First year as self-employed - A basic tax question

Lord TSC

Howdy all,

I do hope this is the right place to ask this. And I apologies in advance if this seems a very basic question. But I'm looking at Preliminary Tax for my first year in operation, and wanted to get some basic clarification about some things.

Basically, I've seen what I feel like is conflicting info; that I don't have to file my tax returns till the year after the year I am being taxed on, while at the same time, I seem expected to file a preliminary tax return now for the year so far. I started in Feb 2015, and am on the Back to Work Enterprise Allowance. I am registered as a Sole Trader.

Now, the basic would be, roughly how much tax would I be expected to pay; my income for the year is €9795 (to date) and my expenses (cost of stock, shipping of stock) is €9730. Its a very small business right now, obviously (I started with €500 back in Feb), and every penny I make goes right back into buying more stock. Now I had a brief chat with an accountant yesterday who seemed to imply my tax was how much I made minus how much I spent, divided by 50%? Is that right? In which case, it's about €33?

But give its based on the entire first year, do I have to do estimates with regards how much I'll make between now and Feb 2016? Can I take on board how much I expect to spend as well?

Sorry if thats a basic question, but its my first time dealing with any of this sort of thing (well, at least since I did Business Studies for a year back in School....). Any help would be appreciated, cause I don't want to muck this up. I'm having another accountant trip soon, but want to be armed with a basic idea this time of what I'm up against

Loughc

Hey Lord TSC,

So your first year of trading is 2015, which means your first tax return due is by 31.10.16.

Preliminary tax is essentially tax paid in advance. So say next year you have to pay €100 tax, people would pay €200, €100 for 2015 and €100 for 2016 preliminary tax.

As it's hard to guess how much tax you would have to pay based off your first year of trading, it's ok to do a good guesstimate based off the figures you gave. €30 seems good. If you don't end up paying any tax next year you will be refunded your preliminary tax.

I hope this somewhat clears it up. Any questions please ask.

Alan Shore

You need to do a projections out to year end. Unless you have a large amount of stock based on those figures you will make very little profit.

Back to work is not taxable so you won't have any liability at all unless your profit for the year hits €5,000.

Alan Shore

Loughc wrote: »

Hey Lord TSC,

So your first year of trading is 2015, which means your first tax return due is by 31.10.16. technically it's not due until 31.10.17

Preliminary tax is essentially tax paid in advance. So say next year you have to pay €100 tax, people would pay €200, €100 for 2015 and €100 for 2016 preliminary tax. I never understand why people think paying your tax on 31.10 in a year is paying in advance

Alan

Loughc

Alan Shore wrote: »

Alan

Hi Alan. I was referring to this 2015 return is due by 31.10.16 and preliminary tax is paying tax in advance. If I pay preliminary tax now for 2015 that is in advance as 2015 isn't over yet.

carman2011

you can offset a lot of other expenses as well as just cost of sales against your income, such as phone and light and heat, motor costs etc.

also, if u bought any equipment of anything, you get a capital allowance for this

it sounds like you will make a loss in the year when taking this into account.

income tax return is based on calender year, so if you accounts year end is feb2016, your first IT return will be based on these accounts apportioned to Dec 15 only.

Also, you can base your prelim tax on 100% of last years liability, and since you didnt trade last year, you can return Nil for PT this time.

you should get some proper advice on this, as you seem extremely not informed on accounting as a sole trade

Lord TSC

Loughc wrote: »

Hey Lord TSC,

So your first year of trading is 2015, which means your first tax return due is by 31.10.16.

Preliminary tax is essentially tax paid in advance. So say next year you have to pay €100 tax, people would pay €200, €100 for 2015 and €100 for 2016 preliminary tax.

As it's hard to guess how much tax you would have to pay based off your first year of trading, it's ok to do a good guesstimate based off the figures you gave. €30 seems good. If you don't end up paying any tax next year you will be refunded your preliminary tax.

I hope this somewhat clears it up. Any questions please ask.

So, I guess the basic question I'd ask (and again, sorry if this makes me sound extremely thick) is that....is prelim Tax optional? I ask because the line is always "You dont need to file tax returns till the year after" which I get, but then it seems to be you actually do need to pay tax for the year it is as well? I feel thats a bit contradictory.

Is Prelim tax obligatory or just good business practice? It doesn't bother me too much if I have to pay it, and I can get it done. Even if its optional, I'll probably pay it for peace of minds sake. But it seems to be just like a down-payment on the tax return for next year?

Alan Shore wrote: »

You need to do a projections out to year end. Unless you have a large amount of stock based on those figures you will make very little profit.

Back to work is not taxable so you won't have any liability at all unless your profit for the year hits €5,000.

Two questions here then....

With projections, I'm (as stated) at just under €10k now, and I'd be hoping to hit about €14-15,000 over Xmas (I'm selling toys, so Xmas is going to be a busy enough month). But since every penny I make goes right back into stock at the moment, I'd expect my expenses to rise the exact same, meaning the ratio is going to be the same as now. When doing projections, I presume its ok to project both income AND expenses, and for my projections right now, I'm keeping the two balanced, the two as close together as possible. Is that ok, projection wise? If I'm paying the Prelim Tax, I can say that the gap between the two now is pretty much the same as it will be by years end.

And stock...I've currently got 650 items in stock at the moment. How do I equate that into the figures? Just as the expenses, wherein I'm already considering how much they cost me? Or should I be looking at how much they could potentially go for?

(And are those two questions actually the same, in terms of projections of sales verses expenses I've spent?) :P

Sorry if these seem very basic questions. I'm trying to educate myself on tax and really am coming at it from the bottom. I appreciate the responses


Actually, to add...would this be the right place to ask about "Start Your Own Business Relief" as well? Reading the conditions, I fully qualify for it, and it seems to say that it gives tax relief up to €40,000? :eek: So would that actually cover me to the extent I won't have any tax to pay this time? Or is there a massive snag I'm missing?

EDIT

carman2011 wrote: »

you should get some proper advice on this, as you seem extremely not informed on accounting as a sole trade

Yeah, I met with an accountant a few days ago but some things weren't clear. Some were; I had no clue Prelim Tax existed before the meeting, but the meeting left me with more questions. Honestly, I'm booking another appointment with another accountant this week, but this time want to go in a bit more educated and prepared, hence my asking here

carman2011

preliminary tax is not optional, it must be returned, but in some cases can be returned as nil (such as this)
to avoid interest penalties, preliminary tax must be either 90% of the ultimate tax due in the year , but as some people cannot calculate this with certainty in october, they allow u to base it on 100% of last years charge.

carman2011

if you have closing stock, this is part of your profit

gross profit = sales less opening stock - purchases + closing stock

(this really is very basic stuff that everyone in business should know)

so, if you are selling stuff at a decent mark up or margin, you will make a profit, whether or not you invest this profit back into stock or not, wont effect your profit.

carman2011

stock is valued at the lower of cost or net realisable value