Where to put Tax payments in S/A return??

billymadbiker

Hi all,
I am self-employed, A couple of years ago I got a 'investigation' by the inland revenue, most things were ok/sorted out but I got told at the time I was claiming di-alowable expenses on my tax re-payments.
I had been putting the amounts of tax I paid into the 'Employee Costs' box on my s/a tax return. At the time, these were removed as expenses and I paid the fine/back payment for them.
Over the next couple of years I have been putting the amounts into the 'Employee Costs, Disalowable' box.

I had a conversation with a friend about theis the outhe day and they pointed out the following:

I submit a tax return and it says (for example) I owe £1000 in tax,
I take £1000 from my bank account and pay the bill,
This £1k then falls into the period covered by my next years tax return, so, on this return I have to put the £1k into the disalowable box, This then pushes up my personal drawings by £1k resulting in the next years tax bill increasing by £200 (asuming 20% tax).

The following year (if all else remains equal) would then result in me owing tax on £1200 worth of drawings and an ever increasing bill would it not??

It does not really seem right that I would be taxed on tax payments when I am already paying tax on the money I use to make the payments?

Maybe I am missing something and I would be most gratefull if somebody would be prepared to take the time to explain this!

chrismac1

Unless the tax being paid is under PAYE or the Construction Industry scheme, leave them off the return completely. They are not business expenses.

billymadbiker

I understand that tax payments are not business expenses,
Are you saying not to put the payments anywhere?
On my 07-08 tax return I put my tax payments (including nat/ins) of £4850 down as part of my 'personal drawings', which I obviously got taxed on along with my other 'wages'.

This is where I think I went rong but was what I was told to do by a IR inspector a couple of years back!

theculverhouses

Hi Billymadbiker

The tax payments you make (self assessed income tax that is) payable on 31 January and 31 July each year are NOT a business expense and chrismac1 is quite right.

Equally class 2 NIC which you might well pay monthly by direct debit under NICO DD on your bank statement is not a business expense.

Good luck with it all.
Tim

jimmo

General advice for people who are in business (self-employed) is that you should have separate bank accounts for personal and business use. You don't have to, but you would probably find it worthwhile.
For the purposes of making your annual Tax Returns you are required to establish your business profits using standard accountancy methods and then make such adjustments as are required by Tax Law to reach your taxable business profits.
If you know what you are doing, and especially if you understand double entry book keeping it is quite feasible to prepare business accounts which include all sorts of private incomings and outgoings and make the required adjustments, but if you are not so sure, you increase the danger of tying yourself up in knots.
By using only one bank account you are pretty much committed to the more complicated option.
When looking at the book keeping you need to look at your business and you, as a person, as 2 separate entities, and you, the person has the equivalent of a personal bank account with your business. You are the account holder and your business is your bank. In the business books that is normally known as the capital account or the proprietors account.
Now, if you had separate bank accounts, business and personal there would be no need for your private car or the interest on the car loan to be included in your business accounts or your Tax Return.
Life would be a little less complicated.
As things stand the sale proceeds of your private car are not business income. They represent a payment into the businesses bank account by you, the person. That is an investment by you, the person into the business. In the context of what you have written, you may need to think of it as negative drawings.
Does your friend understand Income Tax?
I can see a sort of logic in what your friend has said but actually your tax liability has nothing to do with your drawings.
In standard business accountancy there is a balance sheet and a profit and loss account and, subject to adjustments, your tax liability is based on the net profit shown in the profit and loss account.
Drawings are only reflected in the balance sheet and have absolutely nothing to do with the profit and loss account.
Apologies if I am wrong, but I really feel that you do not really understand what you are doing and you need an accountant to put you right.

billymadbiker

Guys,
Cheers for the help.
I fully understand that tax payments (the money I pay on the 31st Jan and 31st July) are not business expenses, I also understand that I can not therefore, claim these as 'costs' or set them against my tax.

However, I have been putting them into the 'personal expenses / disalowable' box
(Box 3.33-Employee costs) added together with my other personal drawings from my turnover.

This was where I was told to put the amounts by hmrc.
As pointed ot to me, by putting them in box 3.33 #i will then get charged tax (on my tax payments) when my return is caculated. Is this correct?

fyi, I have also been putting both of my N.I. (monthly and e.o.y) in the same place.
I have only really started worring about this as, over the last few years, this is having a compound effect. Each time I do a return I pay tax on the money I used to pay the previous years tax bill, hence making that years bill larger, hence more tax again..
What I am trying to say is that each year my tax bill is going up. And, if everything else where to remain the same I am still getting an ever increasing tax payment!

billymadbiker

An example of this:
If I turnover £50k in a year, (year 3 say)
I have (allowable) expenses of £25k
I take personal drawings of £24k
Hand in my tax return for year 3 (in year 4)
I get taxed on £24k, so get a bill of (roughly) £4800

I pay the inland revenue £4800 but this payment is made in year 4.

When I do my tax return in year 4 it is as so:
Turnover £55k
expenses £25k
Personal drawings of £24k.
Now, added to my personal drawings in year 4 of £24k I have made payments of £4800 in tax,
So total personal drawings in year 4 = £28800.
I then get taxed on £28.8k which would be (using same 20% as above) £5760

So, In year 4 I pay an extra £960 in tax although my 'wages' are the same as the previous year.

If I draw the same wage next year I will get taxed on nearer £30k..

billymadbiker

jimmo,
Thanks for the input, a question though..
Say I did have 2 bank accounts..
Say, I took £24k (over a year) from my bus account and paid it into my personal account as wages,
Then, on my tax return I put £24k as personal drawings and get a tax bill of £4800.

So, in the next year I have to take £28800 into my personal account.
Would I then be supposed to only telly the I.R. about the £24k I have used as wages and leave the £4.8k out?
Or, Take the £4.8k from the bus account? What do I put on my return then?

jimmo

No, No, No!
There is absolutely no way that you are taxable on your drawings.
You are taxable on your profits. End of story.
If you don’t understand that you really need professional advice before you get yourself in a deeper mess.
Believe it or not, I understand the advice you have received from HMRC and, in context, it is correct.
Do you understand it? I think not but a half hour with an accountant would almost certainly achieve more for you than a month of posting on a forum.

billymadbiker

ok, so are we talking profits as in what my self employment /sole trader business is left with AFTER paying me a wage?
Or, (what I thought) the personal drawings I take out (which is pretty much anything left at the end of the month) IS the profit?
If that is the case do I take the money to pay my tax bills & nat.ins. from the business or from my personal drawings?

You are right about going to see an account, as it happens my other half is one but she is sleeping now and I am scared to wake her..

billymadbiker

She works for the m.o.d, does something like runs a fixed asset register?
Basically, she told me I was small fry, my paperwork is to messy and gave me the phone number of a place in town!!
Me being self employed thinks I can do everything myself so turned to the internet!
Think I will be taking a trip down town monday!