Tax question.

[skipdiver]

I did a job for my niece last year, which ended up being much bigger than originally planned. As a consequence, she ran out of money and i agreed to defer my bill until the new year, so she could pay all the other trades and for materials.

She now has the money to pay me and i was wondering if i should wait until next week so it goes on next years accounts. I am currently getting this years accounts sorted and have earned just under the tax threshold, therefore no tax due, but if i add in the income from this job, it will go over and i will have to pay tax on it. I have added all the receipts from the job into my accounts and the initial £500 she gave me to buy some stuff when i first started. The money she now owes me is mostly labour charges but some of it is for materials, as i spent more than £500, the rest coming out of my own pocket.

My other half seems to think i can't do this and should take the money now, before April 5th and declare it on this years accounts, because i have put through all the other receipts relating to this job and the initial £500. If i do, it will put me over and i will have to pay tax. Of course, it could put me over next year as well and will still end up paying anyway, but if i have a slow year, i may end up not paying anything on it.

So basically, can you defer payment in this way without incurring the wrath of the IR? Searching Google, the answer seems to be yes, no or maybe, depending on which article you read. Of course, if i was a billionaire, i wouldn't have to pay any tax at all, because i would have clever accountants telling me how to avoid/evade (depending on your viewpoint) my obligations. I'm much better at woodwork than i am accounts. :?

 

[MusicMan]

If your accounts are on a cash basis, which they probably are, then tax is declared in the year in which the cash is paid. Likewise, expenses are accounted for in the year in which they are paid.

If your accounts are on an accrual basis then the tax is due in the year in which the job is invoiced.

So it depends how you told HMRC how you were doing your accounts. If you told them nothing, I think it will be on a cash basis.

I am not a tax professional, but do my mixed pension and self-employment taxes each year using TaxCalc software.

 

[sunnybob]

Bury the receipts, Wait till the tax man asks you.
It may never happen.
Unkless its many thousands, the tax man wont be interested.

 

[Some bloak]

As you have already submitted your costs for this job within the current tax year, potentially to be offset against your turnover/profit, then the relating invoice for the work should also be included.

Had you not submitted your costs or issued an invoice which is your 'tax point' then you can possibly defer its entry. Some trades or businesses opt for the cash accounting method whereby your 'tax point' is when you actually get paid for the work and not when you invoice it. However, this all needs to be run past an accountant to be checked out for certainty.

 

[Rorschach]

Not a problem to wait, assuming you are being paid cash or cheque. If it was a bank transfer then you have no choice.

It's exactly what happens for anyone doing a job over the tax change period, in the grand scheme of things it usually makes no difference, you either pay tax on it one year, or the next. In your case it has benefits though so I would wait.

 

[skipdiver]

Thanks for the replies. I haven't done my accounts yet, just a quick tot up of income/outgoings. I am just under the threshold, so no tax to pay. She owes me £4000, which is mostly labour costs and would take me over the threshold. It's not a big amount of money but i'd rather have it in my pocket, and pay the tax next year, if i go over the threshold, which i may not. I normally don't earn anywhere near the threshold from my part time business, but i did a couple of jobs for family last year, which has bumped it up. She will pay me however i wish- cash or bank transfer, and i haven't given her a receipt of any kind yet. She probably won't even ask for one.

My other half, who does my accounts, works with much bigger budgets at work and thought i wasn't allowed to defer, but she probably works to different criteria with her budget. Maybe it's the accrual/cash confusion kicking in? I wouldn't have thought twice about deferring it until she put some doubt into my mind.

 

[Random Orbital Bob]

Rule of thumb is that the revenue should be reported in the same fiscal period as the costs were incurred. Ie in this tax year. However, as other contributors have said, because you’re so unlikely to be on their radar due to scale, I wouldn’t worry about it. If they do call you out on it, all you’ll have to do is pay the tax due as if it had been reported this fiscal year. They’re not demons!!

 

[Rorschach]

Rule of thumb is that the revenue should be reported in the same fiscal period as the costs were incurred. Ie in this tax year. However, as other contributors have said, because you’re so unlikely to be on their radar due to scale, I wouldn’t worry about it. If they do call you out on it, all you’ll have to do is pay the tax due as if it had been reported this fiscal year. They’re not demons!!

I agree, but it's not always possible, if you start a job on the 4th April, you could incur expenses before the end of the year and not get fully paid until months later after you might already have submitted your return. I always report expenses the day I pay them and income the day I get it.

Thanks for the replies. I haven't done my accounts yet, just a quick tot up of income/outgoings. I am just under the threshold, so no tax to pay. She owes me £4000, which is mostly labour costs and would take me over the threshold. It's not a big amount of money but i'd rather have it in my pocket, and pay the tax next year, if i go over the threshold, which i may not. I normally don't earn anywhere near the threshold from my part time business, but i did a couple of jobs for family last year, which has bumped it up. She will pay me however i wish- cash or bank transfer, and i haven't given her a receipt of any kind yet. She probably won't even ask for one.

My other half, who does my accounts, works with much bigger budgets at work and thought i wasn't allowed to defer, but she probably works to different criteria with her budget. Maybe it's the accrual/cash confusion kicking in? I wouldn't have thought twice about deferring it until she put some doubt into my mind.

You mention your part time business, I assume it's your only income?

 

[Garno]

If it is not likely to put you over the threshold for next year then I would ask for payment on the 5th April.

 

[skipdiver]

Yes, it is my only income. I say it's part time, but that is by choice. I have been self employed since 1991 and could take on more work if i wish, but choose not to. I have a contract with someone that gives me about 3 to 4 months work a year from my home workshop, and that's all i want now, but i do still take on jobs for family members when pushed. I'm still the same sole trader i always was, i just work far fewer hours now and mainly for the same customer, so i suppose it's not technically part time, even though it feels that way. Some weeks, i don't work at all, some weeks i work 20 to 30 hours.

The thing that has got me thinking about it, is that if i declare it before the 5th, i will pay tax, whereas if i declare it after the 5th, i may not if i don't earn as much next year, and i'm not sure how the taxman would view that. If i were unscrupulous, i could just get it paid in cash and not declare it at all, but i'm a by the book sort and believe in paying my dues. If however, i can legitimately defer it, i may as well. It's not like i'm Philip Green or Starbucks after all.

 

[Rorschach]

Yeah just do it, HMRC likely won't care or even find out, they are understaffed, especially when it comes to small time guys.
I have been self employed for almost 10 years, never been audited and any mistakes I made in the early year are long since destroyed since they are past the paperwork deadline :lol:

 

[skipdiver]

Yeah, think i will declare it next tax year and use the money saved to buy the new site saw i've been eyeing up. If i go over the threshold next year, then they will get it anyway.

Thank you all for the input.

 

[MusicMan]

It sounds like you have been using the cash basis, so you are not liable for tax until the year you are paid. But it starts on 6 April, not 5th! As you haven't issued an invoice, it isn't even a bad debt yet.

I appreciate you wanting to do things by the book. I agree, and wish everyone did. This is by the book, however. Using cash basis, you have not had the use of the money yet so are not yet taxable on it.

If your wife is used to big company accounting, that will always be by the accrual system, so is different.

 

[skipdiver]

Thanks Musicman, it's as i thought and i have done it in the past that way. As pointed out earlier, some jobs span the end of one tax year and the beginning of the next. It was just when the other half said that to me, it got me thinking about it. I used to pay an accountant to do them, but switched to doing them online when i downsized my workload and this situation hasn't cropped up until now, since we have been doing them ourselves. And yes, i did realise it's after the 5th that the accounts for the new year start. Been to see my niece today and she is paying me next friday, so all's good.

Thanks for all the input guys.

 

[jlawford]

Music man is correct.

Cash basis means tax is paid on actual spending / incoming cash. Accrual means invoce dates become the date of income/expenditure for tax purposes.

I’ve had my own LTD company and did the same research many years ago!

 

[Sgian Dubh]

Interesting question. I too declare taxable income, but not all my income, through self-employment or freelance earnings.

In my work there are examples of expenses and income that are separated sometimes by years. For example, during this current tax year, ending April 5, 2018 I sold through a gallery a table I built in 2013. All the material costs were incurred during tax year 2012-13, but I didn't declare them on my tax return. I created a separate folder in my accountancy software and dumped all the costs in there, with some exceptions, e.g., mileage to collect materials, mileage and expenses to deliver the table to the gallery, and so on. This year's online tax return will show the income from the sale, and show the direct expenses (materials) to set against the income.

I have an example of another project in which expenses were accrued over a long period, from 2005 until 2017-18. All those expenses went into an expenses folder dedicated to that project, and again, never declared to HMRC. I won't see any return on the project until the end product goes on the market during tax year 2018-19. Whatever income is generated from the product during 2018-19 will be set against all those expenses going back to 2005.

In both circumstances I don't think HMRC are likely to raise an objection to my reporting methodology. They haven't done so in the past. I'm not sure if my reporting methodology helps with your conundrum skipdiver, but it seems to work for me. Slainte.

 

[doctor Bob]

Interesting question. I too pay tax on self-employment earnings.

In my work there are examples of expenses and income that are separated sometimes by years. For example, during this current tax year, ending April 5, 2018 I sold through a gallery a table I built in 2013. All the material costs were incurred during tax year 2012-13, but I didn't declare them on my tax return. I created a separate folder in my accountancy software and dumped all the costs in there, with the exception of things like mileage and similar expenses related specifically to the project, e.g., mileage to collect materials, mileage and expenses to deliver the table to the gallery, and so on. This years online tax return will show the income from the sale, and show the expenses to set against the income.

I have an example of another project in which expenses were accrued in this case over more than a decade, going back as far as 2005. All those expenses went into an expenses folder dedicated to that project, and again, never declared to HMRC. I won't see any return on the project until the end product goes on the market during tax year 2018-19. Whatever income is generated from the product during 2018-19 will be set against all those expenses going back to 2005.

In both circumstances I don't think HMRC are likely to raise an objection to my reporting methodology. They haven't done so in the past. I've no idea if my methodology is relevant to your conundrum skipdiver, but it works for me. Slainte.

Seems an odd way of doing things, what if you make something and nobody has bought it by the time you retire? As a business I'm very keen to get all my expenses in as soon as possible.

 

[Sgian Dubh]

Usually it would come down to whether or not I decided to sell whatever I'd made. If I decide not to sell an item, I don't want to be in a position where I have already declared expenses to HMRC. It makes sense to me. Slainte.

 

[Rorschach]

That is an odd way of doing things. If HMRC checked I am not sure you would fare very well there.

I declare all my expenses from the moment I paid them. If the item fails to sell, that's not my fault, the expenses were still legitimate.

 

[Dibs-h]

I'm with Rorschach on this one. You're expenses are almost guaranteed to be disallowed if they are going back longer than the period you can either bring losses forward or amend returns - both of which aren't straightforward if left for years.

Best bet as DoctorBob & others say, is to put the expenses through as soon as they become expenses, i.e. you pay them. Or certainly in the same tax year.

Then you have a choice of either putting income through on an accruals basis (i.e. when the invoice is issued) or on a cash basis (i.e. when you get paid), but that's counter productive for a small business.

Best leave sleeping dogs where they lie, i.e. don't keep doing what you've been doing.

HMRC aren't there to "help" you in the grandest sense, they are there to maximise tax revenue and penalties are at least 100% of the tax assessed\assumed to be owing.

Skipdiver - sorry to anyone who says anything else, there is no rule of thumb, just the rule of Tax\Case law. On a cash accounting basis, there is nothing wrong with forgetting to "chase" up an invoice and subsequently getting paid by debtors (folk who are owing you money) and doing it when you "get" around to it. :wink: So, if you happen to have a choice of when you get paid, i.e. before 5 April or after - go with after.

Dibs

p.s. if in subsequent tax years you decide to keep the piece, there's nothing stopping you from buying it for cost and invoicing yourself so to speak.