Start up sole trader - losses..

butterflydreams

Hi again group - thanks for previous comments on expenses, and so on. I have another kinda related question and would appreciate any comments that anyone wants to make...

My business hasn't started to trade yet. When I look at the start up costs and consider the income that I'm going to be able to generate per year.....it may take some years before I have my start up costs covered. Is there any HMRC 'rule' regarding how many years you can continue to make losses... My start up costs are things like: computer and office equipment, photography equipment and so on - so quite substantial. I can't really predict how many years it might take me to generate enough income to cover that amount... It could potentially be quite a few... ~bd~

Wywth

butterflydreams wrote: »

Hi again group - thanks for previous comments on expenses, and so on. I have another kinda related question and would appreciate any comments that anyone wants to make...

My business hasn't started to trade yet. When I look at the start up costs and consider the income that I'm going to be able to generate per year.....it may take some years before I have my start up costs covered. Is there any HMRC 'rule' regarding how many years you can continue to make losses... My start up costs are things like: computer and office equipment, photography equipment and so on - so quite substantial. I can't really predict how many years it might take me to generate enough income to cover that amount... It could potentially be quite a few... ~bd~

I would urge you not to embark on this business venture further, or at least not spend your children's inheritance on those items, until you get this fathomed out.

butterflydreams

Thanks Wywyth. The business has great medium/long term potential, but in the short term....start up costs are gonna swallow up a fair bit of dosh (say....£4-5k...which in itself isn't massive massive..but it's enough).... If I have a good initial run, the question of losses isn't an issue. All depends on the reality of the market out there..each year...for my product....a market that's defo present....but until you're out there in the rough of it, you just never know exactly how it's gonna go... If the losses went on for say....3/4 years... I'm thinking, is this acceptable (?)....not from a business pov, because as I say, medium term...I'm confident it's a goer...and I can fund it.... but from an HMRC pov...do they *expect* no losses after a certain period of time, I wonder.... ~bd~

Dangermac

butterflydreams wrote: »

Hi again group - thanks for previous comments on expenses, and so on. I have another kinda related question and would appreciate any comments that anyone wants to make...

My business hasn't started to trade yet. When I look at the start up costs and consider the income that I'm going to be able to generate per year.....it may take some years before I have my start up costs covered. Is there any HMRC 'rule' regarding how many years you can continue to make losses... My start up costs are things like: computer and office equipment, photography equipment and so on - so quite substantial. I can't really predict how many years it might take me to generate enough income to cover that amount... It could potentially be quite a few... ~bd~

You really need to speak with an accountant.

Capital items (such as buildings / contents etc) can not simply be deducted from your profit, in order to reduce tax.

Usually, such items are added to the Balance Sheeet (as a business asset) and are 'written down' annually by a certain percentage - which shows as a business expense on the Profit & Loss account, thus reducing profit, meaning that less tax is payable.

However, there are start-up tax facilities available where a higher figure can be deducted from year 1/2 profit.

Best to spend an hour or so with an accountant.

DM

WHA

I think your biggest problem is persuading the tax inspector that you bought and use the equipment for business use.

You have to add-back any private use. So if, say, you used your computer or camera for a third of the time for business and two thirds for private, then you only get tax relief on one third of the cost.

You may have to justify your "business use" to the tax inspector which is going to be an uphill struggle if you've got sparse trading activity.

I have to echo the earlier comment that if you seriously believe it's going to take so long to turn a profit, then perhaps you shouldn't be doing it. Your time would probably be better spent looking into a different business model that would turn a profit sooner.

But back to the main question, no I don't think HMRC have any pre-set notion of when a business should become profitable. Some are profitable from day one and never show losses. Others may take a few months or a couple of years. It will depend on the nature of the business. However, talking of 3 or more years to turn a profit is likely to raise alarm bells and make them think that you're not running a "proper" business at all - it's very rare indeed for a business to take so long to make a profit.

butterflydreams

Great stuff, thank guys, a lot of very, very helpful advice in there!! The equipment is being partly funded by a business grant - so its use is business, hopefully I could show that in an acceptable manner. It's not that I don't believe it can be successful quickly enough - it's just the 'back of the fag packet' calcs in my head leave me thinking that initially I'm gonna be down on ins vs outs (technical accounting term ), depending on how well it all goes...which is something I can't be 100% sure on...no crystal ball...but I'm moderately confident on. It's also something I cannot afford not to do - very, very limited other options. ~bd~

Mistral001

As others have said you need to talk to an accountant. They will tell you what you can and cannot put down as an expense. There may be things that you have missed as well as disallow those items that those posters above have mentioned. For example my accountant told me that I could bring items of equipment into the business and claim them to be a tax deductable expense even though I bought them before I started trading. Pity he did not tell me this until I had been trading a few years and had missed the boat so to speak.

WHA

butterflydreams wrote: »

The equipment is being partly funded by a business grant

Just be aware that you can only claim the net amount against tax. I.e. if the equipment cost if £500 and you get a £250 grant, then you get tax relief on only the £250.

Auntie-Dolly

What are you going to live on if your first few years profits won't even cover £4-5k capital expenditure?

DKLS

I would seriously re-consider your business plan. That doesnt seem like a business nor a hobby that pays.

butterflydreams

Thanks for further comments. WHA, yes, re only being able to put forward my contribution towards granted items...rather than at total cost..good point.

Dolly - I have savings, am mortgage-free and have low living costs. The last two of these are down to keeping my expectations low when it comes to where and how I live. If I had a mortgage and a less frugal lifestyle, there is no way I'd be able to consider this venture.. ~bd~