Help - new online SA302 only showing Taxable Profit, not Net Profit...

T_Diddly

My wife and I are both self employed and looking at finding our first mortgage. We've done various affordability checks and been given two separate decisions in principle from different places. Great so far.

Both the mortgage brokers we've spoken to (and Nationwide who we spoke to directly) have told us to give our income in the form of Net Profit i.e. turnover minus expenses. On all 3 occasions I've double checked that they didn't instead want Taxable Profit i.e. turnover minus expenses, minus capital allowances. All 3 confirmed it was Net Profit they wanted - one even said "yes, right before your capital allowances come out". Good news for us as this is the higher figure.

At the suggestion of one of the mortgage brokers I've downloaded our SA302/tax calculations as evidence of earnings. I've also phoned HMRC to request the paper copies, as rumour has it that some mortgage lenders will only accept HMRC's paper copies. They should be with us in the post in another week and a half.

However there is a problem. The tax calculation I've downloaded doesn't refer to Net Profit or Taxable Profit specifically - it just gives "Profit from self-employment" and, you guessed it, this number is actually the Taxable Profit - the lower figure!

The higher figure for Net Profit appears nowhere on the tax calculation. So naturally I am concerned that mortgage lenders will not assess us based on our Net Profit, and instead will use Taxable Profit, essentially meaning we can't buy the kind of house we planned to buy (and that we were consistently told we could buy!).

I have contacted both the mortgage brokers and Nationwide with my concerns, and so far they all seem pretty clueless. None of them can shed any light on the fact that Net Profit doesn't appear on the online SA302, yet they still seem to want Net Profit and not Taxable Profit.

I've emailed the files across and one broker (from London and Country) commented that it didn't look like the form he was used to seeing, and nowhere on the Tax Calculation does it actually say SA302 - which is true. He said it a bit more politely but basically suggested that I might have downloaded the wrong thing, or that possibly HMRC have changed their forms recently. I'd have hoped he might be up to date on any such changes but there we go!

So I phoned HMRC to see if they could shed some light. The lady I spoke to said that things are slightly different now that SA302s can be downloaded from the website, but didn't seem to know whether the old version would have had separate figures for Net Profit and Taxable Profit. I asked whether the paper copies on their way by post would have anything different but she seemed to think (without enough certainty for my liking!) that they'd have the same figures as the online version, without any extra detail.

I would of course be happy to submit my full tax returns to mortgage lenders, where they will see Net Profit given in box 21 of the Self-Employment (short) section, and Taxable profit in box 28. But the general feeling among everyone I've spoken to is that they will only want to see an SA302. Even if the new style of SA302 doesn't actually say SA302 anywhere on it?! Can anyone confirm whether the new paper ones do or not?

Anyway I wanted to open this up and see if anyone here is more clued up than the people I've managed to speak to. In particular:

1) Do mortgage lenders REALLY want Net Profit (before capital expenditure) as we've been consistently told, or do they actually use Taxable Profit and are misleading customers and getting their hopes up?

2) Did the old SA302s (pre-online versions) give Net Profit (before capital expenditure)?

3) Do the new postal paper copies of SA302 give Net Profit (before capital expenditure)? And do they actually have SA302 written anywhere on them?

4) Can we just get the head of UK Mortgage Lending to sit down and have a proper chat with the head of HMRC until they can agree on what figures are to be used?!

Hope you can help.

kingstreet

Are you self-employed (sole trader/partner) or a limited company director with equity of more than 20%?

ACG

There are SA302s and Tax overview documents, they are different and you will probably need both.

I am assuming you do not have an accountant?

The online SA302s do not look identical to this, but they follow a similar format. The ones you get in the post will look the same.

You are looking for "Total Income Received".

Aldermore have put together a good guide here - http://www.aldermore.co.uk/media/3257/mortgages_toolkit_hmrc_how_to_guide_broker.pdf

It has some images of the online SA302s and you can on there it has total income received, that is the figure lenders will use.

T_Diddly

kingstreet wrote: »

Are you self-employed (sole trader/partner) or a limited company director with equity of more than 20%?

Hi kingstreet, we're both sole traders.

T_Diddly

ACG wrote: »

I am assuming you do not have an accountant?

Hi ACG, that's correct, neither of us have an accountant.


My online SA302s follow the same format as the one on page 2 of your web link. So it uses the "Profit from self-employment" figure, which corresponds to Taxable Profit (box 28 from the tax return). Bad news for me and puzzling given that I keep being told they want Net Profit (box 21).

ACG wrote: »

You are looking for "Total Income Received".

Are you sure Total Income Received is what lenders are after? In my case, for 2014-15 that figure also includes Pay From Employments. I did some part time PAYE work that year on a fixed term contract which has now ended, so I'm given to understand that that income won't be taken into consideration by a lender.

Total Income Received also includes savings interest - presumably that's not much good as a source of income for mortgage repayments, since one tends to spend one's savings on the deposit so that income would all but disappear once the house is bought.

ACG

OK, total income excluding interest (assuming the savings you have will be used for the deposit) and exclduing income from a job that you no longer have.

T_Diddly

Ok yeah gotcha. So assuming the information in the SA302s now is the same as it always has been, then I guess we've just had the misfortune to speak to 3 mortgage representatives who don't correctly understand the products they're offering?

I wonder how widespread this is... 3 out of 3 is either very bad luck or suggestive of an industry-wide misconception about Taxable Profit vs Net Profit.

ACG

You now have me wondering if I have it wrong :P

To be completely honest, if I do not have an SA302 infront of me I can get confused myself.

steeeb

Isnt the taxable profit the income minus expenses?

https://www.gov.uk/government/publications/how-to-calculate-your-taxable-profits-hs222-self-assessment-helpsheet/hs222-how-to-calculate-your-taxable-profits-2016

Thats the figure the mortgage company also care about. Are you sure youve not done your return(s) wrong?

T_Diddly

steeeb wrote: »

Isnt the taxable profit the income minus expenses?

Not according to the self-employment section of a tax return. I'm a new user so not allowed to post links on here, but if you look online for form SA103S, that's the part of a tax return in question. The relevant bits are on page 2.

As you can see, net profit is income minus expenses. Taxable profit is net profit minus capital allowances.

I phoned HMRC a few years ago to clarify the difference between expenses and capital allowances. In my case, when I buy equipment which would have a resale value on the used market, I'm not supposed to claim its cost as a business expense, but as a capital allowance instead. The web link you posted suggests it should have a useful economic life of 2 years to qualify - fair enough. My basic understanding is that an expense is money you have to spend in the course of business, whereas a capital allowance is when you buy something which you then hold as an asset, and either use it till it wears out, or sell it on.

In the last few years I've spent a few thousand pounds on equipment. The resulting difference in my net profit vs taxable profit is significant enough to affect my ability to buy a house, hence I'm quite keen to get to the bottom of this.

minimike2

The online "Tax Calculation" is the same as the SA302. The SA302 is just the version the revenue send in the post, whereas the tax calculation is what you can get online from your portal. In addition, as my friend above has pointed out, you are also likely going to need the last two tax year overview document (which shows your tax payment position).

The "income received from self employment" is indeed the figure that the vast majority of mortgage lenders are interested in. There was a big shift away from just using the "net profit" figure on any accounts to the SA302 total income received figures around 6 years ago for a lot of lenders, as the SA302 is the earnings you have paid tax on, so that is what they are interested in.

It may be possible a more personal (read not a "national type sales culture brokerage where the brokers tend to last 5 minutes and therefore a high percentage of trainees work there" brokerage) broker may be able to search for an alternative lender for you in order to achieve the loan amount you need.

Some of the tax practices you describe are what I often refer to as "wanting to have your cake AND eat it" when it comes to minimising tax, but still wanting to be able to have borrowing power. Not meaning any offence, but you can't have it all ways. A common theme I have seen with the self employed for, well, ever.
Hope this helps.