To ask how much I've fucked up? HMRC

[ohshit89]

Self employed, done something a bit stupid.

Basically I admit that for the past 5 years of being self employed I have really no idea how much I've potentially earnt that year until my accountant sends me draft self assessments after 5th April. There are things I could do to keep better on top of this obviously but it's really never mattered that much because profits have never been massive. Because of the structure of the business currently, any profit counts as my own income for SA purposes so even though I only "pay" myself a modest amount every month, my earnings are whatever profit the business has made.

Basically business has boomed this past year, which I am not complaining about but our accountant has done my SA and I have earnt in the last tax year over 100k (and I'm talking about a jump from under 30k last year to over £130k). I really was not expecting it, I was obviously aware business had taken off but really I did not expect that. I do not "pay" myself anywhere near that sort of money per month and while the business does have a good float I certainly couldn't have extracted that all from the business for personal use.

Onto the issue...for the last tax year I have claimed free nursery hours for my son and tax free childcare. I am aware I will need to pay it back and I of course have no problems in doing so but I have obviously (unintentionally) been telling HMRC that I earn under 100k for a whole year when I have infact earnt over.

Will there be an issue? A penalty? I know i really should have an idea myself of profits and this has really shocked me into making sure I keep a better track of it but when I selected that I earnt under 100k I genuinely believed that I did.

Do I call them or will they contact me when my SA is submitted?

1. HMRC won’t give a shit you’ve earned over the threshold as long as you talk to them and pay whatever you owe.
2. You need a new accountant.
3. For goodness sake keep a closer handle on your business. Chances are that by muddling through you’re missing opportunities to be more efficient/make more money and sooner or later will come a cropper with HMRC or companies house by missing something.

To be fair to the accountant we have no idea what the OP is telling them, unless they can see the bank account they may have no idea how much profit shes making

You will have to pay the tax free childcare back. Happened to my partner. I think now it's if you go over 80k you pay it all back, over 60 you pay some of it back until you earn over 80 and then you have to pay the whole lot back. He had to pay the whole lot back it was a few years ago and the threshold was 50k. Didn't even consider this as I earn hardly anything but it's based on a sole income not joint. Lesson learned. Like people have said put money in a pension, buy a van, keep a better eye on finances and expenses. Your accountant should suggest vat registration if your earnings have increased this much.

OK, first don't panic.

If you've been making investments in the business, there's a good chance you will have less taxable profit than you think which will take care of the child are issue. You may also be to claim various allowances or exemptions, depending on what you do.

The two key things are:

• you are over the VAT rate on turnover (90k).
• you are over the limit for higher rate tax.

Since this is unexpected, you will probably have the reserves to cover the bill (and there are ways to negotiate repayments in arrears, if necessary). Moving forward, consider switching to a limited company and stay on top of your forecasting & cash flow with monthly reporting.

You're talking about child benefit not tax free childcare. Not the same thing.

OP is your company Limited (and you are a Director) or are you a sole trader?

If the latter then your drawings are irrelevant. You are taxed on the profit not drawings.

Best to contact hmrc to eg register for VAT before they contact you

You are quite correct, apologies yes he had to pay the child benefit back. Not sure about tax free childcare he didn't earn over 100k. A previous poster has said ticking the box is a guess at what you are expecting to earn so hopefully it will be fine based on she didn't earn that previously.

Not much advice here other than to echo suggesting a better accountant. But congrats on doing so well with your business, amazing growth! 💪

Everyone blaming the accountant.... if the OP just hands over records once a year, accountants are not psychic and will assume current year is like previous unless told otherwise

This

OP, as a sole trader I urge you to keep on top of your accounting!, do not rely on accountants, it is quite easy to do most (if not all of it) yourself, especially with modern tools like accounting software.

You should always have a good idea of where you are in terms of gross & nett income, allowable expenses etc. This will stop the unexpected. Many self employed people like myself elect to cut off work in order not to tip into VAT territory, I tend to be off in Feb/March to avoid going over the limit.

Accounting for self assessment is actually pretty easy, I prepare all my own accounts for my accountant to check and then submit my return, knowledge of what's going in and out is key.

Look at your expenses in the year and make sure you are deducting everything you can, accountants can only work with what they are given, that means keeping every receipt for allowable expenditure.

For a lot of self employed there is no benefit at all to being a Ltd company, it offers of course protection against personal liability financially, but if your operation is solvent, you don't have loans etc. then there is no real protection, but more administration and complexity.

AFAIK, you’ll need to pay back the tax free childcare. The team that deals with the tax free childcare definitely do keep an eye as it’s linked to your NI number so I’d personally be upfront about this. Last time I had to reapply they wouldn’t let me do it automatically and I had to call to discuss my DH income and business dealings as he’s a higher earner and MD of a few companies and they said we’d have to repay what we’d claimed if he drew an income over £100,000. I was upfront and said I couldn’t possibly say how much he would earn as I don’t have a crystal ball. It’s different for you but you can always just say you didn’t realise you had been that profitable (well done btw)! Not sure about funded hours as don’t yet get those but hope that helps.

I’d also just like to add that you’re likely to have quite a high tax bill for this £130k you’ve earned as you also pay on account. Also, if you’ve got a student loan, they’ll be expecting a big chunk from you. Just things we’ve learned the hard way when you’ve gone from earning an average income to being a higher rate tax payer.

Indeed, the payment on account needs to be factored, which will hurt too!

really ? you don' t know to that extent ?

I don’t understand any of this. My DH and I run our own business and the profit that your business makes is not the same thing as your salary 😳

’Because of the structure of the business currently, any profit counts as my own income for SA purposes so even though I only "pay" myself a modest amount every month, my earnings are whatever profit the business has made’.

This is just nonsensical, is your accountant professionally certified? Do you not keep records of how much you are actually taking from the business as your ‘pay’? Are you paid by dividend or PAYE or a mixture of both, are you a director of the company, is your company registered? What accounting system do you use?

As pp have already said, you have much bigger issues than some free nursery hours, not being registered for VAT for a start is much more serious. Running a business is not some idle hobby, you have to be across the details and have a decent accountant, ignorance of the law and correct procedure is not a mitigating factor as far as HMRC are concerned.

This. What you’re saying makes no sense OP.

the tax feee childcare isn’t a big deal though you just pay it back if you need to

Well, I guess the good news is that the VAT and penalties will probably sort out the childcare problem...

OP isn't running a limited company, the OP appears to be a sole trader. It's a bit confusing for a sole trader to have a salary and profits, but it just sounds like the OP is splitting money into different bank accounts.

She's not a Ltd company, therefore the nett profit is her earnings, just because she only draws down a certain amount doesn't mean its not all classed as hers.

In some ways its a nice problem to have

BUT

What might happen if the business went the other way - ie towards bankruptcy?

I suggest that you and/or the accountant need to get the finances under control, probably as suggested setting up a Company

Nursery benefits are based on your earnings, not your business’s turnover or profit. If the money has stayed in the business then you don’t have to do anything.

Yep, and just because she is doing that for her own purposes, the nett profit, wherever she is, is her income, and due tax paid on it.

Nothing, unless she has debts, then it can't go bankrupt, just produce lower returns or a loss, in which case her tax bill gets smaller to the point she gets a rebate on the payment in advance.