Expenses and trading allowance

Expenses and trading allowance

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Hi everyone
Can you please help. A self-employed person providing IT services chose to claim Trading allowance of £1000 instead of claiming expenses in current financial year as he started trading in January this year and his expenses won't exceed £1000 but his income will.
He is invoicing customer for service labour £100 and £20 for laptop part, £20 it is an exact part cost so he is not making any profit on this.
1. When he includes the part cost on invoice I assume the total £120 will need to be treated as his income. Is that correct?
2. But if he invoices only for labour £100 and just asks customer to pay for the part separately without his invoice (he will give customer the original invoice which he received when he paid for it), will that be still legal? I can't see why not, but both scenarios have 2 different outcomes when it comes to paying income tax. I'm confused.

Many thanks

Replies (9)

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By SXGuy
21st Feb 2021 14:57

1. Yes

2. Presumably he won't also claim £20 of expenses when he hands the receipt over? Will he also ask for the £20 upfront before purchasing said item, or will he be purchasing it with his own money first?

What would be better if he pointed the customer to where they can purchase it directly.

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Replying to SXGuy:
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By Madi
21st Feb 2021 15:38

SXGuy wrote:

2. Presumably he won't also claim £20 of expenses when he hands the receipt over? Will he also ask for the £20 upfront before purchasing said item, or will he be purchasing it with his own money first?

What would be better if he pointed the customer to where they can purchase it directly.

No, he won't ask for the £20 upfront before purchasing the part, he will be purchasing it with his own money first.
He won't claim it when he hands the receipt over to the customer.

I know but he does it as it is just easier as then the part comes to his address and he can use it to fix the laptop etc

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Replying to Madi:
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By SXGuy
21st Feb 2021 15:40

The delivery address can be seperate from the billing address.

My point is it may be easier but it will be harder to argue that £20 does not form part of his turnover.

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Replying to Madi:
RLI
By lionofludesch
21st Feb 2021 17:49

Madi wrote:

No, he won't ask for the £20 upfront before purchasing the part, he will be purchasing it with his own money first.

It's all his own money, isn't it ? There's no private money and business money.

Who is the bill addressed to ? Where is it delivered ? Who ordered it ? If it's the trader, how do you justify this being the customer's part ? HMRC don't like being taken for fools.

This is just another variant of the oft-asked query about builders getting customers to but their own bricks from Wickes.

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By Hugo Fair
21st Feb 2021 15:41

You open with ".. chose to claim Trading allowance of £1000 instead of claiming expenses in current financial year as he started trading in January this year and his expenses won't exceed £1000 but his income will."

The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from a variety of sources (including self-employment) - such that if your annual gross income from these is £1,000 or less, you do not need to tell HMRC.
If however you have gross trading income over £1,000 or other income over £2,500, then you must register for SA.

You then change topic entirely to the bit where you ask two questions ... and, as SXGuy says, the answer to the first one is an unequivocal 'Yes'.
With regard to second question: He can't (or rather shouldn't) "just asks customer to pay for the part separately without his invoice" as that could be seen as fraud by HMRC ... essentially it would be regarded as undeclared income.
I don't know why you say you're "confused" ... what you've described is the self-employed person purchasing something (which becomes part of his stock) that he then re-sells (becoming part of his revenue) - the fact that he makes no profit on the sale is irrelevant.

The solution, as again suggested by SXGuy, is to get the client to purchase the item direct from the supplier (instead of via the self-employed person) ... although I don't see what this has to do with your opening statement (which is about income not expenses).

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Replying to Hugo Fair:
By SteveHa
22nd Feb 2021 12:12

Hugo Fair wrote:
If however you have gross trading income over £1,000 or other income over £2,500, then you must register for SA.

Care to point me to the legislation that supports this HMRC claptrap?

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Replying to SteveHa:
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By Hugo Fair
22nd Feb 2021 13:42

Fair point ... comes of replying on a soporific Sunday afternoon!

It's the first point of my para that was relevant "The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from a variety of sources (including self-employment) - such that if your annual gross income from these is £1,000 or less, you do not need to tell HMRC."

The additional sentence, that got copied in by mistake, was indeed another example of those oft-reported spurious HMRC claims about SA!

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Replying to Hugo Fair:
By SteveHa
23rd Feb 2021 16:24

OK. I'll let you off this time ;)

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By Duggimon
22nd Feb 2021 10:25

The solution is to charge a mark up on the parts like a normal business in the trade of buying and re-selling things. Perhaps mark it up by 20% and cover your tax.

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