New side business and how to offset a loss against employed income

tabath

Hi

I started a business selling on ebay and amazon in Jan last year and am doing my tax return. I am doing it as a sole trader.I also work full time. I made a loss of around 2.5k upto the 5 April 2021. I am trying to fill my self assessed tax return and have chosen to do it on a "cash basis" as after reading the help documents that seemed the best choice. I am at the section where I have input income and expenses and the site has calculated my loss.

On the next page where it says Losses for "xxxx" I have put my losses in the box titled:

Loss from this tax year set-off against other income for 2020-21: (optional)

Yet it is has come up with an error:(see below)

• The amount entered for 'Loss from this tax year set-off against other income for 2020-21' as you have answered 'Yes' to 'Did you use the cash basis, money actually received and paid out, to calculate your income and expense?'. Please amend.

Can anyone recommend any videos or other that will walk me through the process? I have filled a self assesed return many years ago but never made a loss so have no experience of this.

Thanks

tabath

After a bit more reading I saw it says this:

"Do not make this claim if you used cash basis."

Am I not allowed to offset a loss against income from my full time job  then or do I just do it in another section?

Sandtree

Sideways tax relief doesnt apply to cash accounting business. Cash basis - GOV.UK (www.gov.uk)

The problem with cash accounting is that it isnt real/its highly simplified... if you started immediately before the end of the tax year and bought £10,000 of stock that will sell for £20,000 but you only managed to sell £2,000 by the end of the year. Under cash accounting you;ve made a £8k loss but under traditional accounting you've made a £1k profit and you have £9k of assets on your balancesheet in the form of the unsold stock

tabath

A bit of it is I had stock that hadn't sold but not a major amount. The majority of it was software,subscriptions and training.

Sandtree

Losses will carry forward to apply to next year but you cannot use them on other income as per the gov link in this year.

tabath

Ah, so I'm probably better off picking the other method so I can offset the loss? 

tabath

Sandtree said:

Losses will carry forward to apply to next year but you cannot use them on other income as per the gov link in this year.

Ah ok. So I can offset them against profits from this business in this year? 2021/22?

Grumpy_chap

tabath said:

Ah, so I'm probably better off picking the other method so I can offset the loss? 

Not necessarily.  How big is, or do you plan, the sole trader business?

Cash accounting is simple and losses can be carried forward into a future year to offset against profits in the same trade.  

Depending on the detail of the costs (you say software, subscriptions and training) they may not all be possible to off-set in any case.  This can apply particularly in the case of training which has specific rules about training for future business and training for current business.

You may find it worth while engaging the services of an Accountant.

Sandtree

tabath said:

Ah, so I'm probably better off picking the other method so I can offset the loss? 

You need to speak to an accountant to get professional advice. 

Given the nature of your business it may not make much difference but traditional accounting can cause cashflow challenges... I invoice my client £50,000 + £10,000 VAT and they have 60 days payment terms. Means I need to put that VAT on my VAT return and pay it potentially before I've been paid it

Jeremy535897

Sandtree said:

tabath said:

Ah, so I'm probably better off picking the other method so I can offset the loss? 

You need to speak to an accountant to get professional advice. 

Given the nature of your business it may not make much difference but traditional accounting can cause cashflow challenges... I invoice my client £50,000 + £10,000 VAT and they have 60 days payment terms. Means I need to put that VAT on my VAT return and pay it potentially before I've been paid it

Using the cash basis for VAT and the cash basis for income tax are two completely separate things, and you don't have to be consistent between the two. I find the cash accounting basis for income tax unhelpful, particularly in the context of losses, and also not having proper accounts. The cash accounting basis for VAT is a good idea for people whose output tax regularly exceeds their input tax, and whose customers take a while to pay.