Self Employed Basic Questions

nicenswift

Hi,
Firstly I have to admit I know very little about self employment apart from what I have read on the internet.
My Daughter (21) started a little shop on Etsy at the start of lock down selling artwork.
It has proven to be more successful that she or I imagined.
She has no other forms of income other than this.
I have been reading that if you earn more than £1000 in a tax year (April 2020 to April 2021) you have to register as self employed. 
Quick Questions.
1. Is this above correct ?
2. Is the £1000 threshold your turnover or profit ?
3. I have seen mentioned a trading allowance of £1000 but not sure what this is and does it apply to every tax year or just your first ?
Many thanks for any advice.

Emmaaar22

Seeing as your daughter has no other forms of income, Make sure she declares herself as self employed at HMRC. By declaring this she will have her taxes/NI paid for. I found it easier to phone them rather then use the webchat, My process only took 5 minutes however this is not the case for some people and you can find yourself waiting for hours in the current circumstances.

£1000 is the threshold, However make sure she does her outgoings. If she pays for her phone or internet, materials, paint, stationery, fuel, this is all classed as outgoings.

soolin

The £1000 is turnover , anything over that and your daughter must register and prepare simple accounts each year. However, as already mentioned, if your daughter has no other income then her allowances will offset any tax due, she may still be liable for NI though depending on net income after expenses.

nicenswift

Many thanks for the advice guys.

nicenswift

Another quick question if I may.
I understand about deducting all her costs and commission from her incoming but:
When she gets an order for a print it makes more sense financially to get 5 or 6 done from the printer rather than just one, obviously these extra prints end up in stock until she gets an order for another. When she does her tax at the end of the year how does she take into account any stock she holds or does this not matter to HMRC.
Again many thanks for your time.

soolin

nicenswift said:

Another quick question if I may.
I understand about deducting all her costs and commission from her incoming but:
When she gets an order for a print it makes more sense financially to get 5 or 6 done from the printer rather than just one, obviously these extra prints end up in stock until she gets an order for another. When she does her tax at the end of the year how does she take into account any stock she holds or does this not matter to HMRC.
Again many thanks for your time.

If you do it on a simple cash basis you don’t have to account for stock separately. Just books showing all income, including all the postal elements etc, and another book showing all expenses, including outgoing post, manufacturing, packing etc. 

The only drawback with cash basis, and it is a small one is that if she decides to give up and still holds stock the disposal income from that stock would be taxable . I hope I’ve explained that OK, so just say she trades for 8 years but ends up with lots of dead stock. She takes that stock to an auction house just to get rid of it and gets £1000 , that full £1000 would be taxable if she has no expenses to off set . By that time she might have a full time job and be paying tax and the £1000 would be fully taxable.

Just as an aside, don’t hold too much stock. It is tempting to overbuy to get bulk discounts but can be a false economy if something doesn’t sell after the first sale. 

nicenswift

soolin said:

nicenswift said:

Another quick question if I may.
I understand about deducting all her costs and commission from her incoming but:
When she gets an order for a print it makes more sense financially to get 5 or 6 done from the printer rather than just one, obviously these extra prints end up in stock until she gets an order for another. When she does her tax at the end of the year how does she take into account any stock she holds or does this not matter to HMRC.
Again many thanks for your time.

If you do it on a simple cash basis you don’t have to account for stock separately. Just books showing all income, including all the postal elements etc, and another book showing all expenses, including outgoing post, manufacturing, packing etc. 

The only drawback with cash basis, and it is a small one is that if she decides to give up and still holds stock the disposal income from that stock would be taxable . I hope I’ve explained that OK, so just say she trades for 8 years but ends up with lots of dead stock. She takes that stock to an auction house just to get rid of it and gets £1000 , that full £1000 would be taxable if she has no expenses to off set . By that time she might have a full time job and be paying tax and the £1000 would be fully taxable.

Just as an aside, don’t hold too much stock. It is tempting to overbuy to get bulk discounts but can be a false economy if something doesn’t sell after the first sale. 

Great advice - many thanks

digoffpage

Many many thanks for great and good advice.

nicenswift

My Daughter is now is the process of registering and wanted to say thanks for the great advice so far.
A family member mentioned that if you are self employed you have to have your accounts/tax return done using accounts software like Sage etc. and cannot use a  spreadsheet etc. Is this the case ?
Many thanks

ElefantEd

I'm self employed and just use a spreadsheet. In fact, I fill it in with a pen and add it up by hand. No requirement to use software at all. When it comes to filling in your tax return online you only have to give totals, assuming you aren't earning that much or doing anything complicated.

Emmaaar22

I also use a spreadsheet but online as find it the easiest way rather then writing it all out. Google spreadsheets is free to use