UK Tax - Sole trader - capital expenditure

[Bryan]

I registered as a sole trader when I started to sell stock and to date have written off my capital equipment purchases at 18% per year as a tax relief.

 

I've just bought a new camera (the NEX 6 was showing signs of possible demise) and was wondering if it would be possible to claim the expense as a one off item, the so called Cash Basis accounting that has recently become applicable to sole traders with limited income.

 

Further, can I mix the two methods, i.e. continue writing off existing equipment at 18% as I have been doing, and treating this new purchase on the Cash Basis?

 

Any UK tax experts out there?

 

I guess the easy advice would be to hire an accountant, but, for the money that I make, that is probably not viable!

[M.Chapman]

I use cash basis accounting. If I make capital purchases I deduct the whole amount from my profit in the tax year they are made. If I sell items later (e.g. on eBay) then I credit my accounts with the net sale value. However I have been careful to ensure that my capital expenses have been small relative to my total turnover and profit. I also keep a record of which equipment is owned by the business. I don't see why you can't combine the two methods. Certainly if I was making a large capital purchase (that would cause a significant overall loss), I might consider that approach, so as to maintain profitability year on year.

[spacecadet]

Do as you suggested. Keep the write-down pool for existing items then write down new ones as expenditure under the new rule. I still have a pool of, I think, about £18 under the old rules.

BTW 'cash basis' as such doesn't affect this, it's the new annual investment allowance that was introduced a few years ago. Everyone gets it up to £500,000. Then you argue about write-downs.

[M.Chapman]

Do as you suggested. Keep the write-down pool for existing items then write down new ones as expenditure under the new rule. I still have a pool of, I think, about £18 under the old rules.

BTW 'cash basis' as such doesn't affect this, it's the new annual investment allowance that was introduced a few years ago. Everyone gets it up to £500,000. Then you argue about write-downs.

 

I believe the Annual Investment Allowance has now dropped to £200,000. See here, which also answers the question about mixing write-down method with AIA.

 

If you don’t want to claim the full cost, eg you have low profits, you can claim:

• writing down allowances instead
• part of the cost as AIA and part as writing down allowances

[Bryan]

Thanks for the responses and clarification. Looking forward to the pleasure of completing my tax return later in the year

[Phil Robinson]

Devastated to hear the allowance has dropped from £500,000 to only £200,000. That's really going to mess up my tax return this year.

[Gary Clarke]

I hope it's okay to pick up on this old thread started by Bryan rather than starting a new one as it's also related to UK tax (I found this one whilst searching for advice on the following issues):

 

What do people do about claiming for mileage costs when travelling to/from potential stock locations as well as photo shoots? My income is small but growing a little year on year. To date, I've not bothered on the self-assessment with factoring in my mileage costs but people tell me I should do as I'm missing out (I'm registered as self-employed). The Inland Revenue seem to indicate you can claim 45p per mile as an expense but when I travel (e.g. for stock or to photograph a motorsports event from which I may or may not generate sales to competitors and magazines) the mileage (at 45p per mile) will often by more than I receive in sales. Am I missing something here? I'm retired and so my photo income isn't a big issue, or amount, and I can afford the outlay but it seems that the claimable mileage expenses set against low-ish sales could potentially give me a tax refund every year which seems a bit odd (or wrong).

 

Just as an example, I might do a 50-mile round trip onto the North York Moors to get some stock images especially weather news (maybe just a handful per trip) but this can be a number of times per month so a claimable expense of £22.50 per trip? As we know, these may or may not sell on Alamy and maybe not for years. Similarly, I might do a 400-mile round trip to a circuit for a race, put a couple of hundred images on my website for competitors to browse, sell a handful and maybe sell 2/3 to a magazine but I could potentially claim £180 against expenses, i.e. more than I sell. As said, am I missing something here?

 

Similarly with camera bodies, lenses etc - I've tended to be on the safe side and only class new purchases as capital at 30% for business (70% personal use). Whereas in reality my usage of the equipment is nearer 90% business these days. But I'm advised I may be selling myself short there as well.

 

I'll probably phone HMRC to ask advice but wondered how other UK tax payers on the forum handle it to give me some ideas on what HMRC may say. Many thanks, Gary. 

[Bryan]

I rarely travel specifically to shoot stock, but rather take photos where I find myself. Locally I have a bus/Metro pass or use a bicycle. 

 

At the HMRC course I attended I seem to recall that the emphasis was on being reasonable. So, for example, you can charge some part of your mobile phone against tax, if you use it in connection with the business. I never do, so don't claim.

 

Similarly my annual jaunts into mainland Europe are in order to see some sunshine and enjoy the experience. The photos are a bonus, charging travel would not be reasonable, and would wipe out any notional profit from the business. However I do claim all equipment purchases. I used to do so as writing down capital but now, as advised above, as I write them off in the year. That said I am pretty parsimonious in the hardware department, my level of expenditure is commensurate with the earnings of the business.

 

If you start posting a perpetual loss the tax man will want to know why, but if you can post a sensible profit and pay some tax, I suspect you will be left alone. Many businesses make a loss in their first year or two, and I guess that the taxman would expect that.

 

I have another business which generates considerably more cash, and I do claim for all expenditure there, and still pay a substantial amount of tax - just completed my self assessment and need a stiff drink to get over that......

[Gary Clarke]

Thanks Bryan, seems sensible advice. In the first couple of years I posted losses whilst investing in kit / capital but since then I've done as you say - make sure I pay some tax. I think if I put in all of my mileage as expenses (even though they are for business purposes) then it would start to look a bit silly. Best to err on the side of caution with expenses until I'm making mega-bucks!!! Will increase my capital percentage though - too low at 30%. Thanks.

[Bryan]

1 hour ago, geogphotos said:

I've posted this thought in the past and its fair to say that it has gone down like a lead ballon. So I suppose I can expect some red arrows....

 

When we talk about the financial results of big businesses we talk in terms of Turnover rather than pre-tax profit. eg) Alamy sales were £15 million, but their pretax profit might only be £200,000. We would judge how well the company was doing by its overall revenue because we know that expenses can vary

 

But as sole traders and stock photographers people on forums only seem to regard money received in the bank as turnover. 

 

Alamy is an agency, it makes money from charging commission on its services to us, it actually has no products of its own. 

 

If we rented out houses we would regard the size of our business activity as the total rent received, not the amount received after estate agent commission, repairs and other costs. 

 

So what about assessing our business activity on turnover BEFORE commission and before deducting all the various expenses? Actually, isn't this what Alamy does in presenting our sales figures to us? 

 

I do realise, before somebody points it out, that it will make no difference to tax due. Just an idea that it might be a better way of giving an overall assessment of business activity.

 

Can't see anything wrong with that, although I'm not sure when VAT or NI kick in, are they based upon turnover or profit?  Personally I wouldn't do it as it adds a layer of complexity, but it would perhaps better show that you have a meaningful business, if that is a concern.