A few questions - The Book-keepers Forum (UK)

justme0316 · Member

A few questions

justme0316 · Member

Ok, So I've figured the clogged CGT question, loss is inputted into SA, there is a box whereby you declare that it's to a brother or sister for example. Obviously unable to use it against general gains. I believe to pull back PAYE from previous years, a call to HMRC is needed. Still stumped on the capital introduced question.

Leger · Master Book-keeper

justme0316 wrote:
Hi,

I wonder if you'd help me answer these hypothetical questions please.

An individual paid PAYE of £10,000 in 2013/2014. Earns nothing during 2014/2015. Files a SA in 2015/2016 for a business which has been started during past period - makes a £10,000 loss. Can the PAYE paid during 2013/2014 be used to offset the loss in 2015/2016? How is this achieved? Is there a need to contact HMRC when the loss is X amount of years ago?

Another individual introduces assets worth £3000. Can the capital account be drawn down, via drawings without incurring a income tax charge? I understand that the capital account is what the business owes the owner, just seems to me, at this stage, that a owner could introduce X amount of barely usable assets into the business, earn income from their business activities, then turn them into tax free cash withdrawals, via the drawings/capital a/c(s).

Hi Dee

You can only claim losses against the same year PAYE, or previous profits. What you can do in your scenario is carry that loss through to the following year. So if you made 10k profit the following year there would be no tax to pay.

Regarding assets, if they were allowable as AIA then you would effectively pay no tax on the first 3k of profit, so that could be drawn back out again. If not allowable as AIA then you can claim WDA, which would reduce your taxable profit by the WDA claimed. Remember that the owner has effectively put £3000 worth of their own money into the business, so why should they pay any tax on it?

-- Edited by Leger on Wednesday 10th of February 2016 11:37:12 PM

justme0316 · Member

Hi John, thanks. So, as per your answer, my understanding now is - during 2014/2015 I paid PAYE during employment - I am unable to use this against a 2015/16 SA. Also in regards to capital introduced, whether cash or assets, ignoring AIA and allowances for simplicity, I can turn my introduced 3000 of assets into tax free cash from self employment income?? Dr Cap Cr Cash? Thanks

Cheshire · Master Book-keeper

When you say barely usable assets - can you expand please on what assets you are transferring in? If there is no reason for such a transfer - ie not used wholly and exclusively for the business then this could be challenged. Also beware that you need to transfer the assets in at the value at the time of transfer, not the actual cost - you would need to be able to prove what this was. Plus when there is a withdrawal of cash form the business its not the capital but drawings.

Leger · Master Book-keeper

justme0316 wrote:
Hi John, thanks. So, as per your answer, my understanding now is - during 2014/2015 I paid PAYE during employment - I am unable to use this against a 2015/16 SA. That's correct
Also in regards to capital introduced, whether cash or assets, ignoring AIA and allowances for simplicity, I can turn my introduced 3000 of assets into tax free cash from self employment income?? Dr Cap Cr Cash? Thanks

You can't disregard AIA or capital allowances. If you were putting 3k cash in, then yes, your comment above is correct, although it would be DR drawings. However assets go to the fixed assets account and the monetary value is released by using AIA or capital allowances.

What Joanne has pointed out is also important and I misinterpreted the barely usable as meaning hardly used - oops.

-- Edited by Leger on Thursday 11th of February 2016 01:12:37 PM

justme0316 · Member

Hi guys, thanks for your replies.

Cheshire -

Ok, my scenario is say based upon a hypothetical guy, who partakes in quite a bit of skullduggery.

If his assets are transferred at market value, this to me is an average cost for said asset?

So for instance;

Before the business commenced Mr Wrong buys five barely usable (near end of their life) computers for 100% use in his business. The MV is £500 each, yet he managed to, as these are almost scrap, get them for £50 each. I know with cars, list price is used, but that's another subject in itself.

In the normal course of withdrawing cash I agree, Dr Drawings Cr Cash. My understanding, for which I'm more than happy to be corrected on is, if there is to be a withdrawal of capital introduced, it goes against the capital account.

John -

I appreciate that AIA / WDA / Allowances etc can be claimed, however I don't have to claim these do I? If he wants to take cash out the business, against the assets he introduced, without any tax implications he is fine to do so?

I'm sort of taking my own question off subject here lol.

So, to round up,

Can he take £500 out of the business, tax free, from income he earned designing websites? Against each computer he introduced? At MV?

This isn't even a exam question lol, I was just pondering the angles of a straight forward scenario I may face.

Thanks guys.

-- Edited by justme0316 on Thursday 11th of February 2016 02:03:17 PM

-- Edited by justme0316 on Thursday 11th of February 2016 02:05:45 PM

-- Edited by justme0316 on Thursday 11th of February 2016 02:06:52 PM

Cheshire · Master Book-keeper

Hi Dee
Its Joanne by the way (Cheshire)

Im a little confused. Might just be me as Ive been on the German translations most of today!

Firstly if the computers are near the end of their useful life then their market value is unlikely to be £500. If he has actually paid £50 for them just as he is transferring them then that is the amount they are transferred to the business as - as he can prove their Market value by way of the receipt for what he has paid. Now if he bought them a while ago for £500 then he has to ascertain what someone would give him for them now - so their market value would be eg what someone would be selling them for on ebay. Best thing then is to get a few examples and keep those as 'proof' as to what that item is worth - most likely less than £50.

Not sure what you mean by cars using their list price.

The other thing that confuses me is that you say he wants to take £500 from the business - from income....so is it against income or is it indeed his 'refund' of the amount he paid for the computer (which as I said above would only be £50 at most).

justme0316 · Member

Hi Joanne. With regards to the assets, if you can imagine two computers, one has been barely used. The current MV as an average for these is 500. The one which has been introduced has been used heavily, crashes often, broken keyboard etc. Yet barely works, is bought for 50. Now the 500 withdrawal was on the understanding that the asset was worth MV to the business. Yes the withdrawal of the capital introduced would have to be used against income as there is no other funds in the business. So ultimately can the withdrawal of the value of an introduced asset be taken out of the business by way of cash? Tax free? With that cash coming from trade income? Thanks

Leger · Master Book-keeper

justme0316 wrote:

John -

I appreciate that AIA / WDA / Allowances etc can be claimed, however I don't have to claim these do I? If he wants to take cash out the business, against the assets he introduced, without any tax implications he is fine to do so?
How can he do that without offsetting it? Theres nothing on the capital account to say he's introduced the assets, because assets don't go in the capital account. So if he does take drawings against those assets, without AIA or WDA, he will be taxed on it.

Can he take £500 out of the business, tax free, from income he earned designing websites? Against each computer he introduced? At MV?
Nope, and neither can you introduce a £50 asset for a MV of £500. It's not the MV of a new computer, but the MV of the computer in question. The clapped out computer is worth £50

This isn't even a exam question lol, I was just pondering the angles of a straight forward scenario I may face.
Or the hypothetical guy who engages in skullduggery

justme0316 · Member

John So if it's a loan he has made - Dr Drawings Cr Cash - Then when calculating SA, Allow that transaction within the drawings account, disallow other cash withdrawals for his own wages etc etc. As drawings are added back for tax purposes. Correct? For assets introduced, use AIA. Correct? Thanks

Cheshire · Master Book-keeper

justme0316 wrote:
John So if it's a loan he has made What loan??? - Dr Drawings Cr Cash - Then when calculating SA, Allow that transaction within the drawings account, disallow other cash withdrawals for his own wages etc etc. What wages? As drawings are added back for tax purposes. Correct? Tax is calculated on profit so if profit was £10k and drawings £8k, you pay tax on £10k. If profit was only £6k and the drawings £8k then you pay tax on £6k
For assets introduced, use AIA. Correct? Not necessarily. You might need to use WDA as John said in the first instance Thanks

May I make a suggestion without seeming rude? Might be better in first instance to ask one question per thread (your original had three, which initially put me off responding as Im busy and Im sure put a few others off). The other suggestion is to have a re-wind to the original examples of double entry as these start with sole traders and will help with the drawings angle. Then perhaps have a look at all you can find on capital allowances via HMRC as there really is some good stuff on there.

Shamus · Forum Moderator & Expert

Cheshire wrote:
Might be better in first instance to ask one question per thread (your original had three, which initially put me off responding as Im busy and Im sure put a few others off).

seconded.

Also if a reader cannot answer all parts of a question they may opt not to answer any of it.

justme0316 · Member

Ok.

I'm sorry.

Cheshire · Master Book-keeper

No need to apologise Dee, just a suggestion to help open it up to more peeps.

Leger · Master Book-keeper

justme0316 wrote:
John So if it's a loan he has made - Dr Drawings Cr Cash - Then when calculating SA, Allow that transaction within the drawings account, disallow other cash withdrawals for his own wages etc etc. As drawings are added back for tax purposes. Correct? For assets introduced, use AIA. Correct? Thanks

If the sole trader introduces money into the business it's called Capital introduced, not a loan. The ST can take that back whenever he wishes, funds permitting, and there is no tax to pay.

I think where you are getting confused, and many make this mistake, is that drawings equals profit, when it doesn't. Drawings are what the ST takes out of the business and may be more or less than the actual profit, and Joanne has given a good illustration of this.

Profit is calculated by adding sales and taking away legitimate expenses, but then there a few things that need to be adjusted as well. Not sure where you are in your studies but you will learn about these as you progress, if you are not yet aware.

In the case of the computers, bought specifically for the business, you can use AIA. Had the computers been lying around at home for a couple of years, then it would be WDA. For WDA, Once the assets fall below £1000 you can claim the remaining balance in the same year.