Starting a company to run racing car or go self employed?
Discussion
At our prize giving I was chatting to a friend who has a car which he competes in and writes about in magazines and on his website. He plans to sell ads on the site though this is unlikely to bring in much money. He has a proper job too.
Running the car costs quite a lot in expenses. Currently he plans to pay income tax (40%) on the earnings from the magazine, and plans to do on any advertising income but he covers outgoings from his pocket.
Fuelled by some Christmas cheer (which suddenly made me into an expert) I suggested that he should start a company. That way he wouldn’t have to pay income tax on the articles (the company would make a loss) and claim VAT back on things like expenses, parts etc. His view was that if it was that easy every one would do it and that the taxman would see that it was his hobby.
He has owned the car for about 2 years. The magazine articles are likely to become less regular soon. Ignoring the purchase of the car he might have made a small profit last year though probably not if you added up every fuel receipt and definitely not if you took his labour into account.
It seems reasonable to me that it wouldn't work for most people because most people don't derive an income from competing so it clearly is a hobby. In his case he does have an income, last year of £2500 before tax, and that lots of companies make a loss and are subsidised by their owner. The income is dependant on doing the events - if he didn't compete he'd have nothing to write about.
If it is a good idea could he back date it? He doesn't have receipts for out of pocket expenses (though bank statements might be ok?) but he does for all the components. Could he get the VAT back on them? Would the costs of starting the company, an accountant etc make it not worth while?
Thanks
Running the car costs quite a lot in expenses. Currently he plans to pay income tax (40%) on the earnings from the magazine, and plans to do on any advertising income but he covers outgoings from his pocket.
Fuelled by some Christmas cheer (which suddenly made me into an expert) I suggested that he should start a company. That way he wouldn’t have to pay income tax on the articles (the company would make a loss) and claim VAT back on things like expenses, parts etc. His view was that if it was that easy every one would do it and that the taxman would see that it was his hobby.
He has owned the car for about 2 years. The magazine articles are likely to become less regular soon. Ignoring the purchase of the car he might have made a small profit last year though probably not if you added up every fuel receipt and definitely not if you took his labour into account.
It seems reasonable to me that it wouldn't work for most people because most people don't derive an income from competing so it clearly is a hobby. In his case he does have an income, last year of £2500 before tax, and that lots of companies make a loss and are subsidised by their owner. The income is dependant on doing the events - if he didn't compete he'd have nothing to write about.
If it is a good idea could he back date it? He doesn't have receipts for out of pocket expenses (though bank statements might be ok?) but he does for all the components. Could he get the VAT back on them? Would the costs of starting the company, an accountant etc make it not worth while?
Thanks
Eric Mc said:
Are his raciong related activities making a profit or a loss?
Is he carying on these activities with a view to making a profit (irresspective as to whether he is or not)?
He makes a loss. Its fairly cheap motorsport and the size of the loss is dependant on how many events he does. Last year he could make a profit (if the previous year's purchase cost of the car is ignored) or a loss if every expense is added up. If you added the purchase of the car and the preparation costs incurred over the two years he has owned the car he would definatelly make a loss. Total income about 3000 (inclding some sponsorship) total outgoings obout £3200 for car, £1000 on parts and serivces. £2000 on entry fees, hotels etcIs he carying on these activities with a view to making a profit (irresspective as to whether he is or not)?
He didn't intend to make a profit - he wanted a racing car - and it would be difficult to suggest that he could ever make enough profit to give up his day job. Having said that, he choose events that would be popular when he wrote about them. He would hope that next year the expenses will only be entry fees and transport costs. If he could sell an artical per event (unlikely) and there were no breakdowns (unlikely) he would make a profit.
He is thinking of changing car and disciplins simply becuase he would be morelikey to sell articles so I guess he would be planning to make a profit...
If the racing is an integral part of his self employment (writing articles about his racing) then I believe he can offset it. HMRC are actually very good (and often pleasantly surprised) at giving answers to stuff if you ask them in advance, and that gives you a solid basis to work from.
RapidDave said:
Eric Mc said:
Are his raciong related activities making a profit or a loss?
Is he carying on these activities with a view to making a profit (irresspective as to whether he is or not)?
He makes a loss. Its fairly cheap motorsport and the size of the loss is dependant on how many events he does. Last year he could make a profit (if the previous year's purchase cost of the car is ignored) or a loss if every expense is added up. If you added the purchase of the car and the preparation costs incurred over the two years he has owned the car he would definatelly make a loss. Total income about 3000 (inclding some sponsorship) total outgoings obout £3200 for car, £1000 on parts and serivces. £2000 on entry fees, hotels etcIs he carying on these activities with a view to making a profit (irresspective as to whether he is or not)?
He didn't intend to make a profit - he wanted a racing car - and it would be difficult to suggest that he could ever make enough profit to give up his day job. Having said that, he choose events that would be popular when he wrote about them. He would hope that next year the expenses will only be entry fees and transport costs. If he could sell an artical per event (unlikely) and there were no breakdowns (unlikely) he would make a profit.
He is thinking of changing car and disciplins simply becuase he would be morelikey to sell articles so I guess he would be planning to make a profit...
For an activity to be deemed to be a "self employment" (or a "trading activity"), the activity MUST be caried on "with a view to making a profit". It is not compulsory that a profit actually IS made, but the intention should be there.
HMRC can, and do, stop somebody submitting loss making accounts if they feel that the activity being returned is in the nature of a hobby rather than a bona fide business.
They would probably accept a few years of loss making but if after (say) three or four years of persistent losses and no profit had been returned, they could very well come to the conclusion that what was going on was not a proper trading activity.
You might ask, why should they not want people to submit loss making activities. Well, there are good tax reasons why a trading loss situation might have beneficial tax consequences, especially if the taxpayer has other non-relatted taxed income, such as a PAYE job.
Trading losses can be offset against "other income in the same tax year", so people who do make trading losses often (usually because of advice from their accountants) apply to offset the loss against their employment or investment income of the same tax year and therefore reduce their overall tax bill for the year - or even generate a refund of tax already paid.
So, if he was to try to set this operation up as a business, the LAST thing I would do would be to operate it through a limited comapny.
If the company was loss making, those losses could only be offset against other income of the company in the same year or future profits of the company.
He would be unable to offset these company losses against any personal income.
As a sole trader he would - IF HMRC didn't block his loss relief claims.
OK, thanks so far.
So if he went sole trader he could probably get away with only making a small profit each year. If he didn't declare all the expenses for example, he might be able to pretty much break even. HMRC aren't going to know how many times the engine needed rebuilding. On the other hand, if he didn't declare it, he can't get the VAT back... I assume that a sloe trader wouldn't pay VAT to another firm for parts and work - it would be his responsibility to pay it. But hotels and petrol etc would need to be claimed for.
Problem is that with small amounts - we are talkng thousands - one cock-up could make the whole thing not worth while.
So if he went sole trader he could probably get away with only making a small profit each year. If he didn't declare all the expenses for example, he might be able to pretty much break even. HMRC aren't going to know how many times the engine needed rebuilding. On the other hand, if he didn't declare it, he can't get the VAT back... I assume that a sloe trader wouldn't pay VAT to another firm for parts and work - it would be his responsibility to pay it. But hotels and petrol etc would need to be claimed for.
Problem is that with small amounts - we are talkng thousands - one cock-up could make the whole thing not worth while.
Tax fraud is a crime. Failure to show the true picture for a "business" in order to manipulate the tax situation counts as "tax fraud".
Why would he want to register for VAT as well?
He would have to charge VAT on whatever he was billing his customers (whoever they might be).
The bootom line is that his activity is either a business or it isn't.
Why would he want to register for VAT as well?
He would have to charge VAT on whatever he was billing his customers (whoever they might be).
The bootom line is that his activity is either a business or it isn't.
Edited by Eric Mc on Thursday 30th December 12:58
Eric Mc said:
Tax fraud is a crime. Failure to show the true picture for a "business" in order to manipulate the tax situation counts as "tax fraud".
Why would he want to register for VAT as well?
He would have to charge VAT on whatever he was billing his customers (whoever they might be).
The bootom line is that his activity is either a business or it isn't.
Thanks for your reply. I think it is exactly this point that is holding him back - he'd rather pay for his "hobby" and pay tax on his earnings from that hobby than risk commining a crime. But I think if you are earning it stops being a hobby. I don't think HMRC would be impressed if I said that I enjoy my job and therefore it is a hobby and therefore I shuoldn't pay tax! Lots of people must have hobies that become businesses. Artists who paint in their spare time and sell their pictures, or a Rolls Royce owner who does weddings, for example. Why would he want to register for VAT as well?
He would have to charge VAT on whatever he was billing his customers (whoever they might be).
The bootom line is that his activity is either a business or it isn't.
Edited by Eric Mc on Thursday 30th December 12:58
Personally it seems unfair for him to pay VAT on the parts he buys AND pay tax on the earnings. In my head it should be one or the other.
I assumed he would want to register for VAT so that he didn't pay VAT on parts he bought for the car, the fuel he used to transport it to the track.
If he is selecting events becuase he knows he can sell articles / get more sponsorship / get more traffic on his website and therefore more advertising revenue then maybe it has moved into being a business. Also he wouldn't be able to do the events if he didn't derive an income from it too.
I guess at some point someone in HMRC would have to make a decision - is it a hobby or an unsucessful business. Personally I don't think the tax payers should be subsidising a reasonably wealthy person's hobby (though we do for Opera). On the otherhand it seems unfair to pay 40% income tax when you have not had an income.
RapidDave said:
Eric Mc said:
Tax fraud is a crime. Failure to show the true picture for a "business" in order to manipulate the tax situation counts as "tax fraud".
Why would he want to register for VAT as well?
He would have to charge VAT on whatever he was billing his customers (whoever they might be).
The bootom line is that his activity is either a business or it isn't.
Thanks for your reply. I think it is exactly this point that is holding him back - he'd rather pay for his "hobby" and pay tax on his earnings from that hobby than risk commining a crime. But I think if you are earning it stops being a hobby. I don't think HMRC would be impressed if I said that I enjoy my job and therefore it is a hobby and therefore I shuoldn't pay tax! Lots of people must have hobies that become businesses. Artists who paint in their spare time and sell their pictures, or a Rolls Royce owner who does weddings, for example. Why would he want to register for VAT as well?
He would have to charge VAT on whatever he was billing his customers (whoever they might be).
The bootom line is that his activity is either a business or it isn't.
Edited by Eric Mc on Thursday 30th December 12:58
Personally it seems unfair for him to pay VAT on the parts he buys AND pay tax on the earnings. In my head it should be one or the other.
I assumed he would want to register for VAT so that he didn't pay VAT on parts he bought for the car, the fuel he used to transport it to the track.
If he is selecting events becuase he knows he can sell articles / get more sponsorship / get more traffic on his website and therefore more advertising revenue then maybe it has moved into being a business. Also he wouldn't be able to do the events if he didn't derive an income from it too.
I guess at some point someone in HMRC would have to make a decision - is it a hobby or an unsucessful business. Personally I don't think the tax payers should be subsidising a reasonably wealthy person's hobby (though we do for Opera). On the otherhand it seems unfair to pay 40% income tax when you have not had an income.
If you have an income and do pay 40% tax on it - and then chose to spend the net of tax income on a relatively expensive hobby, you will not get tax relief on that hobby expenditure - quite rightly too.
To show that your friend has an intention to make a profit he will need to do all of what Eric addressed, as well as proving that the activity he is carrying out is capable of being considered commercial, and that in general there is a reasonable chance of making a profit.
Loss making will not be an issue initially, where the business is such that costs as higher in the earlier years. Ina Privy Council case, a taxpayer made losses for 10 years striaght after he acquired a large section of scrub and began working on converting it to a farm. The court found he was in business, because when ready the farm was of such a size that it would be commercially successful.
Thus, your friend will need to be able to show that the losses incurred are not likely to be a consistent trend, and that he is racing enough to be able to make it a profitable exercise. If however the costs are typical of what will be incurred, and likewise the sponsorship money is too, then he will have a very hard time claiming he is in business.
Loss making will not be an issue initially, where the business is such that costs as higher in the earlier years. Ina Privy Council case, a taxpayer made losses for 10 years striaght after he acquired a large section of scrub and began working on converting it to a farm. The court found he was in business, because when ready the farm was of such a size that it would be commercially successful.
Thus, your friend will need to be able to show that the losses incurred are not likely to be a consistent trend, and that he is racing enough to be able to make it a profitable exercise. If however the costs are typical of what will be incurred, and likewise the sponsorship money is too, then he will have a very hard time claiming he is in business.
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