Question
I am new to business and i hoping to start out my own wedding and corporate event photography business in the next couple of months.
I have been in full time employment for a year and this venture would be done in my future spare time (I do not intend to quit my job), but I am confused over the regulations for the AIA (annual investment allowance) and VAT, hopefully you can put me straight. Here's how i see it after my limited research:
To start up my business i would need to but some equipment (cameras, lenses, computer etc..). I have calculated these costs to be £8000 (Including VAT). I will register for VAT (as i will hopefully have some corporate customers), and so would look to claim back 17.5 % of this intial outlay. Balance remaining £6816.
Now on to AIA...as I understand it I would be entitled to claim back 100% of the cost of the new equipment (provided its 100% for business use) against my income tax. So...say i make £1000 in the first year (not much but a start), then presumably VAT (flat rate for photographers is 8.5% i believe, and income tax is taken off this value (20%?). My full time employment gets me 25,000 a year, so £1000 - £85 - £200 = £725 NET (also minus NICs).
Because of my inital outlay on expenses (£8000), can i claim for a tax rebate of the £200 from my self employed income and the full amount of tax from this and last year of my full time income (approx £3250 per year)? This would pay off the inital outlay by the end of my first trading year.
I have no idea if this is correct, and it is probably a rambling incoherent babble, but as i said i am a newbie and would appreciate the help. Cheers in advanceAnswer
You're on the right lines...but some of your maths is a bit optimistic!
It's simplest if we consider separately the three taxes that you could face as a sole trader: income tax, national insurance (NI) and value added tax (VAT).
Income tax
Income tax will be due on all your business profits, i.e. earnings from the business less any expenses 'wholly and exclusively' incurred in carrying out that business. This might include expenses such as travel to venues, stationary and telephone calls. If you use some items for both personal and business use, e.g. home/mobile phone and internet, you can charge the proportion used for your business.
Assets such as cameras and computers are normally deducted from revenue (when calculating profits) over several years via 'capital allowances' but you're right, under the Annual Investment Allowance they can be fully deducted in the year of purchase up to £50,000 (excluding cars).
Be careful though if you intend to use capital items for personal use too. If so, then you'll only be able to claim the proportion (of time) they're used to carry out your business, e.g. if you use the camera equipment a quarter of the time for your own pleasure then you would claim £6,000 and not £8,000 against your business revenue.
The business profits, or losses, would then be entered on a self-assessment tax return, along with your employed income to work out how much income tax you need to pay or reclaim.
VAT
You must register for VAT if your self-employed turnover exceeds £68,000 (2009/10 tax year), below this it's optional. If you register then you must add VAT, currently 17.5%, to all your sales but you can offset VAT paid on allowable business expenses.
The benefit is that you can re-claim VAT on business purchases and corporate customers won't mind as they can probably re-claim the VAT you must add to your invoices. However, wedding customers will likely be private, so becoming VAT registered could make you 17.5% more expensive in their eyes than non-VAT registered competitors. Registering for VAT also means more paperwork as you must submit a VAT return each quarter.
If the VAT you pay on business expenses exceeds the VAT you receive from sales you can reclaim the balance via your VAT return. As with income tax, any non-business use must be apportioned, i.e. reflected in the VAT you reclaim on expenses.
If you register for the flat rate VAT scheme you can't reclaim any expenses – you just pay a fixed VAT rate on revenue (including the VAT you've charged) – although you can reclaim VAT paid on capital items costing £2,000 or more (including VAT) which aren't intended to be sold or rented out. The £2,000 minimum can comprise several items provided they're bought at the same time from the same supplier via a single payment.
Flat rate VAT does make life simpler and worth considering if you decide to register for VAT and don't expect to have lots of smaller expenses below £2,000.
The current rate for a photographer is 10%, although you get a 1% discount during your first year.
National Insurance
A self-employed person normally pays class 2 and class 4 contributions. Class 2 is a fixed weekly amount of £2.40 for earnings over £5,075 and class 4 is a percentage of your profits (8% between £5,715 - £43,875 and 1% thereafter). If your earnings are low in the first year, you might avoid both.
Putting all this together, where would it leave you if you spent £8,000 (including VAT) on capital equipment (100% used for business) and generated £1,000 (including VAT) of revenue in your first year? (We'll ignore other possible expenses for now).
Well, you wouldn't have to worry about NI, except for making sure you've registered for a class 2 'small earnings exemption'.
You would owe £149 of VAT on your invoices, but could reclaim £1,191 on the capital expenses, netting you a VAT refund of £1,042 under the standard scheme.
Under the flat rate VAT scheme the net refund would be £90 – £1,191 = £1,101, assuming all the capital equipment qualifies via the £2,000 rule. If none qualifies you'd owe £90.
Income tax would normally be due on your profits, which exclude VAT under the standard VAT scheme. In this example you'd make a loss of £851 - £6,809, i.e. £5,958, which you should be able to offset against tax you've already paid on your employed earnings. Assuming basic rate tax of 20% you could claim a £1,191 income tax refund.
Under the flat rate VAT scheme your loss would be calculated as £910 - £8,000 = £7,090 (note: expenses shown inclusive of VAT), meaning you could reclaim £1,418 of income tax.
Hope this all makes sense and good luck if you go ahead with the venture.
Finally, a general warning: bear in mind that HMRC expects self-employed individuals to be running a serious ongoing business. If they suspect someone is using a business as a ruse to save tax on equipment for personal use they might take a closer look...
I am new to business and i hoping to start out my own wedding and corporate event photography business in the next couple of months.
I have been in full time employment for a year and this venture would be done in my future spare time (I do not intend to quit my job), but I am confused over the regulations for the AIA (annual investment allowance) and VAT, hopefully you can put me straight. Here's how i see it after my limited research:
To start up my business i would need to but some equipment (cameras, lenses, computer etc..). I have calculated these costs to be £8000 (Including VAT). I will register for VAT (as i will hopefully have some corporate customers), and so would look to claim back 17.5 % of this intial outlay. Balance remaining £6816.
Now on to AIA...as I understand it I would be entitled to claim back 100% of the cost of the new equipment (provided its 100% for business use) against my income tax. So...say i make £1000 in the first year (not much but a start), then presumably VAT (flat rate for photographers is 8.5% i believe, and income tax is taken off this value (20%?). My full time employment gets me 25,000 a year, so £1000 - £85 - £200 = £725 NET (also minus NICs).
Because of my inital outlay on expenses (£8000), can i claim for a tax rebate of the £200 from my self employed income and the full amount of tax from this and last year of my full time income (approx £3250 per year)? This would pay off the inital outlay by the end of my first trading year.
I have no idea if this is correct, and it is probably a rambling incoherent babble, but as i said i am a newbie and would appreciate the help. Cheers in advanceAnswer
You're on the right lines...but some of your maths is a bit optimistic!
It's simplest if we consider separately the three taxes that you could face as a sole trader: income tax, national insurance (NI) and value added tax (VAT).
Income tax
Income tax will be due on all your business profits, i.e. earnings from the business less any expenses 'wholly and exclusively' incurred in carrying out that business. This might include expenses such as travel to venues, stationary and telephone calls. If you use some items for both personal and business use, e.g. home/mobile phone and internet, you can charge the proportion used for your business.
Assets such as cameras and computers are normally deducted from revenue (when calculating profits) over several years via 'capital allowances' but you're right, under the Annual Investment Allowance they can be fully deducted in the year of purchase up to £50,000 (excluding cars).
Be careful though if you intend to use capital items for personal use too. If so, then you'll only be able to claim the proportion (of time) they're used to carry out your business, e.g. if you use the camera equipment a quarter of the time for your own pleasure then you would claim £6,000 and not £8,000 against your business revenue.
The business profits, or losses, would then be entered on a self-assessment tax return, along with your employed income to work out how much income tax you need to pay or reclaim.
VAT
You must register for VAT if your self-employed turnover exceeds £68,000 (2009/10 tax year), below this it's optional. If you register then you must add VAT, currently 17.5%, to all your sales but you can offset VAT paid on allowable business expenses.
The benefit is that you can re-claim VAT on business purchases and corporate customers won't mind as they can probably re-claim the VAT you must add to your invoices. However, wedding customers will likely be private, so becoming VAT registered could make you 17.5% more expensive in their eyes than non-VAT registered competitors. Registering for VAT also means more paperwork as you must submit a VAT return each quarter.
If the VAT you pay on business expenses exceeds the VAT you receive from sales you can reclaim the balance via your VAT return. As with income tax, any non-business use must be apportioned, i.e. reflected in the VAT you reclaim on expenses.
If you register for the flat rate VAT scheme you can't reclaim any expenses – you just pay a fixed VAT rate on revenue (including the VAT you've charged) – although you can reclaim VAT paid on capital items costing £2,000 or more (including VAT) which aren't intended to be sold or rented out. The £2,000 minimum can comprise several items provided they're bought at the same time from the same supplier via a single payment.
Flat rate VAT does make life simpler and worth considering if you decide to register for VAT and don't expect to have lots of smaller expenses below £2,000.
The current rate for a photographer is 10%, although you get a 1% discount during your first year.
National Insurance
A self-employed person normally pays class 2 and class 4 contributions. Class 2 is a fixed weekly amount of £2.40 for earnings over £5,075 and class 4 is a percentage of your profits (8% between £5,715 - £43,875 and 1% thereafter). If your earnings are low in the first year, you might avoid both.
Putting all this together, where would it leave you if you spent £8,000 (including VAT) on capital equipment (100% used for business) and generated £1,000 (including VAT) of revenue in your first year? (We'll ignore other possible expenses for now).
Well, you wouldn't have to worry about NI, except for making sure you've registered for a class 2 'small earnings exemption'.
You would owe £149 of VAT on your invoices, but could reclaim £1,191 on the capital expenses, netting you a VAT refund of £1,042 under the standard scheme.
Under the flat rate VAT scheme the net refund would be £90 – £1,191 = £1,101, assuming all the capital equipment qualifies via the £2,000 rule. If none qualifies you'd owe £90.
Income tax would normally be due on your profits, which exclude VAT under the standard VAT scheme. In this example you'd make a loss of £851 - £6,809, i.e. £5,958, which you should be able to offset against tax you've already paid on your employed earnings. Assuming basic rate tax of 20% you could claim a £1,191 income tax refund.
Under the flat rate VAT scheme your loss would be calculated as £910 - £8,000 = £7,090 (note: expenses shown inclusive of VAT), meaning you could reclaim £1,418 of income tax.
Hope this all makes sense and good luck if you go ahead with the venture.
Finally, a general warning: bear in mind that HMRC expects self-employed individuals to be running a serious ongoing business. If they suspect someone is using a business as a ruse to save tax on equipment for personal use they might take a closer look...
Read this Q and A at http://www.candidmoney.com/questions/question131.aspx
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