Making More Money From Your Home Business
This blog post has been copied from my Art blog and made relevant for a small home business. You can see the original post about Making More Money From Art here. I am going to make this blog more visually appealing by inserting some artwork into it. The blog is quite long, and the paintings will make it more interesting.
You started this home based Valentus business to earn more money to help you achieve your dreams. There are ways that the Government can effectively subsidise your business and help you achieve your dreams. You probably already know this if you had a home based business before you started with Valentus. If you did, then please tell me if I have made any glaring errors or omissions. This article also covers a couple of related business subjects such as insurance requirements. Come to one of the Valentus events that show how you can start your own home business.
Profit is not a dirty word. Let us be clear about something – profit is not a dirty word. You have the right to make as much profit as you can. You have no obligation to pay a single penny in tax more than you have to. There are plenty of ways that you can make more profit. And, the Government effectively gives you a form of subsidy to help you make more profit. It allows you to set your expenses against your profits, thus reducing your taxable income and therefore your tax bill. Make your home business more profitable.
Your profit after tax and expenses
- If you make £40,000.00 profit and you are taxed at 40%, then you will pay £16,000.00 tax. This leaves you £24,000.00 in your pocket as post-tax income.
- If you could claim back £10,000.00 of tax free expenses then your profit will be £30,000.00. Taxed at 40% gives a tax bill of £12,000.00. This leaves you with £28,000.00 in your pocket. You have actually made an additional £4,000.00 post-tax income.
First of all, there are two sorts of business profit. There is Gross Profit and Net Profit. You don’t really need to worry about this, but I thought I would mention it.
Turnover, or sales is the value of the products that you sell. Cost of sales are the costs associated with the obtaining of the goods you sell. Your cost of sales, in this case, is the cost of stock you pay to buy in the stock, and the delivery cost to you. Gross profit is profit made on selling the goods, before any expenses. Your Gross Profit then is your Sales – Cost of Sales = Gross Profit.
Let us assume that In both examples 1. and 2. above, you buy £60,000.00 worth of stock, and then sell it for £100,000.00. In this case the Gross Profit in both examples is £40,000.00.
Net Profit is the profit you have left after you have deducted all your expenses from the Gross Profit. Gross Profit – Expenses = Net Profit. You will be taxed on your Net Profit. In example 1. above, the Net Profit is £40,000.00. In example 2. above, the Net Profit is £30,000.00
Profit Is Not Cash
Profit should not be confused with cash. Make a profit of £1,000.00 and put it in the bank. You have made £1,000.00 profit and it is in cash in your bank account. Now buy £800.00 in stock, you have still made £1,000.00 in profit. But you now have £800.00 in stock, and only £200.00 in cash. You will be taxed on the £1,000.00, not the £200.00. Make sure that at the end of the tax year, you have enough cash to pay the taxes on your profits.
Current and Fixed Assets
Current Assets is the collective name given to cash, and those items that can be easily turned into cash – your stock. Your current assets are always £1,000.00 in the above examples.
There is another type of asset that is called Fixed Assets. These are things that are bought to help you run your home business. A hairdresser who runs a home salon, needs to buy hairdryers, combs, brushes scissors etc. She buys them, she doesn’t sell them, but uses them – Fixed Assets.
Accountants are very friendly and helpful people who charge you for talking to you and working for you. You really need one to advise you on what you are entitled to claim as an expense, and to do your end of year tax return. April 5th is the end of the tax year and soon after this date you should give all the records you have kept on your sales and expenses to your accountant to sort out how much tax you have to pay.
By all means do your own end -of-year tax returns, but this takes time and money. You might be better off using the time you would take to do your tax return, to earn more money than you pay the accountant. Having an accountant do your tax return gives you greater credibility with the Taxman though.
Remember that you are responsible for the accuracy of the information that you give your accountant regarding your personal tax affairs, and those of your home business.
The Taxman is a very friendly and helpful person who does NOT charge you for talking to you. They are very helpful and will answer any questions that you ask them on tax issues. Do not try to fool them though, because if they think you are trying to hide things, they can be very unpleasant about it. The Taxman is forgiving about mistakes made by well meaning citizens starting their first business. They are though, less forgiving the more business experience you have. They are totally unforgiving to fraudsters.
Be warned, the Taxman visits craft shows, wedding shows and art fairs etc. undercover (and monitors Facebook etc.) to see who is making money from hobbies, crafty type things and a home business. The Taxman is not being underhand or nasty, they are just doing their job.
They might see someone selling obviously home made craft work from a table in a village hall and they won’t be bothered at all. They might see someone with a professional looking stand, and professional advertising materials and take a closer look. I remember 35 years ago, one of my friends was an up and coming local DJ. He was very pleased that one day he had a nice piece about him, with a photo, in the local paper. He was less pleased, when 3 days later, he had a letter from the taxman asking him if he had any form of undisclosed income.
You are the person trying to achieve your dreams in a manner that is of benefit to you and others, without hurting other people. Incidentally, you also keep the Accountant and the Taxman in a jobs.
You have a personal bank account in you name – Jane Doe. You might want to open a separate trading bank account to deal with your home business incomings and outgoings – “Jane Doe Trading As XYZ”. It makes matters so much easier to keep home business related money separate from your personal money.
Put whatever you need to start the home business off, in the separate trading account , and then take it out as soon as you can. By all means spend some of your profits, but transfer the money from the trading account to your personal account first.
Don’t spend money from the trading account on personal things as the Taxman might think it suspicious. Doing this also complicates your accounts administration
Me – Russell Collins
I am not an accountant, but have been the owner of a small limited company for 20 years and have a lot of experience in these areas. You must though, if you have any doubts on anything tax related, ask an accountant, or the Taxman.
The Business Entities
I thought I would say a few words about this painting. The Lady In Red is one of my most popular paintings, I sell a few originals and prints of it. The sharp eyed amongst you will see that the soles of her shoes are red – they are Louboutin shoes. Obviously one of her dreams was to own a pair of Louboutin shoes
A home business is probably trading as a Sole Trader – you work for yourself in your own name. You have to register with the Government as self-employed and probably pay a small sum for self-employed NIBC payments. All your sales, commissions and bonuses are treated as income, and you can claim back ALL expenses that were incurred solely for the benefit of your home business – this last bit is important.
You are in good company – The Prince of Wales as Duke of the Duchy of Cornwall runs his Duchy Originals business as a sole trader (big home though). Incidentally, the Duchy of Cornwall was established in 1337 to provide an income to the heir to the throne.
Prince Charles has a charity called the Prince’s Trust and its purpose is to help young people from deprived backgrounds get into jobs, education and training. It also helps young people from deprived areas start their own business. I think that Prince Charles knows more about the deprivation that young people can suffer, than most politicians. Prince Charles, as Heir to the Throne is exempt from paying Income Tax, he does it voluntarily though.
A Limited Company is a business structure that gives you certain benefits. It probably isn’t worth you setting one up, so I will not go into this any further. If you need more information please ask an accountant.
First of all, a Government cannot tax a loss, they can only tax a profit. Governments are also supposed to look after those less fortunate than ourselves, by spending money on them. The Government does this by raising money to spend and the money raised is called taxes. They then spend the money, whether they spend it wisely is not the issue here.
No one has to pay more in taxes than the law says they should. The taxman can use every legal means to get you to pay your taxes. You can use every legal means to reduce your tax bill – the Government, and the Courts say you can. In 1922 an English Court decreed: “That the common man is under no obligation to arrange his affairs in such a manner that allows the Tax Man to take the largest sum thereof.” To put this into plain English, you can arrange your money matters to reduce the amount of tax the Government takes from you.
Tax Avoidance and Tax Evasion
To make use of legal tax rules that allow you to pay less in tax is called Tax Avoidance. Tax Avoidance is perfectly legal, pensions, IRAs and ISAs are a form of Tax Avoidance. Never mind that Apple, Amazon or Google move profits around in such a way to pay less taxes, it is legal. Some people consider this unethical, but it is legal. If Government wants to deal with this “unethical” behaviour then it can just change the law.
To hide money from the authorities, and not tell them about it means they cannot tax it. This is called Tax Evasion, and is a criminal offence – it is not legal. If you sell, as part of a business, something to a customer, whether direct or at some sort of exhibition, the money received should be declared for tax. If like me, you sometimes accidentally put the money in the wrong pocket and don’t declare it, you have committed Tax Evasion and broken the law. Don’t panic though, simply make corrections later.
There are 4 sorts of taxes. There is Capital Gains Tax, Corporation Tax, Income Tax and Value Added Tax (VAT for short).
Capital Gains Tax (CGT)
You buy something (anything) as some sort of investment – say shares in a company. Those shares go up in value and you sell them at a higher price – you make a Capital Gain. You then pay CGT (Capital Gains Tax) on the difference between the buying and selling price (adjusted for inflation). People who buy a house, then sell it some years on usually make a good Capital Gain on that house, but your place of residence is exempt from Capital Gains Tax. If you had a 2nd house such as a holiday home and sold that, then you would pay Capital Gains Tax on the profit
Corporation tax is the tax that companies pay on their company net profits (assuming they have some) – that is after all expenses have been paid.
As a sole trader, you will pay income tax. Being a sole trader means that all your income, whether pay from a salaried job, or sales from a home business, or both is treated as a combined income. All the expenses that you have paid out solely in connection with running the business, are deducted from your business income to get a final figure for tax purposes. If you have a salaried job, then income tax will be deducted by your employer. You (your accountant) will then need to calculate the tax you need to pay on your business income.
I don’t think that VAT will be an issue for most people, so I am just going to skim over the subject. VAT is a sales tax and it doesn’t matter if you are a sole trader, or a limited company, you might still need to register for VAT at some time. You must register for VAT if your sales reach UK£85,00.00 or are expected to reach UK£85,000.00 in the current year.
If you are VAT registered, it means that you must add VAT (currently 20%) to the cost of everything you sell that is subject to VAT. But you do also get back the VAT you paid out on expenses and stock. Every three months you do a calculation, and you send a cheque to the VATman if you owe him money. Sometimes the VATman sends you a cheque if he owes you money. Usually you owe him money.
Remember VAT is a sales tax and you must register when you make £85,000 in turnover, or to give it another name sales. You need to sell 33 boxes a week to make that figure. Commissions and bonuses are income, but they are not part of your sales, and will never be considered as part of your VAT total.
I originally thought that the Valentus products were classified as a dietary supplement, which I think is treated as a food. There is no VAT on food (not subject to VAT). It appears that Valentus has not been charging us VAT when they should have, which is why we now pay VAT on our orders. Valentus is acting as VAT collector and this means that they charge us VAT when we buy, and they pay UK Customs the VAT. This means that we don’t pay VAT before the courier hands over our delivery.
VAT Law Interpretation – Jaffa Cakes
incidentally, VAT law can sometimes be rather vague, and requires a court interpretation. There was a court case in 1991 when the food manufacturer McVities had an argument with the VATman over whether Jaffa Cakes were cakes or biscuits. In the UK, cake and plain biscuit, were historically made in the home, and were seen as necessities and therefore not subject to taxes. Chocolate biscuits though were factory made and a luxury. McVities agreed that Jaffa Cakes had some chocolate biscuit attributes, but were predominantly cake therefore should not be subject to VAT.
After due consideration, some of the finest legal brains in the country came to the conclusion that biscuits were hard when fresh and soft when stale. Cake though was soft when fresh, and hard when stale. Jaffa Cakes were soft when fresh and hard when stale, so therefore were a cake – a necessity – and should not be subject to VAT. The price of Jaffa Cakes dropped by 20% (VAT) immediately after the judgement.
The Government Business Subsidy
It isn’t a real Government Art Subsidy, but you can see it as one.
If you sell something that you have made for sale, or bought at a low price with the aim of selling for a higher price, then you have generated a taxable income. You can set off the cost and expense of running your home business against your taxable income. You can claim for samples, marketing materials, advertising materials etc. A training course is an expense, as is the cost of travelling to the event. If you pay for exhibition space then that is an expense, as are other costs associated with that exhibition. Your travel costs to the exhibition are also legitimate home business expenses.
You can also claim some expenses to cover the cost of where you run your business (your home) and the cost of utilities to run your business. Do not set aside a room solely though to run your business. You must make sure the room can be used for personal purposes as well. The reason for this is that if the room is solely for the use of the business, then you could be liable for Capital Gains Tax on the value of the room when you sell your house
All of these expenses can be set against your tax. You cannot though claim any tax back until you have made sufficient sales to cover the tax you want back. You can though carry over tax you want to claim back, for a couple of years until you do make a profit.
Accounting for the sales of your home business is easy. Get a notebook and note every single sale made and note it by date and name of customer.
Accounting for expenses takes a little more time, and you should deal with this at the end of each week. Trust me, you don’t want to leave it until the end of the year.
I am assuming that you sometimes use your personal car for business purposes. Get a notebook that you leave in the car, and log every journey that you make for the business accurately. If you drive somewhere for the home business then you can claim 45p per mile, tax free, for the first 10,000 miles of business travel. After 10,000 miles it goes down to 25p per mile tax free. The extra 20p for the first 10,000 miles is to help with depreciation, maintenance and insurance costs.
You must only claim back expenses that have been incurred wholly for the purposes of the home business. So, if you do a 10 mile round trip delivering product to your customers then you can claim 10 x 45p = £4.50 in expenses, and this will be taken off your profits, thus reducing the tax you pay.
Home Business or Private Mileage
If you stop off at Tesco, 2 miles into your journey to do your shopping because it is on your route, then your trip is not solely for the purpose of the home business. In this case you can’t claim the entire 10 miles, but can only claim 6 miles. This is because you would normally have gone 2 miles out to Tesco, and 2 miles back. You might though get away with claiming 8 miles instead of 6 miles. The Taxman is very generous as he will allow you to claim the full 10 miles if you fill up with fuel on the way, stop to buy a paper, or stop to buy a coffee. But, doing your shopping is a big no-no.
You need to keep ALL your fuel receipts to prove that you have not claimed back in mileage expenses more money than you have actually paid out in fuel. If your private mileage is small compared to your home business mileage then you could end up doing this. Petrol costs about £5.25 a gallon (4.54 litres). Do 30 miles to the gallon then you claim back £13.50 at the 45p rate, having paid out £5.25. The Taxman WILL NOT let you claim back more in mileage expenses than you have paid in fuel overall.
The issue of free samples is a serious one. If you buy 20 boxes of stock, you might end up giving 2 boxes of sachets away as individual samples. You can claim back the cost of those samples against your profits. So you make a note that you actually bought 18 boxes of stock. You then make a separate note that you bought 2 boxes for samples. the cost of samples is counted as an expense and comes off your pre-tax profits, and therefore reduces your tax liability.
If you use the products you sell, then buy them yourself, don’t help yourself to them.
Get a note book, or if you are computer literate use a spreadsheet. Make a note of every single outgoing (expenditure) that you have, including that of stock. Take the receipt for that expenditure, staple it to a piece of A4 paper and file it in date order. This is your expenses folder. If you lose a receipt then don’t claim the money back.
Different countries deal with this type of extra income in different ways, but they all need you to keep records. A simple notebook where you jot down details of expenditure will be fine. Get receipts for everything, and spend an hour or two at the end of every month putting them in order. At the end of the year, use it in your tax return. Put it into a spreadsheet, or use some of the free basic accounting software out there. Doing this will make your life so much easier.
You have to be properly insured for whatever you do. Insurers can and will neutralise an insurance if you have breached a term of the insurance in any way. This could include refusing to pay out on your medical insurance today, because you never stated that you had your appendix taken out 40 years ago.
There are 3 main forms of insurance:
- Home Insurance
- Car Insurance
- Public Liability Insurance
Your home is probably just insured as your residence. If a friend calls on you and trips over something and hurts themselves then your insurance company could pay out insurance money. If someone visits you for a business related matter and trips over and hurts themselves, then you might not be covered for insurance purposes. Delivery drivers will visit it you for the purposes of business – they deliver things, customers might also visit.
Phone the insurance company and ask for advice. You will be asked questions about your business and if you are not covered they will cover you. The extra cost will be minimal, and they will re-issue your insurance documents – you are covered.
Their was a case a few years ago about a lady who was running a vintage cloth business from home. She had a bad house fire and tried to claim back her stock on her personal contents insurance. The insurance company discovered what she was doing, refused her entire claim and put her on an insurance blacklist – she attempted insurance fraud. If she had spoken to the insurance company, it would have cost her about £5.00 per month extra.
Your car insurance covers you for personal motoring, and probably covers you for driving on behalf of your day job. Contact your car insurance company to find out the situation is regarding using your car for your home business purposes. They will ask you some questions, and if you are not covered they will cover you and re-issue your documents. They might charge you, but only a small amount.
Public Liability Insurance
If you ever display, or exhibit your products, then you should have some form of Public Liability Insurance. This type of insurance coves you against injury or death caused to members of the public by the actions or inactions of you, or your employees. People can trip over loose carpets, or uncovered cables, or be injured by falling display banners. or collapsing displays. Public Liability Insurance covers you against this.
Exhibition organisers usually require you to have a minimum of £10,000,000.00 (ten million pounds) of cover – don’t panic. You can usually buy your own insurance policy, or use the one usually offered by the exhibition organiser.
Dealing With A Tax Investigation
At sometime you will be subject to a tax investigation, we all are. The Taxman will want to look at your home business accounts and will ask you questions. Show the Taxman that you have kept proper records, and can account for your expenses. Also, show that you look like you know what you are doing and give straight answers to the questions and your investigation will be over very quickly.
If you have poor and disorganised records, and are evasive when answering questions then the Taxman could be with you for sometime.
Make a note of everything and keep all your receipts tidily stored and up to date. Get an accountant to calculate your tax return. Make sure that you pay your taxes on time, and you should have an easier life of it.
Do your own day-to-day accounts as you will keep up-to-date with your financial situation. You will know what is coming in, and what is going out. I would recommend that you use one of the small business computer software packages, they make small home business accounting so much simpler. Many of these software’s can also act as a simple customer and contact database as well that you can use for follow up purposes.
You should be properly covered insurance wise.
Go out there and make the most of their Valentus opportunity.
To learn more about me – Russell Collins.