AIBU to have given unwanted advice

[GarageRoofLeak]

My sibling has decided to go self employed in order to get off benefits. The job requires a lot of up front expenditure and many further expenses which they have been told they can claim as business expenses for the purposes of tax. However, they seem to think that claiming expenses means they will be refunded the full amount by HMRC. I have tried several times to explain that this is not what happens. They have budgeted as though they will be getting all this money back and already made some fairly big business purchases.
When I broached the subject they became very hostile, claimed I was trying to sabotage their job (by explaining how tax and expenses work) and has now blocked all contact with me.
Was I unreasonable to give them factual information about tax? They insisted I was “lying”. Funnily enough, after a bit of googling, I can see that many people do seem to believe they get their expenses paid back in full, if self employed. Is anyone actually in self-employment and receiving reimbursement for business expenses rather than a reduction in tax?!
Was I unreasonable to explain tax to them when they didn’t ask for my advice?

At best they have misunderstood what the advisor said. Expenses and some set up costs can be claimed against income. So if they are a window cleaner taking in 10 k a year and buy a new ladder and hosepipe for 2k they would be taxed on 8k. They don’t get 2k paid back to them. You have done your best. Let them get on with it.

@GarageRoofLeak Ah well, you tried but as we all know, you can't argue with stupid. Your sibling will find out soon enough, so just leave them to it now.

I freelanced doing accounts for small businesses for quite a few years, and it really is amazing just how many misconceptions there are among business owners about finance and tax. You can explain it until you are blue in the face, but they still don't get it.

Came here to find this post 🤣

Your sibling can write off expenses to reduce profit right down so reducing tax owed and some big upfront expenses can be spread across multiple years against any money made to reduce down taxable profit.

Are you sure you have given accurate advice?

It could be crossed wires.

It wasn’t some sort of crazy advice. Just some links to HMRC website, and told them to clarify with an accountant. Each time they brought up in conversation that they would get their expenses reimbursed I said “Ah, well that’s not what happens.” and gave an example of earnings-expenses =profit, and that the profit is taxed. Bigger expenses mean lower profit and probably no tax to pay (in their case). Smaller expenses mean higher profit and possibly some tax to pay.
That’s all really, but multiple times, and they still didn’t understand.
It’s not some outlandish or offensive advice, though they were probably pissed off that I was telling them they had misunderstood, and multiple times.

Is it possible that they have been given government funding to get their business started and are confusing this with tax?

They could have very easily fact checked rather than call me a liar and block me. Lying about tax? Why would I blatantly lie about something they can very easily check for themselves?

I don’t think so, unless they’ve kept that under wraps. They simply said (multiple times) that they were told they could “claim it on expenses” and get the money back.

Expenses just come off their profit and reduces the amount of tax they pay. They won't get any money back.

Yes, this is what I tried to explain to them.

Someone told me I could claim back my expenses when I started my business. And they would not be told differently! The weird thing is they had a business for several years so I have no idea hour they thought this.

I bet your sibling will never admit the truth!

And this is kind of why I was doubting myself. I went online to see if some people CAN claim it back. I think if you make a loss you can recover some costs from universal credit, but I don’t think that’s what they meant…seeing as coming off benefits is the goal.

They might be eligible for the universal credit 'start up period'. If they meet the criteria they could claim UC for the first 12 months of starting the business. There is no requirement to look for employment providing their time is spent on building the business.

I've done it before. The scheme doesn't get much attention. The first year of a business may not turn much profit but at least with this there's some money coming in. They will get a work coach who specialises in this and will be more supportive that the 'let them fall on their arse' crowd who've stumbled across this thread.

I did suggest this is what they (adviser) might have meant.

At least they don't think they can 'claim the VAT back' when they aren't even VAT registered...😂

I don't understand their position at all. They've been on UC but had enough savings to set up a business and buy expensive items up front, and to pay an accountant? Would UC cover some expenses for a new business - I have no idea. Or are they in effect working for another organisation which has given them an expense account? But then they wouldn't be expecting HMRC to pay it.
It's a shame you have fallen out with your sibling over this. I hope you can make it up at some point and one day you may find out what was going on!

They don’t have an accountant (yet) though they do keep referring to their accountant.. and they haven’t set up a business. They have purchased some expensive non business items in advance of starting a business for which they have already paid for some things like training and random business items. They will be self employed, not working for anyone else.
They have said that their (future) accountant will manage their expenses and tax so “knowing about tax” is unnecessary, however they believe that “claiming expenses” means HMRC literally paying them back for ongoing costs of running the business once it is set up. E.g. if they buy a printer they can claim the full cost back from HMRC. So basically, they have vastly over estimated potential disposable income as they have included imaginary “refundable” expenses. I think it’s possible to claim something back from UCredit, or at least reduce income in the same way as tax, for the purposes of UC calculation, however the whole point was to come off benefits, so this doesn’t make sense. I did try to get to the bottom of it but they said it was none of my business. Fair enough. I just didn’t want them making a huge up front outlay thinking ongoing costs are refunded, as they will have barely anything to live on.

Well, you've done your best. People make their own decisions. I hope it doesn't work out too badly for them.

Someone like your sibling will probably have been claiming UC fraudulently. Probably because they didn’t understand the savings threshold or similar.

What I find strange is that you and your sibling clearly aren’t close. In fact your sibling seems to view you very suspiciously. And yet you thought that if you told sibling multiple times over and over that they are wrong..,, this sibling would suddenly miraculously believe you.

So the HMRC allows him to deduct legitimate business expenses up to 7 years before the actual start of the business itself it states, if it's 100% dedicated to the business purpose. VAT registration and expenses has a different set of rules. You tried your best to explain things, and if they get in trouble then that's their choice. What I explain to my tax clients in the U.S., is that I tell them what they need to hear, not what they want to. Why avoid being involved any further, because some people will do as they please, and tax preparers make a fortune cleaning up other peoples' mess.

They aren’t trying to avoid paying tax, they just don’t understand that they don’t get paid back their expenses.

It's always unreasonable to give unsolicited advice, imo. However your advice was correct, as will become apparent before too long, I imagine.