taking drawings when at a loss

[jodipodi]

Hi everyone I'm hoping someone can help me out with something thats confusing me a little please...
I am newly self employed, I dont employ anyone- just a one man band Im a sole trader in the beauty industry.
As soon as I started up I was running at a loss as I had a lot of products etc to buy before I could provide my services. I would like to take some drawings out of my cashflow each week to keep my personal head above water...have two children and living on tax credits at the moment. What Id like to know is this..if I take say for example £x amount per month/week/whatever how do I work out tax etc...
Say Ive made a loss of £1500 but took drawings of £500 would this mean my loss was in fact only £1000 ?? I understand that I pay tax only on my profits but just cant grasp it when Im at a loss but still drawing £....

I would also appreciate it if someone could explain the implications on my tax credits...do I declare my loss as above and offset my drawings from that loss and give them that figure or am I not classed as having an income until I am in profit on paper? ...
Any help would be appreciated , thanks in advance.

[jbell2210]

Hi,

As you are a sole trader the cash you draw from your business has no affect on the tax at all and no affect on the profit/loss. You just pay tax on the profits you make which is sales minus expenses. Simples : )

[jodipodi]

Thanks alot for the quick answer Joanne, can you confirm my understanding of your reply... basically I can take as much cash as I like out of my business and only pay tax on my profit (not my cash) when I make it. I feel like I shouldnt be taking cash without paying something on it lol ...its so confusing when you are just starting out.
Would this mean for tax credits that the figure I give them would be my '' LOSS OF £X AMOUNT'' and my cash drawings is 'mine all mine' and has no effect on anything. Only my profit or loss is my years income?
Someone hit me with a large hmrc stick hehe.

[GillespieBS]

You are correct that drawings are not liable for tax. If your business has made a loss, you are either drawing cash you have introduced yourself or you are drawing cash that has been put aside to pay the VAT bill (if registered) or other creditors so be careful you understand your balance sheet before drawing cash out.

[jbell2210]

Yes that's right, in the eyes of HMRC and for the purposes of your self assessment tax return it's all about the profits and you are free to take as much cash as you like :) Although I would be surprised if there was a lot of cash to draw if you are making a loss.

Re the tax credits I'm afraid I'm no expert on these but I would imagine that again you would just declare the loss, not net off your drawings.
Best to check by calling the tax credit helpline on 0845 300 3900. They'll give you a definate answer.

You obviously have a seperate business bank account but some people just run a sole trader business from their own current account, in which case if you had to net off your drawings they would have to include all the personal expenses going out of their account as drawings! Does that sort of make sense? I know it's hard when you set out on your own all this financial stuff :p

[jodipodi]

Thanks GillespieBS , please excuse my gobbledy-gook way of writing things but here goes...
It is my understanding that CASH FLOW is totally different to PROFIT & LOSS.
My start up costs were paid out of my own pocket...about £2500 so before I even started taking in any CASH I was at a LOSS on paper.
Say I take £300 CASH in my first week from the services I offer and pay out £100 CASH in expenses that means I have £200 in CASH left.
I am already at a loss of £2500 from my initial start up expenses.
As I have £200 left after my expenses for that week my current loss of £2500 would then be reduced to £2300 ( this figure obviously changes week to week depending on clients and expenses)...but the £200 CASH I put in my cash tin/bank is my CASH FLOW ...that doesnt necessarily mean thats how much my PROFIT is.
Please correct me if you feel I am wrong.

[Jenni384]

Make sure you have made a loss. You mentioned buying products. If that is stock of goods to be resold and if that stock is unsold at the year end, then it is not counted as a cost of sales. Only the cost of stock that you have sold is an allowable expense in that year; the remainder is carried forward against the next year.

With that said, if you have made a profit then there will be tax to pay.

As has already been said, what you draw out of the business is irrelevant for tax. You are only taxed on profit (but be aware of rules such as stock when calculating your profit).

Tax Credits:

Have a read of the notes that go with the tax credits renewal form - they are very self explanatory. I can't remember offhand but if you make a loss I think you just put your income as Zero.

I think (and this is the bit I'm woolly on) that if you have other income such as employment in the year, you can offset the loss against that (eg loss of 3k, emplyment income of 10k, you declare s/emp profit of zero and employment income of 7k. However loss of 3k, no other income, you can't report the loss anywhere, you income is just zero). Do please double check that as I'm doing it from memory and it's been a good few years since I looked at it. It should all be clear on the notes.

[jodipodi]

Yes Joanne I cant take much in cash but every little helps when you've got nowt to start with hehe! My start up costs for products were mega for just little old me and I had to find all that myself about £2500 so that made me at a significant loss from day one...hoping it will be worth it soon though when things start to balance out a little. Just didnt know if I could touch my pennies or if Mr TAXMAN would want a piece of that pie too lol. Thank you very much for your good advice..think a meeting with tax credits is my next step x

[jodipodi]

Hi Jenni, thanks for that. The products I use are to provide a service as a nail technician so I dont actually sell the products..more a service, all my products get used to create nail enhancements and I dont retail the products alone.
Think you are right about reducing our yearly income by taking my loss off the total, just didnt know if my drawings are classed as ''other income'' . Thanks x

[jbell2210]

I'm sure it will be worth it Jodi you sound like you've got it all under control. Here's to women in business aye?! :p

Please feel free to email me directly if you need any help with your tax return this year.

All the best.

[jodipodi]

I'll second that one hun, appreciate the help x