Sole Trader Tax questions

[78fca]

Hi,

My first post here...

I have previously been one of those sole traders where I give receipts etc to my accountant and get my accounts back, keep my fingers crossed for a small tax bill. The money I had month to month was what I had and I was ok with that.

Recently as my business has grown ( Manufacturing of leather goods ) I need more of an understanding of how this whole thing works, so I can plan ahead for tax bills, and investing money back into the business, making worthwhile purchases etc.

We keep spreadsheets of bank transactions and these get divided into columns for labour ,materials, vehicle costs etc , I have also completed a cash flow forecast which I find really helps.

Getting to my main question. If I was to get to the tax year end, Apr 5th, I am making a profit and I have money in the bank, say 10k, how is this money treated in an accounting sense. I assume it goes towards that years profits? and then if I take it out on say the 7th of Apr, how would that work? In my non accountants head... I see it as last years money and then how does that not get factored into the equation if I take it out in the following tax year?

I know this is probably a very basic question to most of you and I hope I am making sense, but I am still learning here so appreciate any advice

Thanks in advance

 

[jf-financial]

Hey,

When you're a sole trader, what you take out of your business (your drawings) has no bearing on your tax bill - your tax is calculated based on your taxable profit, not based on how much cash is in your bank or not.

In very simple terms your taxable profit will be your income less your allowable expenses - in your case however some of your expenses are likely to be stock items that relate to the following years sales so there will be adjustments to make.

thanks
John

 

[Newchodge]

The money in the bank is a complete irrelevance, except to you. What matters is your income and expenditure. You ought to consider using an accounts software package, which can show you day to day what you are earning and what your tax liability is.

 

[MyAccountantOnline]

Hi,

My first post here...

I have previously been one of those sole traders where I give receipts etc to my accountant and get my accounts back, keep my fingers crossed for a small tax bill. The money I had month to month was what I had and I was ok with that.

Recently as my business has grown ( Manufacturing of leather goods ) I need more of an understanding of how this whole thing works, so I can plan ahead for tax bills, and investing money back into the business, making worthwhile purchases etc.

We keep spreadsheets of bank transactions and these get divided into columns for labour ,materials, vehicle costs etc , I have also completed a cash flow forecast which I find really helps.

Getting to my main question. If I was to get to the tax year end, Apr 5th, I am making a profit and I have money in the bank, say 10k, how is this money treated in an accounting sense. I assume it goes towards that years profits? and then if I take it out on say the 7th of Apr, how would that work? In my non accountants head... I see it as last years money and then how does that not get factored into the equation if I take it out in the following tax year?

I know this is probably a very basic question to most of you and I hope I am making sense, but I am still learning here so appreciate any advice

Thanks in advance

It's really commonly misunderstood.

As has already been mentioned you basically pay tax on your sales less your business expenses (expenses exclude your drawings ie monies you take out of the business)

I also second the suggestion to use some accounting/bookkeeping software in place of your spreadsheets. It'll make your bookkeeping and accounting a lot easier in the long run and it will enable you to see instantly your profit and hence the tax and NI to put aside. You will probably have to use some software at some point too to comply with Making Tax Digital.

 

[Somos Accounting]

+1 for using some accounting/bookkeeping software.

If you aren't already, it may make things simpler if you have a separate bank account for the business. This coupled with some software with a bank feed will mean importing transactions and explaining should be quick and easy. It will give you better reporting potential on the Profit & Loss side of things, give you the transparency and help you better plan for your tax bill.

Brett

 

[78fca]

Hi,

Thank you all for taking the time to reply, that does make it sound much simpler, than I have been getting confused with. I am getting there... slowly!

I tried quickbooks but as I am an online business, I found it quite difficult to get it inline with my business. I may have not been looking at it right, but it seemed like it was more setup for making invoices etc, where I don't make any invoices out, unless I do a custom order for a customer, and then this is handled through my website where they pay directly on the website.

Also with quickbooks, I found the import method very labour intensive, in the sense that I would have had to change the format of pretty much all of my information on my spreadsheets, which was a serious amount of work, and they mentioned to me that if I import over 600 transactions, it is likely to cause errors. For me wanting to learn about my business, I wasn't too confident in that, because I am of the thinking that the reports are only as good as the information put in.

I would be interested in hearing your thoughts/recommendations on accounting software, as I am willing to give it another go

Thanks again

 

[Somos Accounting]

Whilst I haven't used QuickBooks extensively nor have many of my clients I work with, it's a popular choice amongst many businesses and a number of accountants also highly recommend.

I work with Xero and recommend to my clients. It lends itself to online businesses too, as there are many apps that will integrate and automate a lot of the data input. Not sure which you use but the likes of Stripe, PayPal etc. will integrate. You can check out the full range on their Marketplace.

Once these are integrated you can add a number of bank rules too, to further take away the need to be manually explaining the same type/recurring transactions, such as bank fees.

Hope this helps.

Brett

 

[78fca]

Thank you for that Brett, I will certainly take a look at Xero

Thanks again

 

[Somos Accounting]

Thank you for that Brett, I will certainly take a look at Xero

Thanks again

No problem at all.

To add, they do a 30 days free trial so you should be able to get a feel for it before committing to payment.

My recommendation would also be to convert and start using at the start of a new accounting period, but it's worth having a chat with your accountant to plan when would be the best in your case and give time for implementation/training etc.

Brett