Self employed tax question

banja · 24 Jan 2012 at 13:03

A question for any accountants out there.

I'm self employed - a sole trader. If I buy equipment one year (and claim it as tax deductable) and then sell that equipment a year (or more) later, how do I declare the income from that sale?

Do I simply include it in my total income, so that it is liable to standard income tax like the rest of my income? Or should it be declared in another way?

Many thanks.

Kemik · 24 Jan 2012 at 17:48

banja said:
A question for any accountants out there.

I'm self employed - a sole trader. If I buy equipment one year (and claim it as tax deductable) and then sell that equipment a year (or more) later, how do I declare the income from that sale?

Do I simply include it in my total income, so that it is liable to standard income tax like the rest of my income? Or should it be declared in another way?

Many thanks.

What are you buying and what is your trade?

mollymoo · 24 Jan 2012 at 17:52

Are you going to take themoney and spend it on yourself or put it back into the business ?

If you take it for yourself then if I'm thinking right it is taken as a drawing, if you reinvest the money in the busineess it will be capital. However I may of completely misunderstood what your asking.

banja · 24 Jan 2012 at 17:57

I'm a sound engineer. The gear is microphones and accessories. I will be buying more gear, but how the money is directly used is not relevant is it? As I'll be buying more gear anyway and declaring those purchases as tax deductable.

mollymoo · 24 Jan 2012 at 18:08

I think if you have bought equipment and instantly put it through your purchases, the full amount in your profit and loss, rather than having it as an asset and depreciating it then it would likely go through as a sale, and you would increase your tax liability. Then when you use the revenue from the sale to purchase more equipment then this will go through as a purchase and decrease your tax liability.

banja · 24 Jan 2012 at 18:08

mollymoo said:
Are you going to take themoney and spend it on yourself or put it back into the business ?

If you take it for yourself then if I'm thinking right it is taken as a drawing, if you reinvest the money in the busineess it will be capital. However I may of completely misunderstood what your asking.

I think this might be the relevant point. What does this mean and how do I declare a sale of equpiment as reinvested capital? I do plan on using all proceeds to fund further (business) purchases.

To clarify, I don't draw a salary from my business, I just live on what I earn, buy what I need and then declare those expenditures as tax deductable.

Freakbro · 24 Jan 2012 at 18:11

It comes under the capital allowances section.

In simple terms, if you have claimed the full purchase cost of your equipment in year 1, under the Annual Investment Allowance (section 22 on the return) then when you sell (dispose) of that capital equipment, say in year 2, the amount you sell it for would be entered in the Balancing Charges (Section 25) as the "profit" on the sale in year 2's accounts.

It doesnt matter if you then buy further capital equipment in year 2, that will then go into that years AIA.

edit : helpsheet here http://www.hmrc.gov.uk/helpsheets/hs252.pdf

banja · 24 Jan 2012 at 18:12

mollymoo said:
I think if you have bought equipment and instantly put it through your purchases, the full amount in your profit and loss, rather than having it as an asset and depreciating it then it would likely go through as a sale, and you would increase your tax liability. Then when you use the revenue from the sale to purchase more equipment then this will go through as a purchase and decrease your tax liability.

Sorry to sound dumb, but I don't quite get this. If I declare a sale of some gear as income (and pay tax on it) then purchase something else (and it's tax deductable) won't they just cancel each other out?

banja · 24 Jan 2012 at 18:14

Freakbro said:
It comes under the capital allowances section.

In simple terms, if you have claimed the full purchase cost of your equipment in one year, under the Annual Investment Allowance (section 22 on the return) then when you sell (dispose) of that capital equipment, the amount you sell it for would be entered in the Balancing Charges (Section 25) as the "profit" on the sale.

It doesnt matter if you then buy further capital equipment in year 2, that will then go into that years AIA.

Okay, kind of getting somewhere. So I need to declare it seperately? I thought my purchases were declared as capital expenses, but I can't recall exactly.

Thanks for your help guys.

mollymoo · 24 Jan 2012 at 18:16

banja said:
Sorry to sound dumb, but I don't quite get this. If I declare a sale of some gear as income (and pay tax on it) then purchase something else (and it's tax deductable) won't they just cancel each other out?

Yes they will, however if you were to keep your books properly you would need to show both of these transactions, it sort of keeps the HMRC happy if they were ever to inspect your books. If you were to trade your old equipment in, and get new equipment from the same supplier, you could contra the two off, this would also be acceptable. Oh and you don't sound dumb, it's often difficult for people to get their heads around, like not understanding why a business can profit yet have no cash

pull2808 · 24 Jan 2012 at 18:20

It's a capital expense, Freakbro isnt far off with his explanation. Mollymoo, unfortunatly it's not a trade item therefore shouldn't go onto the profit and loss (as income or an expense).

To be honest mate, find a local accountant (1 man job) for some tax advise. Even if it costs £400 it's likely you'll save on the tax in the long run.

banja · 24 Jan 2012 at 18:21

Freakbro said:
edit : helpsheet here http://www.hmrc.gov.uk/helpsheets/hs252.pdf

This was starting to make sense. And I followed it up till the point where it specifically answers my question, at which point it started to mention 'pools' page 7, 'disposal of assets' :confused:

Head spinning now. I hate this stuff.

banja · 24 Jan 2012 at 18:22

pull2808 said:
It's a capital expense, Freakbro isnt far off with his explanation. Mollymoo, unfortunatly it's not a trade item therefore shouldn't go onto the profit and loss (as income or an expense).

To be honest mate, find a local accountant (1 man job) for some tax advise. Even if it costs £400 it's likely you'll save on the tax in the long run.

Doubtful, I earn barely enough to even pay tax, and live a life of borderline poverty, just so I can do a job I love instead of earning three times more in a job I'd hate.

Pudney · 24 Jan 2012 at 18:23

Is this hypothetical or actual?

banja · 24 Jan 2012 at 18:24

Pudney said:
Is this hypothetical or actual?

Real life bro!

Pudney · 24 Jan 2012 at 18:25

How did you treat the expenditure originally?

Freakbro · 24 Jan 2012 at 18:25

banja said:
Okay, kind of getting somewhere. So I need to declare it seperately? I thought my purchases were declared as capital expenses, but I can't recall exactly.

Thanks for your help guys.

It's not included in the Turnover (Income) side of your business no, just as the purchase of these assets is not included in the Allowable Expenses section either (box 8 - 21)

They get entered in the next part (box 22 - 25).

And dont worry about if they seem to cancel each other out, ie: expense on one side income on the other, thats what its supposed to do. ie: it works out the difference between how much you spent on assets and how much you got back from disposing of old ones.

pull2808 · 24 Jan 2012 at 18:26

Ah right fair enough. You'd still be suprised how cheap some local ones could be to just complete the tax return.

In your above post, the pool reference is just a heading to represent the assets.

Any more questions just ask mate.. if you're filing online they usually have good pointers to help out.

Freakbro · 24 Jan 2012 at 18:28

banja said:
This was starting to make sense. And I followed it up till the point where it specifically answers my question, at which point it started to mention 'pools' page 7, 'disposal of assets'

Head spinning now. I hate this stuff.

Dont worry about that part. Your Annual Investment Allowance is £100,000 a year.

So you can claim up to £100,000 off your profit in any one year for capital expenditure. Its only if you spend more than this that you carry over the balance into a pool and have the WDA (write down allowance).

Raymond Lin · 24 Jan 2012 at 18:28

pull2808 said:
It's a capital expense, Freakbro isnt far off with his explanation. Mollymoo, unfortunatly it's not a trade item therefore shouldn't go onto the profit and loss (as income or an expense).

To be honest mate, find a local accountant (1 man job) for some tax advise. Even if it costs £400 it's likely you'll save on the tax in the long run.

That's what I did, much easier and less hassle.

....even though I actually can do a profit and loss account and passed my BLP exam, it's just easier and I am not up to date with any legislation amendments, if any.