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• # 82295
• Wed 25 Apr 2012 04:55 PM

Hello,

I have a question about Drawings.

Are there any rules regarding drawings ? In particular, how much can a Business Owner (Sole Trader) withdraw ?


At the end of the year, drawings are merged with Capital and Profits/Losses ? Can Capital be a negative figure if Drawings are higher than Capital ?


I have a real life example, although the guy doesn't keep records, so these numbers are the only ones available :

Turnover £ 45K

Expenses £ 37K

Drawings £ 10K

Bank Balance £ 1K


It appears to me that Drawings are a "Tax-Free" way of taking money out of a business. Or am I missing something here ?

Regards,
Andreas                     

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• # 82296
• Wed 25 Apr 2012 05:01 PM

Hi Andreas,

I would be interested to hear others take on this as I am still relevatively new at putting my learning into practice but in my mind, the sole trader would be taxed on earnings i.e. turnover as part of their self assessment & I would "assume" that they would have to list drawings as income on their SA?

I've not completed the training on self-assessment (yet) so please wait for others with more experience for a definitite answer.

All the best,

Jo

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• # 82297
• Wed 25 Apr 2012 05:17 PM

Jo Gsaid:

“Hi Andreas,

I would be interested to hear others take on this as I am still relevatively new at putting my learning into practice but in my mind, the sole trader would be taxed on earnings i.e. turnover as part of their self assessment & I would "assume" that they would have to list drawings as income on their SA?

I've not completed the training on self-assessment (yet) so please wait for others with more experience for a definitite answer.

All the best,

Jo”

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• # 82298
• Wed 25 Apr 2012 05:17 PM

Bottom line: any sole trader will be personally liable for income tax on the net profits of his or her business, just as if the net profits were salary paid by an employer.

It matters not if there is a draw on the company's bank account by the sole trader, because drawings don't effect the net profit figure; Gross profit less business expenses.

He or she will be taxed the same if there is a draw on funds - or not. 

• Too old to die young...

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• # 82299
• Wed 25 Apr 2012 05:20 PM

Hi,

I agree with Jo, he would be taxed on his income/turnover less allowable expenses.

For a basic example: say his allowable expenses were £20k of the £37k, he would pay tax on the figure of 25k (45k - 20K), so no, drawing are certainly not tax free. Whether he took £10k or £0 out of the business, he would still have a tax liability against the £25k.

Regards

Kerry 

• www.berrybookkeeping.co.uk
  
  My responses are based on my opinions, not necessarily facts.
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