Sole trader and unpaid travel expenses

[Degsy67]

Not sure if this is the right board or if I should ask on the Tax board. Thought I’d try here first. Would also be interested in links to any UK bookkeeping forums people have found useful for this type of query.

TLDR:
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these haven’t been paid yet, or do you claim these expenses on the next Self Assessment when they have actually been withdrawn from the business?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.

I’m 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 I’m 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 daughter’s 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 account—it remains within the business.

I’m 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 I’m aware that a sole trader’s 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!

Degsy

[Mike4]

Should her unpaid travel expenses be included or excluded from her profit & loss?

I am a plumber so know little about this, but surely, the point of cash accounting is that you account on the basis of the sums actually paid and received.

I'd tentatively suggest until the travel expenses are actually paid/received, then they don't go in the P&L account.

Ready now to get demolished by the accountants here!

[tjh290633]

Having been self employed for a period after retirement, I am continually bombarded by HMRC with advice and information on how to deal with travel expenses, accounting and all sorts besides. A little exploration of gov.uk may well provide the information that you seek.

TJH

[the0ni0nking]

I'm slightly confused by some of the terminology used - you mention an "owner" but also mention "sole trader" - are you using those terms interchangeably (I ask because as soon as I hear the term owner, I am immediately thinking ltd company). I am assuming that's me going off tangentially given the rest of the post seems pretty clear (i.e. sole trader and cash accounting basis).

Cash accounting is intended to be straightforward - i.e. you follow the cash - and so if the sole trader has incurred costs that have left their bank account then they can include them (subject to them being allowable) in their P&L.

Re this £700 travel expenses - who paid for them as I'm confused as to who is intended to reimburse them? If the sole trader hasn't paid for them then there is no cash out of the door and no P&L entry to include in the self assessment.

[modellingman]

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?

Cash accounting is intended to be straightforward - i.e. you follow the cash - and so if the sole trader has incurred costs that have left their bank account then they can include them (subject to them being allowable) in their P&L.

First, I'm very late with this response, but I hope my two penn'orth will have some value.

I agree with the statement from the0nio0nking quoted but would add to it that it doesn't matter which bank account is involved. So whilst an expense may not have been paid for out of the account which is being used for running the business, if the expense has been legitimately occurred then it should be accounted for at the time it was incurred even if the money has come from a different bank account.

In my own cash accounting, for a property business, most of my business transactions go through a dedicated bank account. However, occasionally, some expenses are paid for using something else (different bank account or even cash). These latter are accounted for by maintaining a seperate list of such transactions. The calculation of profit then takes into account transactions from both the bank account and this separate list.

There may or may not be a subsequent transfer from the business account to the "paid from" account to repay the latter account for the expense, but whether there is or not does not change the business' profit.

For travelling expenses I would probably treat them in the same way. I'd treat each journey as an expense transaction and enter it onto my list of other transactions along with its relevant details such as date, distance in miles, cost.

I doubt HMRC will get too hung up on how you deal with the matter provided you don't distort the tax payable. This could happen if you accumulated travelling expenses over several years and then accounted for them at a single date which had the effect of reducing that year's profit (and tax) substantially.

The cash basis and the accruals basis are simply accounting conventions. At least as important as the details of each convention is consistent application of whatever convention is actually implemented. So for travelling expenses you have several possibilities: the journey as a transaction (as suggested above), a monthly claim (as often applied to employees) or even an end-of-year claim. Whichever you choose though should be consistently applied and documented across years as part of your tax records.

modellingman

[Degsy67]

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?

Cash accounting is intended to be straightforward - i.e. you follow the cash - and so if the sole trader has incurred costs that have left their bank account then they can include them (subject to them being allowable) in their P&L.

First, I'm very late with this response, but I hope my two penn'orth will have some value.

Many thanks for taking time to respond (and also to everyone else that did). Enormous value.

Degsy