Draw up a financial statement for a self-employed client

• Sole traders and partners in a business partnership
• Directors of a limited company

Creating a personal financial statement for a client running their own business is generally similar to that of an employed person, except that expenses may need apportioning and the amount of income may be less predictable. Both of these things should be made clear on the personal financial statement.

How to calculate the amount of income that a client can take from the business depends upon the client’s trading status and any special rules that may apply to the type of business that the client carries out.

Sole traders and partners in a business partnership

For sole traders and partners in a business partnership, a business financial statement is required to calculate the income (drawings) the client can take from the business. The business financial statement forms part of the overall assessment of the client’s financial position. It uses information about how the client’s business has performed in recent months to estimate what income (net of income tax and NI) the client will likely get from the business in the future.

It is important to complete a business financial statement if needed, and not to simply use the amount that a client says the business can pay them. This helps to provide a more accurate view of how the business is performing. It also protects against a client giving figures that are based on what they would like their business to be able to provide, rather than what the business can afford to pay.

It is not unusual for a client who is struggling to pay their debts to be surprised at the drawings figure produced by a business financial statement. Some clients may need time to digest this information and assess how it affects their next actions. If a client’s business cannot provide any drawings or is running at a loss, specialist advice is needed. Specialist debt advice organisations can provide templates for a business financial statement. The Business Debtline website1businessdebtline.org provides interactive statements for both sole traders and partners of a business partnership. Both statements can be saved and printed by the client. It is important that the correct business financial statement is selected based on the client’s trading status. That is because, for a partner in a business partnership, the statement needs to look at how the business is performing and calculate the client’s own share of any business profit or loss.

 

Consider any special tax rules that may apply

When dealing with clients who are sole traders or partners in a business partnership, you should always consider how any special tax rules affect the business financial statement they are using. This commonly affects clients who receive a self-employed income as a foster carer, from letting residential property or who are covered by the Construction Industry Scheme. You need to check that the business financial statement you are using takes into account any special tax rules that apply. If not, a signpost to specialist help is usually needed.

 

1     businessdebtline.org »

Directors of a limited company

Do not attempt a business financial statement for a limited company. The director of the limited company should obtain monthly drawings figures from the company’s bookkeeper or accountant. These figures can be used as income on a personal financial statement.

They may also receive income as dividends, and this information should be obtained from their accountant.

Check that the figure provided by the client is net of any tax liability.