Tax and equipment purchases

psycrow57

I'm setting up as a sole trader and have had to purchase lots if equipment which will be re-used. I went on a brief accounting and tax course and was told that any equipment you own gets added to your profits, so it's not technically a loss, but my head is in a spin and I'm trying to do my accounts so far.

As a massive simplification, let's say I have made £1000 after deducting all other costs (room hire, rates, ingredients, advertising etc) and spend £800 of that on equipment.

Would my profit be £1000 or £200? And would I have to pay tax and NI on £200 or the whole £1000?

I'm getting very confused! Thanks for any help

Savvy_Sue

I think - and I'm not an accountant type person - that the answer is 'it depends', because it's not as simple as that!

It depends on what type of equipment you're talking about, for starters. If it was one major piece of kit, which will last you for several years without needing a replacement, then it would be an asset of the business, but its value would decrease each year. That's depreciation, and if you need to depreciate things, then I'd suggest that you find an accountant, go and see 2 or 3 for a free half hour and get quotes.

However, if it's not one major piece of kit, or if it's consumables, then it would be treated differently. Spending £800 on consumables - eg fabric, glue and sequins for a collage - would mean that your profit would be £200, I believe.

And if it's 'small' equipment that you don't depreciate - say 100 pairs of scissors at £8 each - I think that would be treated in the same way, but I'm not entirely sure. Which is why you need an accountant.

You pay tax and I think NI on your profit, and again you'd benefit from good advice on what you can legitimately off set against your incomings - use of home, phone calls, utilities, mileage etc.

antrobus

'It all depends' is a good answer. OK, it may not quite be the kind of definitive answer that the OP was looking for, but that can't be helped, because it does all depend, and in fact, faced with the same set of raw numbers, different accountants will give different answers.

In principle if you are in business and buy some equipment that is expected to last for more than a year, then that expenditure is treated as a fixed asset and written off over its expected useful life, so that the cost isn't charged to profit in a single year but rather spread over a number of years. And is known as depreciation. Your taxable profits are always worked out before depreciation, and you have to claim 'separately' for Capital Allowances in respect of anything you've spent on your fixed assets. The good news is that HMRC will (as a general rule as far as small businesses are concerned) let you claim 100% Capital Allowances.

So in the example quoted - "let's say I have made £1000 after deducting all other costs (room hire, rates, ingredients, advertising etc) and spend £800 of that on equipment" - your taxable profits before depreciation would be £1,000, but you would pay tax on £200, having claimed capital allowances of £800. Your final accounting profits might be £850, having charged £150 depreciation, but that's not what you pay tax on.

psycrow57

Thank you - that makes sense.

It's all quite complicated - i'm teaching cake decorating so most of my purchases are small tools, cutters etc which can be used multiple times, as well as a couple of larger items like a mixer and an oven (although I bought an oven second hand that I'll need to replace with a new one as soon as I can afford to do so).

I think I will have to find an accountant - I may he able to get a session with one through my Princes Trust programme though.

The main thing I was wondering about was what I would be taxed on and this makes more sense now, so thank you!

Savvy_Sue

Just wondering, if you are doing this from home, do you need to have your kitchen inspected by Environmental Health?

You definitely need insurance, of course. And your home insurer needs to know.