Money not yet spent tax return.

foxy91

Hello,

I am currently self employed and in the most basic terms buying and selling products to make a profit. The extra I make on each item I sell is what I keep. Then I use the rest of the money to buy other things to sell. Once I make a sale, there is a time where I have money in my business bank account that just hasn't been spent yet on new things to sell. But obviously this is not profit as if I spend it on myself i'll have no business left. 


When I comes to doing my self assessment tax return and my books are made up to the end of the tax year, I will have some of this money left in actual money and not products to sell. Simply because I haven't purchased anything new with it yet. 

So when it comes to submitting the return and it asks for my income and expenses, this extra money I have that is not profit will be seen as profit on the tax return when it isn't. How do I go about not having this taken as my personal income without making sure i've spent everything I have to spend, by the end of the tax year.

Is there a certain box on the return this money would be inputted or something similar?

Hope this makes sense
Thanks for all help.

[Deleted User]

It really doesn’t make sense unfortunately. In the very very simplistic most basic of terms:

Let’s say that you started with £1000 and bought and sold 100 items and had absolutely no expenses whatsoever. You have £3000 in the bank at the end of the year and no stock left. Your profit would be £2000 regardless of what you intend to do with the money.

There are two basic methods of calculating profit. Gross Profit less expenses results in a profit (or loss). The other way to calculate profit is to work out what the business is worth at the end of the year and subtract what it was worth at the start. In my pitifully simple example - £3000 minus £1000 is £2000.

Jeremy535897

Do you use the cash basis or the accruals basis?

In its simplest form, if you started with £5,000 in the bank, bought £5,000 of stock with it, and sold that stock for £6,000 in the same tax year, your profit is £1,000, despite you having £6,000 in the bank. 

Penguin_

So lets say you start off by buying an item for £100 & you sell that for £120. Your profit is £20. You then use the £100 from the £120 to buy something else, which you then sell for £120 (for ease), again your profit would be £20. 

So your Income would be £240 
Expenditure would be £200
Profit would be £40

[Deleted User]

Jeremy535897 said:

Do you use the cash basis or the accruals basis?

In its simplest form, if you started with £5,000 in the bank, bought £5,000 of stock with it, and sold that stock for £6,000 in the same tax year, your profit is £1,000, despite you having £6,000 in the bank. 

Yes - I went the other way. Still - the difference in the business’ net worth remains valid.

foxy91

Thank you for the replies.
I am using the cash basis

Sorry if I am getting anything wrong here I am quite new to it.

Let's say I start with £1000 and everything I purchase is £100 and I then sell it for £120 each time. Not including any other expenses here just for simplicity.

I am only to be taxed on each £20 profit I make is that correct? So say I do this 10 times in a tax year my taxable income is £200

Id input £1000 expenses in the text return and turnover as £1200 meaning my taxable income would only be the £200 I took home. (obviously this is below the tax threshold but this is just for example sake)

Basically there is a time between a sale and a purchase (expense) which could be a day or two and I'm wondering what happens if this time lands at the end of the tax year.

Let's say I sell one of these items on the 5th of April and I have the £100 I would usually make my next purchase with as cash and not stock as the tax year ends. This would then push my taxable income up by £100. Even though that £100 isn't money I will keep or give to myself?  Basically it's money I will be spending at the very start of the next tax year.

Obviously I am using low amounts for my example but I only ask this as I am over the personal allowance and this extra money that just because I haven't purchased more stock with it as the tax year ends is being classed as my personal income adding to the amount of tax I have to pay.

So I would be best to make sure I have as low as possible actual cash at the end of the tax year in my business bank account and have everything in stock so I can submit it as an expense, otherwise I will be taxed on that money regardless of if it's going to be used on my business purchases or not it is that correct? 

Jeremy535897

If you use the cash basis, you can deduct what you pay for the stock in 2020/21 even if you don't sell it until 2021/22. If you had made your £200 profit by 1 April 2021, say, and then bought the next lot of goods for £100 on 2 April 2021 and sold them for £120 on 6 April 2021 (ignoring that it was Easter), your profit for 2020/21 would be £200 - £100 = £100, and on 6 April 2021 you would make a profit of £120.

Edi81

I’d suggest you speak to an accountant for them to explain to you. 

There are pros and cons to both but ultimately you will be taxed in the long run. 

unholyangel

OP you seem overly concerned that not having stock at the year end will lead to you paying more tax. 

Simplified for ease of understanding but revenue - cost of sales = gross profit. Gross profit - operating costs = net profit. Cost of sales = opening inventory + purchases - closing inventory. 

So lets do a comparison. Both scenarios have a revenue of 6k. 

First scenario you have spent all revenue on purchases to retain closing inventory. Opening 0 + Purchases 6k - 1k closing. Cost of sales = 5k. Deducted from revenue gives 1k profit. 
Second scenario you have kept what would have been spent on closing inventory as funds in the business. Opening 0. Purchases 5k. Closing 0. Cost of sales 5k. Deducted from revenue gives 1k profit. 


But in any event, if something falls into a different year it doeesn't mean you lose it. It's just accounted for in a different year (as per Jeremy's post). So even if an expense fell into next year instead of this year, you would end up paying more tax this year BUT you would end up paying less tax next year.

The £1000 would be included in your income/revenue figure, from which your expenses are deducted. So you wouldn't need to input it separately.