooms in the house and assumes that you have one of those rooms as a home office.

I hope you don't mind me butting in with a question - I'm self-employed from home, and I was going to claim back a proportion of utilities, but then I got worried in case it led to capital gains tax problems if I came to sell the house.

Since then, someone told me that it was OK as long as you didn't claim back more than one-fifth of the bills, and someone else said you should make sure that the home office was also used for another purpose, maybe by keeping a sofa bed in it (although ours isn't big enough for that). Does anyone know what the rules are?

Debt_Free_Chick

tyllwyd wrote:

someone told me that it was OK as long as you didn't claim back more than one-fifth of the bills, and someone else said you should make sure that the home office was also used for another purpose, maybe by keeping a sofa bed in it (although ours isn't big enough for that). Does anyone know what the rules are?

There are no hard & fast rules here... your expenses (for the business) must be reasonable.

There is a theoritical argument that a room used solely for business purposes could render that part of the property as "business". AFAIK, you don't need to go as far as leaving a sofa bed in that room ... you only need to have personal effects in there e.g. the papers that relate to your personal affairs.

I see no evidence of HMRC cracking down on this and devoting lots of resources to it, at the moment. That's not to say that they don't have this option .. just that I don't see them ab/using it.

At the end of the day ... if you can demonstrate that the ampount you have claimed as a business expense (tax deductible) is reasonable and wholly a business expense, then you should be OK. However, any personal circumstances need to be taken into account.

HTH