Full time employed and sole trading too - dealing with a loss in the first year

cakeadoodle

Apologies if this is posted in the wrong place - I'm viewing on my phone and I couldn't see a more appropriate part of the forum.

I currently work full time, and started a small business (as a sole trader) in May 2011. My business isn't a big enough concern at present to warrant paying an accountant. In fact, I would have been happy to keep it as a hobby whilst I built my reputation but as people were paying for the cost of ingredients I was technically trading, and wanted to do things by the book.

My plan for dealing with my accounts was to do a 'basic bookkeeping' course at the local college this year and to build my knowledge from there, but the course was, unfortunately, cancelled three times. I have however kept careful records (and receipts) of all money in and out.

The business needed some initial investment to get started, which I supplied from my personal savings. Whilst the business was started in May, by the time I started getting regular work (and building my reputation) it was around September, hence the business has made a loss for 2011/2012 (this was expected, as I had to invest in a training course and equipment).

I want to get started on my self assessment, but speaking to HMRC has confused me somewhat. In fact they have contradicted themselves twice now. Can any of you helpful people tell me if I am understanding this properly? I do appreciate that there is a wealth of information on the HMRC website, but it is not that straightforward to understand for the layman (perhaps I'm just a bit thick).

I made a loan to the business of £2420.33.

The business brought in cash of £2118.48 but spent £3921.29, resulting in a loss of £1802.81. My understanding is that the loss can either be carried forward to a new tax year (to be set off against future profits) OR can be set against my other earnings for 2011/2012 (my salary), reducing my overall tax liability for that year. I'm a basic rate tax payer so we're not talking about much in the way of a rebate! Is my understanding correct so far?

The part that HMRC have confused me about, is the owners loan. They have told me that by setting off the loss (whichever way it is done), I can no longer repay the owners loan from the future profits of the business. This can't be correct surely? If I was a creditor of the business (which I suppose I am, technically) the profits or loss of the business shouldn't have any effect on the debts of the business, which still require to be paid.

Can someone set me straight? It seems nonsense to me that a loss at the end of an accounting period has the effect of write off on the debts of the business!

cakeadoodle

So sorry, no idea why it has inserted all those exclamation marks, I'm not that excited!

ceeforcat

The business brought in cash of £2118.48 but spent £3921.29, resulting in a loss of £1802.81. My understanding is that the loss can either be carried forward to a new tax year (to be set off against future profits) OR can be set against my other earnings for 2011/2012 (my salary), reducing my overall tax liability for that year.

There are other options e.g. set against your other income of 2008/09 under the losses in early years of trade rules but if the end result is the same and you receive full relief, your option is just as good.

They have told me that by setting off the loss (whichever way it is done), I can no longer repay the owners loan from the future profits of the business.

Complete and utter twaddle in my view. You are correct.

cakeadoodle

Thank you so much for your reply, I was starting to worry that I just wasn't getting it! I feel a bit more confident about tackling my SA now - and I've managed to book onto a 'completing your self assessment' course with my local business gateway next week just in case

chrismac1

Note that on the basis of your post it is not likely your training course is a valid expense. Instead it is a capital investment in the human capital of your business.

As an example, the costs of an accountant gaining a qualification are not allowed, even if he or she is doing some accounts commercially on the side. But once qualified, the costs of maintaining that qualification by attending training courses are fine.

chrismac1

And as a general point, as you've already learned anyone getting advice from the HMRC hotlines is probably speaking to someone with 5 weeks' experience telling them twaddle. HMRC has no legal liability for such twaddle, whereas a qualified accountant with PII cover and a letter of engagement with a client very much does have a legal liability for any twaddle dispensed.