Help needed from an accountant - what is hissalary?

[HollowTalk]

Hope an accountant can help - this is for my son.

He's self-employed in a creative job. His turnover for 2019-20 was around £31,000. His allowable expenses were around £9,000, which gave him a salary of about £22,000. However, in the year 2017-18 he had a loss of about £4,000.

He's filling in his self-assessment form and is asked whether he wants to bring this loss forward to reduce his tax this year. I don't know why that didn't happen last year - he may well have said no.

If he says yes to this, it would give him a taxable profit of around £18,000. However, he's getting married soon to someone who is from another country. He has to sponsor her and his salary has to be at least £18,600 before tax in order to do this.

Will the govt class his income as £22,000 or £18,000? I say it's £22,000 as the rest is a tax rebate. Does anyone agree?

The difference in his tax payment this year is about £800 and he's happy to forego that if it means he can show a higher salary.

Any knowledgeable people out there? We'd be really grateful for any help.

That’s correct.

If he declares £18k for tax purposes that’s what immigration will use.

He doesn’t have a salary if he’s self employed. He has profit and turnover. His turnover would be the total amount he made, his profit would be minus his expenses.

But the deductions are his expenses. If a taxi driver brought in £30,000 per year in cash payments, but paid £10,000 in petrol, you wouldn't say he earned £30,000, would you?

I'm not an accountant, but my understanding is that if he is reporting as a self-employed individual (i.e. not a company director or anything), then his 'salary' is his turnover before any deductions, i.e. £31,000.

That’s wrong. (Don’t take up accountancy )

It’s income minus costs of raising the income (expenses).

His "salary" would be the profit, not the turnover.

@Feminist10101 But his salary is only £18,000 because they are averaging his pay this year with his pay in an earlier year. He's effectively getting a tax rebate, isn't he?

His difficulty is that he has to show his salary is £18,600 minimum, but if he accepts the rebate then he's under that figure. Should he just refuse to take the earlier low income (his first year of trading) into account?

@Feminist10101

I'm not an accountant, but my understanding is that if he is reporting as a self-employed individual (i.e. not a company director or anything), then his 'salary' is his turnover before any deductions, i.e. £31,000.

That’s wrong. (Don’t take up accountancy )

It’s income minus costs of raising the income (expenses).

Happy to stand corrected

OP, this page says "If you are self-employed, £18,600 must be your net income (pre-tax profit) from your activities." if that helps.

Immigration should have guidance on what they take into account. It's a while since I worked there but I would have counted turnover rather than income after expenses for someone who was self employed. But the current guidance should state what they use now.

You can’t have it all ways. The final figure on the tax return is what immigration will do. Can he forego claiming some of the expenses to put his overall income up? Depends whether the aim
Is to maximise profit or minimise tax. Can’t do both!

Why wasn't the loss used in 2018/19?

Usually it should be offset against the first available profits...or has this already happened?

Or what was his total loss in 2017/18 and profit in 2018/19?

Losses can't 'skip' a year in most circumstances, they are carried forward and offset against profit until utilised in full.

If he hasn't claimed them against 2018/19 at all he should go and amend the return to claim it which is correct.

And would also solve the current issue.

@ClashCityRocker I'm not sure. He was completing his SA form today and that question was asked. Maybe he said 'no' last year?

If he hasn't claimed them against 2018/19 at all he should go and amend the return to claim it which is correct.

Oh that's very useful, thanks. I hadn't thought of that.

I'm not sure what his profit/loss was last year. He's only just starting out so getting more and more each year with royalties. I imagine he paid a couple of thousand tax last year, so less than this year.

If the loss was in his first year of trading he may also have been able to use opening years loss relief...

It might well be more than worthwhile sitting down with an accountant on this.

@AnneElliott

Immigration should have guidance on what they take into account. It's a while since I worked there but I would have counted turnover rather than income after expenses for someone who was self employed. But the current guidance should state what they use now.

Thanks for this. I think he'll need to speak to someone to confirm, but obviously he's worried about making a false move in case she can't move here for a while.

@ClashCityRocker He's avoided using an accountant so far because his figures are actually really simple, with less than a dozen incoming payments and then just a bunch of expenses. It might be worth it though, just to be sure.

Take proper advice. Not that people here aren't helpful but implications if he gets it wrong are very grave.

His earnings will be his taxable profit.

In the year of the loss did he have any other income? He could set the loss against that and potentially claim a tax refund.

It would also possible to carry the loss back and reduce his taxable income in previous years which would result in a tax refund (see early trade loss relief on hmrc website)

Offsetting the loss this year will reduce his tax bill but also his earnings.

Is it too late to amend last year's figures?

Im an accountant (though not a small business one). I agree with you. His income this year is at least the profit figure, £22,000. Im not too sure about sole trader accounting. Is it not that he earns the £31k but has costs and so again they are deducted to get to profit chargeable to tax for this year. He then applies the loss relief to calculate his taxable profit after reliefs.

He can still say he earned £22k after costs in the year. Or say he earned £31,000.

Don't forgo the loss relief. The loss may only carry forward for a couple of years. So it may be use it or lose it! I dont know why youd turn down tax relief you're owed. Tax calculation is not the same as salary.

Not figures, but ticking the box that asks about previous year's loss.

Thanks, @ZenNudist. I agree, he shouldn't forego that figure. I think he's just really nervous in case he claims it and then loses the chance for her to get a visa. It's very stressful here!

With so much at stake for getting it wrong, it's definitely worth getting an accountant in.

The only way he should have losses brought forward from 2017/18 would be if his loss in that year exceeded his profit in 2018/19 and the 4k is the excess loss.

However, if he paid a couple of grand tax it doesn't sound like it. It sounds like he's completed the form incorrectly.

He also had scope to potentially use opening years loss relief, which means that the loss would not impact future years at all...