Home to work travel expenses, self employed.

dungie203

chrismac1 wrote: »

Dungie, one of the commonest sorts of tax enquiries concerns the situation where a person's lifestyle cannot be explained by their declared income, which in the case of a self-employed person is really drawings.

These cases are becoming more common due to the HMRC digital intelligence unit. This has a digital picture of every UK citizen made up of lots of data such as bank accounts, tax returns, Land Registry, credit cards and so on. The exact data sources are of course speculation as the people who work in this unit cannot disclose the total data sources on which their algorithms are based.

If your digital footprint should loook like a circle, but it looks like a circle with a big segment missing, the inference is that that missing segement is potentially your black market, undeclared income.

So it is quite common for taxpayers to be challenged on the basis that their drawings are not sufficient to maintain their lifestyle. If you are declaring £20k of drawings per year and driving a Bugatti Veyron then HMRC are likely to be on your case.

That makes sense,

I doubt we have much to worry about as we live on around £90 per week at the minute if that. I have no car, no land, no credit card and about 2.5k in the bank which i have had for years and will be spent in march on a new line of products to hopefully turn our current business around.

It does worry me though that i have never taken note of our drawings. We are only talking a few pounds here, mainly bus fares to work and some fruit and veg from the shop. Any profit we have ever had has been drawings if that makes sense, thats the closest to a figure i would have.

When you say someone is declaring £20k per drawings, how does one go about declaring drawings as ive never seen it on my self assessment, or do you mean the 20k is what profit for the year they are showing?

Darksparkle

dungie203 wrote: »

No it is not a problem, it is just not something i had done before and i could not work out why they would need it.

So things like bus fare and other non deductible expenses i should just class as drawings and keep a note of how much we spend?

All you need to show is what drawings you take out.
So if you take £50 out, that's what you'd show.

What you then spend that £50 on is up to you. It's no different to that of an employed person paying the bus to work, they don't need to keep records of it unless they want to but they'll have the record of where the money came from in the first place (e.g wage slip)

dungie203

Darksparkle wrote: »

All you need to show is what drawings you take out.
So if you take £50 out, that's what you'd show.

What you then spend that £50 on is up to you. It's no different to that of an employed person paying the bus to work, they don't need to keep records of it unless they want to but they'll have the record of where the money came from in the first place (e.g wage slip)

Thanks very much, that makes sense. Basically i am just keeping a note of as and when we take money out.

dungie203

Just one last question if thats ok:)

As i run a small business with not many transactions is this type of book keeping ok? http://www.clivemurphy.co.uk/super_simple_bookkeeping.html

Basically i write down what cash we take each trading day and then add it all up for a monthly total. I also write down whatever we spend and keep all receipts and add that all up for a monthly total. If i also keep a note of any drawings will that satisfy the taxman?

All takings will be cash, rent and stock will come out of bank so i will have bank statements to show all this if needed. Do i now have it all covered?

Pennywise

If you're a "cash" trader, you're regarding as higher risk by HMRC. To defend yourself against claims by a tax inspector that your cash takings are understated, it's wise to "reconcile" your cash, i.e. your cash takings should balance against your cash payments, your cash drawings and any balance you bank. If you can "prove" your cash in this way, HMRC will have a much tougher job in trying to contest your figures. So, I'd suggest not just simply recording your drawings, but also compiling a day-sheet to prove the balance of your cash in's against your cash out's.

booksurr

just to echo pennywise's comment that simple list in your link is a little too simple..

what you really need is a "proper" cashbook:
a) left hand page records all cash received each day and if totalled for the month then that is your cash "in" for the month
b) the right hand page should record where the cash has gone. The easiest way to do that is to have separate columns for the 3 key "uses" of the cash. The most basic level would be columns called:
column i) spent on "purchases" for the business ("business related expenditure")
column ii) "drawings" - ie money taken out as actual cash for your own use (there is no need to list what you spent it on, simply show the date, the word "drawings" and the £value
column iii) "banked" - ie money paid into the bank (if any)
The total of those three columns is obviously the total money "out" for that month.

a) - b) is thus the net cash remaining at the end of the month and so should agree ("reconcile") with what you have in your cashbag/till that you use when on the stall. That way you have a "perfect" record to show HMRC that all the cash you took can be accounted for.

when it comes to do your tax return you obviously declare the total cash income per the left hand page but you only deduct from that the total business related expenditure ie. cash out column i) per the right hand page. By the sounds of it you would also need to include the business related costs you paid from the bank account (rent etc) so the total net figure is obviously the profit you made in the business and is the value upon which you will be taxed.

HMRC are not interested in what you spent your drawings on so you do not need to record anything other than the word "drawings" and the amount. If HMRC ever investigated you they would initially want to see the total value of the drawings so they can then say OK you say you only drew £500 that month, can you reasonably be expected to live on that much, if not, something ain't right....

dungie203

Ok thanks, im a little confused though.

Say i pay 500 into the bank, 250 for rent and 250 for stock i record that in the banked column but do i also record into the purchases column also as thats what it will be for ie rent and stock?

Pennywise

dungie203 wrote: »

Ok thanks, im a little confused though.

Say i pay 500 into the bank, 250 for rent and 250 for stock i record that in the banked column but do i also record into the purchases column also as thats what it will be for ie rent and stock?

No, the £500 cash is shown as paid into the bank in the "cash" page.

In the "bank" page, it's shown as £500 banking on the income side and then the two lots of £250 shown on the payment side of the bank pages.

You need to keep cash and bank pages separate to provide the follow through. Or get a bigger book (called a cathedral analysis book) where you have more columns, i.e. cash and bank columns and then the analysis columns.

dungie203

I think i may see how much an accountant is lol, it just seems a bit complicated for me.

Pennywise

Or you could use some software instead. Try the free cash book from vtsoftware.co.uk which is remarkably simple to use, basically just recording all the ins and outs.