How to Sell Handmade Cards - Tax and Vat

Selling handmade cards - Tax and Vat

If you're based in the UK, one of the best ways to learn about tax is to phone the Inland revenue on 0845 9154515 lines open 8.00 a.m. Till 8.00 p.m. Seven days a week and ask for a free copy of the Starting up in business video,
it may not have the excitement of Die Hard, but it covers getting your new business off to a good start, tips on keeping records, the basics of income tax, National Insurance and VAT plus tax credits and allowances you may be entitled.

When you start you have up to three full months to register as self employed after which you may be liable to a penalty of £100.

In the April after your business starts, the tax man will send you a Self Assessment tax return to fill in, this is not as daunting as it first appears, as long as you have kept your trading records in good shape, it's a simple matter to fill in the necessary parts and return it, they also use the return to assess any profit-related (Class 4) National Insurance contributions you may need to pay.

What records do I need to keep

All purchases and expenses made regarding your business.

Keep all purchase invoices for everything you spend to do with your business, preferably filed in order.

Record all your sales and issue a numbered invoice, print two copies, one for the customer and one for yourself, Again keep your invoices filed in order.

Keep all bank statements, cheque and paying in book stubs, sales or purchase of business assets (office equipment, computers, anything that is directly connected to functionality of your business).

If you make purchases for your business using a personal credit card, pay the credit card bill using a business cheque.

Keep a record of your Drawings, Drawings is the term used for the money you take from the business that is not spent on the business. E.g. Going down the pub with!

Class 2 contributions

What are they for:

They cover Incapacity Benefit, Retirement Pension, Widow's Benefit, Maternity Allowance.

Who pays them:

You have to pay Class 2 contributions if you are self-employed.

This applies even if you are also paying Class 1 earnings related contributions as an employee.

Who doesn't pay them:

Men over 65 and women over 60 (most cases) do not pay class 2 contributions.

You can apply to be excepted from liability to pay Class 2 contributions if your net earnings from self-employment are expected to be less than £3955 in the tax year period from 6 April 2001 to 5 April 2002.

To claim phone 0845 9154515 and ask them to send you a form CF10, which you will need to complete and return, or get it online click here.

You do not have to produce evidence of earnings to support your application, unless this is specifically requested by the Inland Revenue.

You do not have to pay class 2 contributions if you are receiving Incapacity benefit, Maternity allowance, Unemployment supplement to Industrial injuries benefit or War disablement benefit, Incapable of work even if you are not getting any benefit.

Class 4 contributions

Who pays them:

Self-employed people, on profits or gains from any trade, profession or vocation, if those profits or gains are over a certain amount.

Who doesn't pay them:

Men over 65, women over 65 in most cases.
Non resident in the UK.

A sleeping partner, that is, someone that supplies capital and takes a share of the profits but takes no active part in running the business.

Class 4 contributions are set at 7% for 2001/2002 for profits between £4,535 (lower level) to £29,900 (upper level)

Example:

You MUST register for VAT when

The value of your taxable supplies in the past 12 months or less has exceeded the current VAT registration threshold currently (£67,000), or the value of your taxable supplies in the next 30 days alone is expected to exceed this threshold.

How it works

If you are registered, you must account for VAT whenever you supply any goods or services, These goods or supplies are your outputs and the tax you charge is your output tax.

If your customers are registered for VAT and the supplies are for their businesses, the supplies are their inputs and the tax you charge them is their input tax.

In the same way, the VAT which other businesses charge you is your input tax.

When you prepare a VAT return, you take your input tax away from your output tax and pay what's left, if any to Customs and Excise. If your input tax is greater than your output tax you can claim back the difference from the vat man.

For instance:

You spend £10,000 on supplies and goods for your business in a three month period, £1,750 of it is VAT (input tax).

You sell £2000 pounds worth of goods the VAT equals £350 (output tax)

That leaves you £1,400 down on the deal as the vat man has got your £1,400, well the good news is you can it claim back from him.

But it's not all roses.

You buy £10,000 of stock, again £1,750 input tax.

This periods turn over is £25,000 , vat equals £4375 output tax.

OOPS, now the Vat man's down £2625.00.

Of course you would have to buy in more supplies, this would then help off set the vat owed, you could also go out and have a spend up, new computer, office furniture, etc. The vat paid on such business related items could also be claimed.

All in all VAT will usually work in your favour, and registration should be seriously considered by anyone in business.

Don't forget you can claim any VAT back relating to business purchases for a three year period prior to you registering.

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