Starting a new company

RossDargan

I wrote a little application in my spare time and it has done loads better than I thought it would so I'm not starting to worry that I'm going to have to pay tax.

I'm currently fully employed and getting close to the higher tax band (work are being very good with this side project, so that is not an issue).

I'm making approximately £700 a month on the side with this application so what I think I need to do is:-

Register as a sole trader
Start paying £2.50 a week NI class 2
keep records of anything I buy which is as a result of my application (things like broadband, industry magazines, a computer with backup applications, and about 10% of home electricity/water/gas bills)
Keep records of all money taken in (how accurate do this have to be? All money comes via Paypal and google checkout so should I just keep monthly figures rather than individual amounts which tend to be less than £5?)
Expect at the end of the tax year to pay class 4 ni @ 8% (minus 5k or so on the nett profit), and income tax probably pushing me into the higher tax band again on the nett profit.

So, my question! Firstly have I got all of the above correct? and secondly is it worth opening a business bank account, or getting a credit card with cash back and just use that for all outgoings related to my app?

And finally is there a better list of what I can claim for from a tax point of view?

Thanks!

fengirl_2

You are about right, but you must keep really accurate records of all your income and outgoings. If you put business income through a separate account you will be able to track it more easily. There is no list of what you can claim. The rule is simply that you have to include in your accounts any expenditure which you incur wholly and exclusively in the business. Ask yourself - did I buy this for the business? if the answer is yes, then its a business expense.
Use of home is calculated on the number of rooms used for business divided by the number of rooms in the house (not bathroom and kitchen) times the household expenses.
If you have been trading for some time, you need to register as soon as possible as you could be in for a £100 fine. You may be exempt from class 4 NIC, depending on your salary.

RossDargan

cheers

detailed expenses isn't going to be an issue (everything goes online, and I will use a dedicated credit card for outgoings now).

How would it work for my broadband because that is obviously used for home purposes but it would be impossible to develop my app without it)

About the home amount I live in a two bedroom semi and I currently code in the living room - so could I really claim 1/3 (all the rooms bar bathroom and kitchen) of the bills?!

I am approaching the 3 months but not there yet - I do have the date marked!

I'm struggling to find info on the web regarding class 4 nic exclusions - could you expand on that a bit please or give me a clue what to google:-D

Finally I'm guessing if my nett profit is below £5,075 then I don't need to pay any ni contribution, just income tax - is that assumption correct?

Glad to be getting this all above board because it has been worrying me a bit!

Thanks for your help!

fengirl_2

Dual use things like broadband and use of the living room - HMRC will accept anything which is reasonable. Obviously if you included 90% of everything, they would challenge this, but something like 50/50 or 60/40 wuld probably pass. HMRC do not nit pick over small adjustments like this.
The 3 month period for registering as self employed has been abolished - the rules now say 'as soon as possible'.
If your profit is under 5075, then you are exempt from class 2 and class 4. here is a link to the HMRC site on deferment of class 4 NIC:
http://www.hmrc.gov.uk/nic/class4-faq.htm

cosyc

When was the three month rule abolished? so had the £100 fine gone as well? cheers

fengirl_2

The 3 mth rule was abolished this year. The £100 fine still stands.

RossDargan

Thanks for all the help

One thing thats confusing me is if I count a computer purchase as an capital allowance or a business expense?

Obviously I can't do much on the app without it! What do you think?

Thanks

Ross

fengirl_2

Items like computers and other equipment which are not 'consumed', like paper and ink, are treated as capital and these are claimed spearately on the SA. You can claim capital allowances on equipment which you owned prrior to trading but which you bring into the business. The base cost would be the value at the date you brought it into the business.

PlutoinCapricorn

I quite understand that a fleet of vans or heavy equipment are capital items that are depreciating assets. These cannot be treated as expenses in the same way that ink cartridges, paper, advertising costs etc. are.

I do think that if the total profit is under £15,000, which means that you just give a total for the expenses as opposed to listing the details, and you have bought a very cheap printer, there is a case for just calling it an expense. It simplifies the tax returns. The prices for IT equipment have dropped so much that these items are hardly a huge investment: netbooks can be found for £150 for example.

RossDargan

yeah thats what I would have thought. I have bought a back up server that cost around £450 - that surely is just an expense

And I'm going to buy a camcorder thats about £600 - not sure what to classify that as

and finally I'm going to buy a laptop which could be towards 2k - perhaps that then becomes a CA

Its this bit that is causing me the most confusion!

fengirl_2

Sorry to correct previous advice, but something which costs £450 and has a life beyond a year is capital and not revenue. The camcorder and laptop would also be capital. I wish people wouldn't post about things they don't know about.
Don't forget you can claim AIA on these items, so you would effectively get 100% releif in the first year anyway.
Here is a link to HMRC guidance:
http://www.hmrc.gov.uk/helpsheets/hs222.pdf