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?

OP, you're getting some really confusing advice here. I'd ignore most of it and speak to your accountant. Ask about VAT, self assessment and mention that your income being under £100k is worth a lot in childcare to you.

You can be a business without being incorporated. You css ask incorporate now. You can also put the excess in a pension or pay others for business related expenses etc. When her turnover is over c.70K there’s a VAT change too. Her accountant should update her monthly or quarterly. Not many people are financially literate.

If her accountant hasn't mentioned VAT or the benefits of being a Ltd company and taking dividends at near £100K she badly needs another accountant.

I do invoicing and VAT for our business . I don't know the exact profit until the accountant gives us the figures at the end of the year, although i normally have a rough idea from the accounting software. Money in our business account is not all profit. Weve been mostly overdrawn in the past, and still made a small profit. We claimed child benefit last year, but then went over the threshold and paid it back, I don't think there was any penalty.

I can't think of a way any business is set up that all the profit counts as your income when you don't take it as income. That sounds like rubbish to me.

I purposely leave money in my business with a view to paying myself a salary in later years when I'm doing less. HMRC don't do performance appraisals and you don't have to have revenue to make salary payments, so of course you leave it in for the lean years, that's tax efficiency.

You pay corp tax on it though.

Its sole trader, not corporate, say I invoice £70K, deduct allowable expenses of £30K , my nett profit is £40K, so I pay tax on £40K.

Only the nett is the income, and it's your money, there is no separation between you and the business, the business assets are your personal assets, not that of a corporation.

It has lots of benefits, but once you get into VAT and higher tax brackets you are better off with a Ltd company and paying yourself via a dividend.

Have you never heard of a sole trader?

Why do you pay an accountant ?

Always call HMRC first. Never allow them to chase you. They are very human when you call - I've had a couple of arseholes over the years, but mainly helpful human beings, especially if you ask them for help.

It all depends on the business profit. There comes a time when corporation tax becomes preferable to being self-employed & paying higher rate income tax on the business profits.

I'm still amazed at the unlikely speed that the accountant has shown here, in producing draft figures only a week after the year-end.

Based on the fact the accountant seems to have failed to give any sage advice (no pun intended) to the OP on tax at this level and the benefit you correctly mention or indeed VAT, perhaps they have very few customers!!

Well you'll be moved onto Making Tax Digital for Income Tax so you'll have quarterly returns from April 26 onwards. So at least you might have a better idea of what's happening...

The comments on this post sum up why we as accountants are permanently exasperated (and kept in work!)
It may be surprising to some that we actually don’t have crystal balls 🙄

OP - I’m sure this has already been mentioned to you but now is the time to consider quarterly management accounts so that you can keep on top of things a little better, if you remain a sole trader with similar profits you’ll have to submit details of earnings quarterly from next tax year anyway.
If you expect similar profits a limited company may be a more appropriate setup, your accountant will be able to provide tax comparisons of sole trader vs Ltd co.
You may also have to register for VAT depending on your type of supply.

That is what had crossed my mind too.

Consult your accountant with your direct questions.
It will be sorted quickly enough.
Possibly, due to your size, you do not engage your accountant regularly. Pay for them to work a few more hours and to make a rough forecast of what your income will be in the coming years.
Ask them to advise on the best business model for you - sole trader, partnership, company etc. And whether you would be better as a Trust etc.
Do you have family also working in the business?
Do you wish to expand or upgrade essential equipment?

Then seek a second opinion from another accountant, one recommended by some successful businesses in your area.

Sit down and make some decisions.

Become a Ltd company.
Pay yourself dividends.

That and show a bit more interest in the financial side of the business.

Following….. 🧐

Did you post this just to brag?
How could you possibly not know how much you earn?? Especially if your revenue has supposedly QUADRUPLED?? Did you not notice that you were doing quadruple the work?? This is why not everyone should be business owners 🤦🏽‍♀️

If op did post to brag, well that back fired!

This “business” is skating on think ice and I would guess that this particular issue is a drop in the ocean compared with the messed up finances of this company.

Given OP’s utter ignorance re how to operate finances of a business, in fact how to operate basic personal finances, I don’t think it would be a surprise to learn the OP had misread her turnover of £130k to actually be £13k

or worse still

the £130k is listed in the liabilities column

Chortle chortle chortle sneer sneer sneer

Huh?

What has your accountant said op?

And has he actually seen the books, given that it's only a week past the year end? He must have, to give you a draft SA claim.

There's a lot that doesn't add up here - the tax free childcare could be the least of it. At face value, you're going to have a significant tax bill on top and potentially VAT registration (assuming what every you supply is subject to VAT) issues.

The accountant can't be blamed for not setting up a limited company if he or she hasn't heard from the op since the last accounts which showed £30k profit. It would be unlikely that a limited co would be suitable in those circumstances.

However if they aren't now telling you about breaching the VAT threshold (and they should know if this applies to you) or considering the most suitable structure for you, that's an issue.

You need to sit down with an accountant and go through everything, quantify how much you're likely to owe and what you can do about it. Don't take too much advice from an online forum - there's some sound advice on this thread but also some utter rubbish, and no one here can (or should!) know the ins and outs of your personal circumstances which can make big difference in how you approach things.

VAT will be more of a worry than the other stuff with expenses you may get the 130k down to under 100k.

You should think about setting up a ltd company as your tax on account for coming years is going to be a killer if you remain self employed.

Congratulations on your flourishing business.