Mortgage for Self Employed & How to Prove Income - Help

bobwilson

Hi everyone

I'm self employed, sole trader and I work from home. I have 5 years accounts & a chartered accountant.

I've been to countless mortgage lenders and brokers, and chose what seemed to be the best (or "least bad") one. None of them seem to understand self employed accounts.

Despite what we were told when they drummed up our business, our mortgage broker doesn't seem to understand accounts, and has had to have my accountant explain everything to her.

She is now insisting on deducting things like depreciation, rent, & capital allowances from my income, to give a MUCH lower (and not applicable) figure for my income. Both myself & the accountancy firm have tried talking to her, but she doesn't seem to understand. My accountant (who's usually very un-emotional) has become exasperated trying to get her to understand the most basic things "It's not rocket science", he says.

She says things like "I cannot dismiss anything - it is there, it is declared, they will have to deducted."

It seems she isn't interested in my actual income, but in how much tax I pay. She says "The downside of having a clever accountant is the reduced ability to borrow.". My accountant isn't clever, he's just following HMRC's rules by deducting depreciation etc. It's almost as if she's annoyed my accounts are so tax efficient that she's seeing it as a moral duty to offer less mortgage than I can afford.

Even if rent from a year ago is deducted from my income (silly as I'm not paying rent anymore and clearly when you buy a house, you pay the mortgage instead of rent), however surely it's obvious things like depreciation in equipment shouldn't be deducted from income. I would have thought a lender would want to lend as much as I can afford, not try to teach me a lesson for being tax efficient.

The SA302 forms show even less net income because they deduct things like depreciation of equipment from my yearly income, yet now lenders seem to insist on taking the figure on your SA302s instead of your actual income.

My questions are:

1. Are there any rules (e.g. set out by the ombudsman) for calculating income?

2. Are there any mortgage brokers or lenders who are sole trader friendly (i.e. won't deduct depreciation or rent from income), who can understand accounts?

I appreciate this isn't exactly a specialist forum on the topic, but if anyone knows the answers it would be deeply appreciated. Thanks

right_track

If you haven't done so already then call HMRC on 0161 931 9070 and request copies of your SA302 forms for the last 3 years.

As far as I know, if your self employed this is all most lenders will request, but some may also request copies of your company accounts so best to make sure you have copies of the last 3 years of these as well

For my affordability my broker just asked 'how much to you pay for this, for this each month' etc. He used my SA302 forms to look at my monthly income history.

bobwilson

The SA302 forms don't show income, they show a figure with depreciation deducted. Such as depreciation in value of equipment, machinery or car. The fact that lenders don't seem to understand how SA302s are calculated is part of the problem.

Just to further clarify this point, I just copied and pasted this from accountingweb.co.uk:

"an SA302 is not a useful confimation of income for the self employed as it only shows taxable profits which can often be very different from accounting profits due to Annual Investment Relief for instance.

Conversely, a business with much disallowable expenditure like entertainment could show the opposite - a higher taxable profit than is actually the case."

The SA302 does not show income. Are there any lenders who understand this, or are they literally all blindly ticking off paperwork on their tick list?

GMS

SA302's are the general way of proving income.

What sort of figures do yours show for last 3 years? How much do you want to borrow?

Bluntly put you can't avoid tax and expect to borrow against the higher figure.

leveller2911

[QUOTE=bobwilson;

The SA302 does not show income. Are there any lenders who understand this, or are they literally all blindly ticking off paperwork on their tick list?

[/QUOTE]


If your looking to get a mortgage lenders will ask for proof of income and as GMS has said SA302's are the accepted route to prove income for self employed. Don't bother to get ask your accountant to do a "earnings projection" for the forthcoming years as your wasting your time.......

Its not a problem to prove income via SA302's so long as you filled out your self assessment tax returns....... Which of course you have so its not a problem is it...

Thrugelmir

however surely it's obvious things like depreciation in equipment shouldn't be deducted from income

Depreciation is a non cash item. However the asset , what ever it is, is being depreciated over it's economic life span. At the end of which it will require replacing. This will require cash. Even in the form of loan repayments. So the underwriters appear to be taking a conservative view which appears correct.

Most people are overly optimistic when it comes to finance in particular their own. Lenders on the other hand have to take a more pessimistic view to fulfil their regulatory obligations.

Simon_gloster

If I could multiple thank posts, #4 would get 2,499 from me tonight. That's basically how it works for self employed. Well done GMS you sound like you know what your talking about #cheeky wink#.

bobwilson

I can see from these replies that the problem of a lack in understanding is not just limited to mortgage lenders :eek: I am surprised.

As for assets eventually needing to be replaced, this is again a presumption and not always true. Some assets are optional and some never need replacing anyway.

Most people are overly optimistic when it comes to finance in particular their own. Lenders on the other hand have to take a more pessimistic view to fulfil their regulatory obligations.

You can't generalize like this. I'm extremely conservative, all I'm asking is for them to base their decision on my actual income, not on an arbitrary figure (whether you understand accounts or not, it doesn't change the fact that SA302s do not represent income). Our combined income is over £9,000 a month (£108,000 a year) and is proven by our bank statements, but the lenders will only give us approx £200k mortgage (around £900 a month mortgage repayments, even at 12% interest rate, the monthly repayments are a small fraction of our income). I never take out credit cards or loans unless I already have the cash, and always save up to pay for things before I buy them. The lender isn't offering me a mortgage based on my income because they don't understand what SA302s are, and don't get accounts. I know I'm not alone in this problem.

Bluntly put you can't avoid tax and expect to borrow against the higher figure.

You've just proven my point unfortunately. The attitude of lending should be based on income, not on an attitude of punishment for being tax efficient or legitimately "avoiding tax". Not only is it illogical, it would be dishonest to HMRC to avoid being transparent about capital allowances that do exist. Anyone who suggests otherwise clearly doesn't understand accounting.

This isn't a case of earning (x) amount and paying 33% tax on (x). There are certain items that are tax free or follow different rules. That doesn't change (x). Taking an SA302 as income is a simplistic and misguided view. This has nothing to do with trying to get away without paying tax you should be paying. Self employed people follow different rules for tax than employed. These rules are set out by HMRC.

Since this post, I've found accountancy forums where many self employed people and accountants are noticing the same issues with mortgage lenders. It seems it might be a better place to post about it than here. Income isn't a matter of opinion, it's a matter of fact.

For example, if you can see a person's income from their bank account, that doesn't necessarily mean the same figure will appear on an SA302 as some of it may have tax relief. Does that mean he's deliberately avoiding or evading tax? No. He's just following HMRC's rules. Did they still earn the full amount though? Yes they did, even in the eyes of HMRC, yes they did. If you disagree with this, take it up with HMRC.

Mortgage lenders aren't offering reduced lending because they disagree with the HMRC's rules, or because they want to punish sole traders. They're doing it because they're ticking off items from a checklist, one of them being the SA302s, even though they don't understand what it represents. To them, it's just a figure in bold. They think it's a way of reducing mortgage fraud because it comes directly from HMRC. However, they don't understand it doesn't represent income.

This quote is taken from Accounting Web, and sums it up nicely:
"Problem is that SA302 shows taxable income, I have clients who claim SED so taxable income is nil even if they earned £100k, also non res clients who earn big money but UK taxable income is minimal.(perhaps a forces pension)

Its problem which is rife in the industry our answer was to suggest clients use a particular mortgage advisor who you recommend,and who understands the problems with SA302. The Banks simply just dont get it."

Anyone in this forum who disagrees either doesn't understand accounting, HMRC's rules, or the purpose of a mortgage lender. The fact that you don't understand doesn't change the truth. I'd be surprised if there are many (if ANY) accountants who will tell you otherwise. SA302s do not represent income.

GMS

Climb off your high horse and answer the question on income. It owuld be much easier.

I understand your predicament I really do. Self employed do not pay many items an employed person does as it is an expense of the business.

SA302's are a blunt tool. Agreed. However this is where we are in terms of lending.

On a separate note why are you not limited? With an income such as your stated one why would your accountant not suggest a limited company so as to minimise your tax liabilities?

What do your SA302's show and how much do you need? How much would your accounts show as net profit?

Nebulous2

It's pretty simple really.

If I am an employee my employer pays all the costs of my tools for the job, all the costs of running a car needed in my job and gives me a salary for my labour. A lender does a calculation based on multiple of my salary and decides whether or not to lend.

If I am self-employed there can be all sorts of costs in running my business that become my responsibility and that I can set-off against my tax. The cleverer my accountant is and the closer the two of us are prepared to sail to the wind the more beneficial this becomes. The dilemma for the mortgage company is that this arrangement is opaque. How on earth can they work out what is really going on? The closest figure they can come up with is the SA302 figure.

An employed person can't go to their lender and say, it costs my employer £3k a year to run my car, can I get another 4 times £3k on my loan please?

Equally I don't see why a self-employed person should expect to go to the lender and say, I've declared £3k in costs for my car, but I think you should take that £3k into account when calculating how much you are prepared to lend, as it forms part of my income.

Lending to self-employed people is seen as more of a risk. One way of minimising that is taking a conservative view on what income you base the lending on.

Its not just you, or self-employed people either. The world is a very changed place, post 2008ish. This forum has plenty of employed people who are struggling to persuade lenders of their ability to pay back a loan. Many of these would have gone through very readily 7-8 years ago.

kingstreet

Lenders use net profit to calculate borrowing power for the self-employed as this is the closest thing to an employee's gross income.

You do everything you can to reduce your net profit so you pay less tax.

As a result you get to borrow less.

Unfortunately, that's how it works. We understand what you are saying and what you are trying to do, but a lender will only see what you are declaring to HMRC.