Self Assessment - Finance from Employer

day2day77

I am a sole trader working for a company.  I have a verbal arrangement with my boss where he lends me money each month until I have built up enough income to sustain myself.  That point hasn't been reached yet, so technically I am not in profit.

In my situation the loan amount for the current year is more than the income I generated.  Does anyone know how to key this into the self assessment?

Thanks

Jeremy535897

If you are a sole trader, you don't have a boss. You have a customer. Assuming that the amounts you receive are genuinely loans, by which I mean that if you stopped doing work for the company you would have to repay any amount that exceeded the value of work done by you, your turnover is the figure you earned for the work done by the tax year end.

day2day77

Thank you.

Dead_keen

day2day77 said:

I am a sole trader working for a company.  I have a verbal arrangement with my boss where he lends me money each month until I have built up enough income to sustain myself.  That point hasn't been reached yet, so technically I am not in profit.

You'll have to explain more.  Are you saying something like

1. You have a sole trade.

2. You have a company as a client ("Company").

3. You invoice the Company each month for the work you do.  This is a variable amount.  For example, it might be £100 per month some months and £2,000 per month other months.

4. There is an individual (your Boss) who has said something like, I will lend you enough each month so that you will always get at least £1,000 per month.

5. So in Month 1 you get, say, £100 from Company and your Boss lends you £900.

6. In Month 2 you get, say, £1,200 from the Company and so repay your Boss £200 and so now owe your Boss £700.

Is it something like that.

Having loans like this is very unusual.  Why was it done?  

What would happen to the £700 owed to your Boss if for some reason the Company stopped being your client?  Would you always have to repay the £700? Would you never have to repay it?

Why doesn't the Company just pay you £1,000 in the first month and knock £200 off what it pays you in the second month?

Why is your Boss involved when the Company is your client?

day2day77

I work in finance - it is common that the principle will pay a minimum monthly income as an interest free loan whilst building up the pipeline.  For various reasons including covid and personal the amount lent over the tax year was more than the invoiced amount.

So, some months for example I would invoice less than the loan and others more.

Bottom line - at the end of the tax year I owed more than invoiced.

Question is, do I just declare just the invoiced amount as turnover?

Jeremy535897

This doesn't alter my earlier answer. If the self employment is genuine, and the advance is genuinely a loan that is repayable if the future work is not done, I believe that what you invoiced, plus any work done by your year end but not invoiced (work in progress), which is what I meant by "earned", is what you declare. It might be more complicated if you elected to use the cash basis for tax.

Dead_keen

day2day77 said:

I work in finance - it is common that the principle will pay a minimum monthly income as an interest free loan whilst building up the pipeline.  For various reasons including covid and personal the amount lent over the tax year was more than the invoiced amount.

So, some months for example I would invoice less than the loan and others more.

Bottom line - at the end of the tax year I owed more than invoiced.

Question is, do I just declare just the invoiced amount as turnover?

You've not given enough facts to provide an answer.

In normal circumstances where an individual receives a loan, I'd agree with Jeremy.  So if, for example, the roof of your house blew off and you needed a short-term loan to cover it and your client paid lent some money as a favour then you'd only include any invoiced amounts (plus WIP) in turnover and ignore the loan in working our your taxable profits.

Your position is different though.  The amount that you borrow is linked to how much you invoice.  And that means that your tax position is much more complicated. Whether the loans are taxed is based on your actual facts.  For example:

1. Your profits are based on your accounting profits and these are based on generally accepted accounting practice.  If there are circumstances when the loan is not repayable, and is in fact remuneration, then an accountant applying proper GAAP may well say that an amount equal to some or all of the loan needs to be included in the profits.  If so, you are taxed on the extra amount included.  You say "it is common that the principle will pay a minimum monthly income". That's rare in most of "finance" but I've seen it with "financial advisers" and asset managers (e.g. a partner in a new LLP).  In all the circumstances I've seen, the loan never needs to be repaid if someone leaves in "good" circumstances.  That may well support early revenue recognition.  You've not mentioned the circumstances that the loan does not need to be repaid.  What are they? 

Let's assume that GAAP does not require some or all of the loan to be repaid (e.g. my 1. above is not relevant).  We then move on to anti-avoidance:

2. The self-employed disguised remuneration rules are designed to tax (among other things) loans connected to a trade that are not already taxed as trading income.  It will be a question of fact as to whether they do but, if they do, you would include the amount of the loans in your trading profits that are taxed as trading income.  The rules are complex but guessing some simple facts, it would be easy to imagine that Conditions A to E are all satisfied where your principal lends money and so they would potentially apply.  But you've not said enough about what your facts are.  Jeremy, if you are interested these are in s23A ITTOIA.

3. The disguised investment management fees are designed to tax sums (including amounts paid by way of loan) if an individual provides, directly or indirectly, "investment management investments" services in respect of a collective investment scheme.  If you are a financial adviser or an asset manager then you may well satisfy this test.  My points 1. and 2. take priority (so if you are already taxed by one of those points you won't be taxed again).  The fact that the loan may be repaid (or is later repaid) is neither here nor there.  So if this is relevant the loan is likely to be taxed as the profits of a notional trade.  So you need to do a separate set of pages on your self-assessment tax return for this.  Jeremy, if you are interested these rules are in s809EZA ITA. 

Jeremy535897

Re 1, that is why I qualified my answer by asking whether it is a genuine loan.
Re 2, I don't see condition D being met. Even if not, if it is a small genuine repayable loan in a self employment situation, I don't see HMRC trying to argue it.
Re 3, thanks for that. I admit I have not come across this before, but OP's post doesn't sound like this sort of sophistication is applicable, but no doubt they can confirm.

Dead_keen

I'm not trying to be argumentative Jeremy but wanted to comment / ask further.

Jeremy535897 said:

Re 1, that is why I qualified my answer by asking whether it is a genuine loan.

It can still be a genuine loan and my three alternative tax analysis could apply.  Many employment-related loans, for example, have situations where they are forgivable or of limited recourse.  But they are still loans.  Same with the self-employed (at least pre-DIMF).

Jeremy535897 said:

Re 2, I don't see condition D being met. Even if not, if it is a small genuine repayable loan in a self employment situation, 

Why do you think Condition D is not satisfied? Feel free to make any facts you want!

Why do you think it is small?  I've seen similar situations where the loan is very large. Admittedly, I would not expect someone with a large loan to ask questions on a random forum.

Why does genuine or repayable make a difference?

Jeremy535897 said:
I don't see HMRC trying to argue it.

If it is relevant, it is a self-assessment obligation but I'm interested in why you believe that? 

My experience is that HMRC will normally pursue DIMF first but I'd be interested to know why you think that.  My experience is also mainly with LLPs rather than sole traders and if HMRC look like they might win, it would normally be better to concede that the mixed partnership rules would work. 

Jeremy535897 said:

Re 3, thanks for that. I admit I have not come across this before, but OP's post doesn't sound like this sort of sophistication is applicable, but no doubt they can confirm.

It doesn't need to be sophisticated.  If a financial adviser recommended that a client invests in a house fund, that can be enough.  An accounting doing due diligence on an acquisition is providing IMS. Normally, any sums received though are taxed as employment income or trading income and so it is just not relevant.  Again, this is a self-assessment obligation.

What I'm not sure about though is what the OP does.

day2day77

It is a genuine loan.  It's a gentlemen's agreement with the expectation it will run until no longer required and to be repaid in full.

It is common among mortgage brokers.  Normally it would last several months.   Mine has gone longer due to extenuating circumstances - by principle is happy to continue with arrangement

My understanding is it doesn't need to be declared because it is not disguised employment as the loan amount is far less than the expected income.  Also it is getting paid back regularly. So in theory, I'll end up paying tax on it at some point anyway.

Nearlyold

day2day77 said:

I am a sole trader working for a company.  I have a verbal arrangement with my boss where he lends me money each month until I have built up enough income to sustain myself.  That point hasn't been reached yet, so technically I am not in profit.

In my situation the loan amount for the current year is more than the income I generated.  Does anyone know how to key this into the self assessment?

Thanks

Can you clarify what you mean "by working for a company" is the company your customer ie you are selling goods or services to them or are you acting more as an agent and "selling" whatever it is the Company supplies (like loans or insurance or some sort of finance related service) to customers that you find, which the company then pays you a commission on spread over a term.