Tier 1 General Self-employed

[samira_uk]

Dear All,

I have two questions regarding Tier 1 G extension. I registered as a sole trader in the UK and I opened my business bank account. Therefore, my trades would be done through this bank account.

1-For the purpose of previous earning should I consider the profit of my business before tax or after tax? To be honest, the Tier 1 General is not clear about it and always says the Net Profit which means usually after tax but in Rules part 6 it says before tax. I do not want to pay myself a regular salary and therefore retain the profit in the business.

2-As you know in accounting the profits are accrual it means that you claim a profit is realized but its related cash may be paid in your bank account later. Therefore, how could bank account show your profit when the money has not been received from the customer and it is due in future?

Thank you for your comments.

[John]

samira_uk, given the wording of your questions, can you confirm if you are operating your business using a Limited Company?

[samira_uk]

No, I am working as a sole trader and due to that I am confused as there are many obscure points in Tier 1 G guidance.

[samira_uk]

To clear my position I will explain it in more depth:

1-I registered as SOLE TRADER and therefore not working in a company structure.

2-Every month there would be payment and drawings from my business account due to business activities.

3-Occasionally I may withdraw money from my business account for my personal use.

4-There is no specific relation between the payments in to business account and profit as the profit calculated according to accrual accounting principles and not cash flow.

5-At the end of year, I'll pay for Tax and I'll pay for NI by direct debit.

Now my questions are:
-In guidance it is said the net profit is used in part 6 it is said the before tax. It seems that the before tax is more reasonable. Which one is correct?
-How UKBA uses bank account to verify the payments and net profit as you cannot verify the net profit by bank accounts?
-They said in the guidance that use bank account to verify payment to me whereas I am not drawing a regular salary and my drawings are only occasional for my personal expenses?
-What about the NI? Should I consider my earning before NI or after deducting that? It is said earning before tax and no reference to NI made in the guidance.
-Finally, can I use my produced accounts and a letter from the accountant to prove the earning? in that case there would not be any need to supply bank account.

[samira_uk]

Is there any idea especially from expert accountant that how UKBA relates the profit to bank statement?

[John]

The term "net profit" is being said by UKBA in the accounting sense. That is, a business will have receipts, and will incur expenses in order to ensure those receipts are forthcoming, and the difference between the receipts and the expenses is the net profit. In very basic terms!

That net profit is then subject to tax, and NI, in the ordinary way.

For the purposes of UKBA it is the profit they are interested in, before deducting tax and NI on those profits.

By its very nature a self-employment can vary considerably. For example the nature of the receipts and expenses will be very different between say a retail shop and an eBay trader.

That being the case, it may or may not be the case that there is much relationship between bank statements and the receipts and expenses of the business. For example, a retail shop, in order to minimise bank charges on paying cash into the bank, will often buy its supplies at a wholesale Cash & Carry, and hand over cash it has taken from its customers over to its supplier, by-passing the bank as regards that cash.

Given that you confirm that you are a sole trader and not operating the business through a limited company, you will be liable for tax (and NI) on the net profit, as defined. For tax purposes it is irrelevant how much money you draw from your business bank account to your personal bank account.

[samira_uk]

Hi John,

Thank you for your reply. Yes, I agree with you and my problem is exactly this point. Because UKBA said that they use business bank account to verify the profit I claimed but as you told yourself depends on the nature of the business, the net profit (revenue-expenses) may be not related to cash inflow and outflow of the business. Then, how they use the bank account and verify what by that??

Regards

[John]

What is the nature of your self-employment? That is, what type of business do you operate?

[samira_uk]

I am education consultant. My clients are overseas students who want to come to uk and study for example english course. I will be paid commission from english language schools after the student gets his/her visa and comes here. According to my agency agreement, commission is due when the student gets his/her visa but the schools usually pay them later and it depends on the school. some of them on the arrival of student, some of them on specified time. Then, there always is a discrepancy between my profit and cash payment.

[John]

You are, quite correctly, making up your accounts on the accrual basis, not the cash basis, and accordingly fees might well be earned some time before you actually receive payment. After all HMRC insist that accounts are made up on the accrual basis, and you need to be taxed on that basis.

The accounts you will submit to UKBA, they will include a Balance Sheet? Such a Balance Sheet will of course disclose the amount of fees outstanding.

[samira_uk]

Thank you. Yes, I'll provide Balance sheet that shows debtor as an item in Assets. I think UKBA only verifies the paid elements of net profit by bank statement and for the rest o it uses Balance sheet and accountant explanations as there is no way to verify the net profit correctly by bank statement. They instead could verify cash flow and bank balance in balance sheet by bank statement.

[silverline]

Thank you. Yes, I'll provide Balance sheet that shows debtor as an item in Assets. I think UKBA only verifies the paid elements of net profit by bank statement and for the rest o it uses Balance sheet and accountant explanations as there is no way to verify the net profit correctly by bank statement. They instead could verify cash flow and bank balance in balance sheet by bank statement.

You are on right track. Home Office rely on bank statements primarily. Accountant's letter/explanation does the rest. But as I said in another post, things should adds up in ordinary fashion. Anything odd/exceptional should carry a valid explanation.

Best of luck!!!

[rpsarangi]

if you are operating as a sole trader.. there should be a explanation letter from your accountant stating the net and gross income...in that there should be a profit and expenditure.. and the UKBA will consider the profit from the bisiness.. but make sure that the invoices payment matches with the input in your business bank..
all the best..

[jpmorganjr]

samira_uk, given the wording of your questions, can you confirm if you are operating your business using a Limited Company?

Would your answer differ for a Limited Company?