TSCB 7: Those rules apply to me? How? Summary of Expenses so far

As we’ve now reached a grand total of 7 articles in the Tax for Small Craft Business Series, and quite a few people are showing a bit of bewilderment, there’s a couple of points I think I need to emphasise, and also examples to share about how the rules can be very simple really. No, honestly they can, although perhaps not so much for craft businesses because of the stock valuation issues.

This post follows the steps a brand new small crafting business (a made up person called Alice’s made up new venture making & selling fudge) takes to get her first year’s figures into their Tax Return, based on the issues about trading periods and the sorts of expenses we’ve covered so far – so it’s not complete by any means, but should give you a bit of help to understand how what we’ve covered operates in real life.

The example ended up quite long, so it’s in two parts:

• Today’s post covers how to deal with all the ‘normal running costs’ expenses – that is anything that’s not ‘stock’.
• The second part (available on Wednesday) will cover the ‘stock’ expense and a bit more on stock valuation, and getting the figures into the Tax Return itself.



Featured Seller: BrightStar 109 (Claire English) See her Etsy shop here

and about her work at the foot of this article

TSCB 6: Expenses - Stock, Work in Progress & Appropriations

As a crafting business you often are both manufacturer and retailer. Stock control is important so you know what you’ve got on hand to sell, but it also matters for working out your expenses for tax. You need to know what you started with, what you used, what you’ve sold and what you’ve got left.

To be absolutely clear, you can only claim the underlying expenses relating to the products you have actually sold (or have left your ownership) in the Trading Period – all the other expenses for raw materials/ supplies etc that you’ve bought aren’t eligible for tax relief until those materials or supplies have been sold. They just sit in your stockpile until they are ‘used up’.

So, if you have been claiming expenses for raw materials or supplies purchased during the Trading Period that you haven’t actually used to make something that has actually been sold or otherwise taken out of your ownership during the Trading Period– technically you’ve been doing it wrong because that’s the ‘cash basis’ and you should be using the Accruals Basis (see the last post about Cash & Accruals Basis). To regularise your position you will have to make an adjustment to add back the expenses you have overclaimed in earlier years, based on what stock you have on hand on the first day of your new Trading Period. You really also ought to tell HMRC, which could lead to a revised and higher tax liability for earlier years (or reduced losses), penalties and penalty interest.

Featured Seller: Poppy Sparkles (Viv Smith) See her Etsy shop here

and about her work at the foot of this article

TSCB 5: When and how to claim Expenses

The last post covered the basic technical principles behind what type of expenses are claimable and why they might be disallowed for tax purposes. This article covers how to work out when you can claim a (revenue) expense, & how much detail you need to give HMRC about your expenses in your tax return.

To work out your business income & expenses you can’t just look at the actual cash position – the money you received and the money you paid out (‘cash basis’ in accounting speak). You also have to look at money that is owed to you, or you owe others at the end of each Trading Period at your business’ year end (‘Accruals Basis’ in accounting speak).

Some expenses examples of this would be if

• you’ve ordered and received some raw materials but not paid for them yet (you need to make an Accrual adjustment), or
• where you’ve paid for something you haven’t had yet, like the line rental on your home telephone (you need to make a PrePayment adjustment).

This article explains what happens to those sort of expenses that are hanging over from one year to the next.

Featured Seller: SoapDragon (Amanda): See her Etsy shop here

and about her work at the foot of this article

TSCB 3: Tax Planning with Year Ends

The last post dealt with the very simple and most common situation where a new business starts up and chooses a year end that matches the UK tax year.

If you don't choose the simple route, you can obtain a cashflow advantage, quite legitimately and within the law, because choosing a year end towards the beginning of the tax year means that you pay the tax liability later than you would if you aligned your year end with the end of the UK tax year.  You still pay the same amount of tax over the full life of your business, regardless of what year end you choose: the difference is when the tax payments fall due in relation to when the underlying profits arise.

As a matter of Public Policy, HMRC prefer people to pay their tax sooner rather than later: so there are special rules that temporarily ‘penalise’ businesses choosing an earlier year end by taxing them twice when they start and only giving it back when their business ends - which could be years later when inflation has eroded its value.  Despite this, many businesses choose an earlier year end because it's better for their personal circumstances.

This article explains how the simplest of those special rules work for businesses who are making profits. It doesn't cover what happens for businesses that are making a loss (that will be in a later article).

Featured Seller: Imynda: See her Etsy shop here

and about her work at the foot of this article

TSCB 2: What's my year end and which tax year?

The last post in the TSCB (Tax for Small Crafting Businesses) Series covered how to work out whether you’re trading for tax purposes and so what to do to satisfy HMRC (HM Revenue & Customs) requirements to get you properly set up with them for your trading life.
It also explained how to work out the date your trading started (commencement date in accounting speak), your commencement date is the date you put into Box 14 on the CWF1 form to register your business with HMRC.

Once you’ve got your commencement date you can then sort out what income & expenses fit into each tax year by working out your business year end date and trading periods.