Note: this is a 2013 post. Cash basis is currently allowed if you want to use it (but accruals suits me better – it means in years that you sell more, you claim back more of your material costs, reducing your bill).
Given that I’m doing my first tax return, I thought I’d mention a few things that are handy to know for small craft businesses. Craft businesses in particular have some extra complications, because we do things that HMRC only expects big businesses to do, just on very small scales. (We have a great deal of very slow-moving stock that we haven’t made into anything yet and which doesn’t depreciate much. Items we have made can take years to sell. We can end up receiving money in Paypal in dollars, keeping it in dollars for some time, then either spending it in dollars or converting it to pounds, thus having to pay attention to foreign exchange rules…)
I’m going to point to Lois Designs UK Tax for Small Crafting Business Series. These are a really useful series of posts!
The big unintuitive thing, and one I really wasn’t expecting, despite having done some reading before December on tax returns, was the difference between cash basis and accruals basis accounting. Cash basis is what you probably think of first: you take this much money, you spend that much on stock, you can claim this much on the stock you’ve bought. But HMRC doesn’t allow *anyone* to use cash basis accounting. (If you are and you’re tiny, you might get away with it if they never audit you. I do not think it’s worth the risk).
So, in accruals basis accounting, you record things when a transaction takes place, not when you spend the money. The usual example given is magazine subscriptions – you can pay a lump sum in advance, but when accounting for it, if it goes over different tax years, you need to split it up based on how much of your subscription you’ve received in each year.
The big change is to do with stock. You should only be claiming for stock you’ve bought when you have sold an item made with it. That is a HUGE difference. Got beads you bought years ago and used half of them in a necklace last year that sold this year? You can now claim for half of them.
This means you have to keep track of what materials you used in what item, and when you sell it so you know what you can claim for and when.
You also need to do an annual stocktake of everything – all your finished items, all your supplies, all your WIPs. (If you can manage not to have any WIPs at the end of the tax year, so much the better!)
This is Lois’ post on stock, which lays it all out very well: TSCB 6: Expenses – Stock, Work in Progress & Appropriations.
Advice To Myself In The Past
1. Do a full stocktake the minute you become self-employed. Then you know exactly what you’re starting with.
2. When you make something, write down what was in it. (Time taken is also handy for pricing, not for the tax return). I’m not too bad on this one – I keep a record of what I do in each beadmaking session, with recipes, so I do know when I made each bead and what was in it. I also have a notebook with jewellery designs where I note what I’ve used (and the time when I remember…). I think what would help is weighing seedbeads before and after use in a piece. That way I know exactly how much of them I used. Larger beads are easier to keep track of! How much of each colour of glass was used in a lampwork bead is trickier, but there are reasonable and consistent estimates I can make.
3. The usual, keep my accounts up to date as I go along. That’s not nearly as big a deal as the stock issues, though.
I’ve finished cataloguing all my bought jewellery supplies. I am almost finished doing my personal lampwork glass rod collection (there’s always another jar :p) and I have the Lauscha to do. The Lauscha’s simpler because I know how much I bought and how much I sold. There’s some I used myself for my test beads which aren’t for sale, there’s some I used in beads which are for sale, there’s some I gave away (advertising!) and there are the single rods I sold which I have average weights for, so aren’t a problem.
In terms of lampwork rods, I’ve weighed all the bundles in my glass storage so I know how much I have unused of each colour. In terms of the jars on my desk, I’m splitting them into unused, longs (more than half a rod) and shorts. Unused gets an average price for a bundle of mixed rods. Longs get a reduced value, because they would still be sellable at a discount. Shorts I am considering unsellable (I mean, you maybe could, but we normally give them away to newbies or just for the price of postage). Silver glass shorts are an exception and get a further reduced value.
I began in time and have enough time to finish. It really does take a while if you’re not up-to-date, though! I’m going to be counting and weighing things for the rest of the evenings this week.