Sole trader, cash accounting basis, and questions around accounting for and claiming travel expenses. Annual turnover is small, only around £5,000, with a loss in Year 1 of trading.
Under cash basis accounting, as input into the self-assessment tax return, how should travel expenses be accounted for in the profit and loss statement? Should the total amount paid back to the individual in the year be noted, or should the total amount that can legitimately be claimed as travel expenses for the year be used?
Approximately £150 of legitimate travel expenses have been paid out to a third party who provided some help with the business during the course of the year. However, there are about £700 of legitimate travel expenses due to the owner, but nothing has been paid out from the business back to the owner during the course of the year in relation to these costs.
For the Self Assessment Tax Return, do you claim the full amount of the travel expenses even though these haven't been paid yet, or do you claim these expenses on the next Self Assessment when they have actually been withdrawn from the business?
More Context:
I'm currently assisting my daughter with bookkeeping for her sole trader business, which she runs alongside her full-time employment. The business is still in its early stages, with an annual turnover of around £5,000. In its first year (2023/24), the business has incurred a loss after allowable expenses, which will be carried forward into the next year.
Im preparing her profit and loss statement using cash basis accounting, which will feed into her self-assessment tax return. She maintains a separate business bank account to keep her business finances separate from her personal finances, and she also has a petty cash system for cash transactions.
Though Im not a trained bookkeeper, I have a reasonable grasp of business basics and accounting. I've been educating myself on bookkeeping principles through various resources, but I'm still navigating some of the specifics.
I have looked for HMRC guidance on cash basis accounting, particularly regarding unpaid expenses, but I haven't been able to find anything that answers these specific questions. The situation is this: my daughters business incurred £850 in deductible travel expenses during the last tax year, using the simplified expenses basis (45p per mile). £150 relates to someone who provided some support with transportation, and this has been paid out from the business. The remaining £700 relates to my daughter's travel, but this amount has not yet been paid out from the business to her personal accountit remains within the business.
Im advising her to withdraw this amount now since these are legitimate business expenses, with thorough documentation backing them up. However, this leaves me with the questions above, which I need to answer before helping her complete her Self Assessment Tax Return.
Should her unpaid travel expenses be included or excluded from her profit & loss? The travel expenses to the third party have been incorporated as a cost of sale.
When you include travel expenses in the Self Assessment, is this simply noting how much has been claimed and included in the P&L, or is it actually being used in the tax calculation to reduce the amount of tax payable, so it should be excluded from the P&L? As she made a loss in Year 1, which will be carried forward, I'm not expecting any tax to be due for Year 1, but she's likely to be in profit in Year 2 with some income tax and additional student loan to pay.
I understand the difference between sole trader and limited company status, and Im aware that a sole traders business finances are not legally separate from their personal finances. I'm trying to help her run her business in a way that will facilitate a smooth transition to a limited company at some point in the future when the business grows. At the moment, all bookkeeping is done in a spreadsheet as opposed to using any accounting software, which would probably help with this. I'm considering moving over to Pandle in the future to assist with this.
I appreciate any guidance or advice on how to best approach this situation. Thank you in advance!
