carry a loss forward or ask for a sub

LindaJane47

Dear all

I've been self employed, sole trader, for over 10 years, but never found myslef in this situation before so I hope someone can advise.

My business is very small, usual turnover about £8,000. I only work part time in the business, and have a part time office job as well. This year has been dire, for obvious reasons, so my turnover is well down.

Just after Christmas I quoted a lady to do a £10,000 job, which she has accepted. I will need to spend about £5,000 on materials. so far so good, cash flow isn't a particular problem, so I can do this.

The PROBLEM is that the money will go out this financial year, but I will not be paid for the job until after it is finished, ie almost certainly into the next financial year. So THIS financial year I will make a loss of about £3000 - and overall my taxable pay (employed and self employed) will be about £5000 - well below the tax threshold. So I think i will lose out here.

If I 'carry the loss forward' when I do my tax return, does that mean the IR will take the loss amount off next years S/E income? How should I go about dealing with this??

There IS an easy way round it - ask my customer for a 'sub' - but I've always felt that was very unprofessional and my quote clearly stated that payment would be due at the end of the job (which when I wrote the quote was expected to be this month, but there has been a delay in someone elses work)

I can't get my head round how to deal with this from a tax point of view. I'm just sure that to go below the tax threshold in one year isn't a good idea - i think I'll end up paying extra tax in the next year.

Am starting to worry.... so I hope someone can help

Thanks and regards
Linda

fengirl_2

Yes, you can carry the loss forward to the following year and there is space on the SA to do this, plus space on the following SA on which you can bring the loss forward from the previous year.

LindaJane47

Hi Fengirl, thank you very much for your reply.

I thought I could do that. Can you confirm for me how it works though? I carry forward (say) a £3000 loss and then what? Does my s/e income for 09/10 tax year appear as 'nil' and then my 10/11 tax year s/e income is xxxx-3000? That would be logical.... but....

sorry if I'm being dim here.... just don't want to lose out on an already very low income

Cheers
Linda

fengirl_2

Yes, this is how it works.

Pennywise

The money you spend on this job isn't an allowable expense in the year of purchase - you have to carry it forward to set against the income in the next tax year. You have to "match" the expenses against the income on any job in the same way. So basically, you won't have a loss - the advanced costs go down on your balance sheet as stock or work in progress, not as an expense so they don't affect your tax at all this year.

Of course, if you have started the job and it is, say, partially completed, you also have to bring in the estimated "Profit" to date, even though you havn't billed nor been paid for the job as at the tax year end.

Have a look at HMRC webpage http://www.hmrc.gov.uk/MANUALS/BIMMANUAL/BIM74201.htm

LindaJane47

aha, so let me get this straight....

Current profit so far for 09/10, say £2000.

I spend £5000 on plants in the 09/10 yr, for a job that will be done/completed/billed in 10/11 year, but this isn't an 09/10 'loss' it is stock. OK, I get that bit....

so profit for 09/10 = 2000
stock for 09/10 = 5000

Then what happens next year? I put the 5000 down as an expense for 10/11 even though I spent it in 09/10?

I don't have to do a balance sheet, i am on the short tax return, but there is something about carrying losses forward, and there is something about stock.

Am now horribly confused.... I think I know what you are getting at, but it sounds so complicated. And all because the beginning and end of the job are in different tax years!!

Thanks (I think!) and if you could elucidate any further I would appreciate it....

Linda

mrkbrrws

Basically it's not a tax problem, it's an accounting problem but your profit for tax purposes must be based on current accounting practice.

Assuming you have £5,000 of materials in stock at 5/4/10, you deduct that amount from your expenses for 2009/10 and add it to your expenses for 2010/11. The short Tax Return pages don't require you to complete any details about your balance sheet, so there are no other entries required.

Just keep a note of how you calculated your expenses, including the deduction for stock, with your records and ensure you include the stock when you do the calculations for 2010/11.