Desperate for a clear answer

Molineux99 · 25 August 2017 at 2:54PM

Hello all,
I will get to the point. I am a self employed contractor and my company year end is August 31st. I am about to raise an invoice for the work I have done in August which will be paid in September. Crucially the invoice will be raised in SEPTEMBER (first week in new tax year)

My question is this - my accountant is telling me I will have to pay the tax on it in THIS tax year but this denies me the opportunity to divert any to my company SIPP in order to reduce the corporation tax bill for this year as I haven't physically received the money

My investment manager thinks this is nonsense and it should be taxed in the forthcoming tax year - when I called HMRC they lent towards agreeing without committing but then lost me ending up saying both I think !

I really need a clear answer please - what year would this money be taxed in. So ...

Work done in August
Invoice raised in September
Paid in September
Company year end Aug 31st

I will be so grateful for any help!

Thanks

Pennywise · 25 August 2017 at 3:03PM

Your accountant is correct. Limited companies must declare the income in the year in which it is earned, and the date of invoice and date of payment are irrelevant.

Surely you have money left over in the company bank account to pay the tax and PAYE on earlier invoices raised/paid, in which case, there's nothing wrong in "borrowing" some of that tax money which isn't due for payment immediately. That's how most companies operate - using the tax monies as short term cash flow. You just have to be careful to control things and not lose track.

TheCyclingProgrammer · 25 August 2017 at 4:19PM

What your accountant is referring to is accrued revenue - which can also include work in progress - basically any billable sales/services rendered that have not yet been invoiced for. This is because Ltd company accounts are prepared on an accruals basis. Ignore what your investment manager thinks - he isn't your accountant.

I would expect your accounts to show an accrual to some kind of debtors/accrued revenue account for the work and a subsequent reversal of this accrual in the next financial year when the invoice is raised. This ensures the the work is accounted for in the year it was done. It would look something like:

31 August (journal entry):
CR Sales £xxx
DR Other Debtors/Accrued Revenue £xxx

Then say you invoice on 1 September, that would effectively result in:
CR Sales £xxx (invoice)
DR Current Debtors £xxx (invoice)

Finally you'd reverse the accrual which cancels out the invoice value in the next year (so it doesn't get included in the P&L again):
DR Sales £xxx (accrual reversal)
CR Other Debtors/Accrued Revenue (accrual reversal)

It works both ways, so if you incur an expense related to one year but don't get a bill until the next year you can accrue the expense and receive tax relief in the correct year.

I don't understand why this prevents you from making a company contribution to your pension and receiving corporation tax relief for the current year.

Also, I was a bit confused by your post at first as you start off saying you're self-employed but then you start talking about corporation tax. So my answer is based on the assumption you are actually a director of a Limited company (this is not the same as being self-employed).

[Deleted User] · 25 August 2017 at 4:49PM

TheCyclingProgrammer wrote: »

Also, I was a bit confused by your post at first as you start off saying you're self-employed but then you start talking about corporation tax. So my answer is based on the assumption you are actually a director of a Limited company (this is not the same as being self-employed).

Unfortunately yet another example where one does not understand that the company and its directors remain two entirely separate business entities - very common on here! One would have hoped and expected the accountant to have ensured that the op fully understood this from the outset.

Molineux99 · 25 August 2017 at 10:11PM

Pennywise and The cycling - thank you for taking the time to answer - obv it wasn't wanted I wanted to hear but I genuinely appreciate your help. PurdyOaten can keep their less than helpful contribution !

Can I just focus on The Cycling paragraph (yes I do have a limited company)

I don't understand why this prevents you from making a company contribution to your pension and receiving corporation tax relief for the current year.

OK - allow me to expand with actual figures and if you can iron this one out there is a guaranteed beer if you're in my neck of the woods

Remember my company year end is August 31st

So I submit the invoice for August (7k) and my Corp Tax liability is £10k - however I want to pay that 7k into my SIPP which would reduce that £10k tax bill by 20% so £1.4k thus my tax bill would be £8.6k but because the invoice doesn't get paid until deep into September I don't get that chance. It seems grossly unfair that HMRC take the full tax liability from that 7k but deny me the opportunity to transfer it into a SIPP ! I know I can in the following tax year but the opportunity to reduce the tax bill has gone !

If I am completely barking up the wrong tree I will happily be corrected (and comforted) but today I have had my accountant, investment people and the HMRC in turmoil !!

Kind Regards

anselld · 25 August 2017 at 10:24PM

You are presumably proposing an Employer Pension contribution. That can be done at any time assuming the Business has cash in hand to pay for it.

TheCyclingProgrammer · 25 August 2017 at 10:51PM

I'm guessing from what you're saying that this is a cashflow issue? Do you not have enough cash in the bank to make a SIPP payment now?

Molineux99 · 25 August 2017 at 11:10PM

OK - I might not be helping

If this helps make it clearer - again with actual figures

15k in the company acct now - so yes can divert that to my SIPP and 3k off my corp tax bill

However if I have the 7k from my Aug invoice I have 22k to put into my SIPP thus 4.4k of THIS years tax bill

BUT and to the essence of this I won't receive that money according to HMRC in this tax year and therefore cannot transfer it BUT they can tax it in this tax year

Is that any clearer ? - I would love someone to tell me I'm being an idiot (hopefully with reason) but so far I haven't a reason to believe so - it seems like company law applies to 11 months of the year but your final invoice cannot be diverted to a SIPP to reduce Corp tax purely due to timing it seems.

Genuine thanks again for sticking with me - I have spoken to every 'expert' and their dogs today and got nowhere !

TheCyclingProgrammer · 25 August 2017 at 11:23PM

What you say is correct but in the long run it doesn't really make a difference.

Whilst you're not able to put that extra £7k into a SIPP now you will get the effect of the CT saving in next year's bill. It's swings and roundabouts really.

Molineux99 · 26 August 2017 at 1:44AM

OK quick question - if I submit an invoice on say Sept 5th how does the HMRC know its for work carried out in August , this tax year, and not for Sep1st-4th, next tax year ?

TheCyclingProgrammer · 26 August 2017 at 2:45AM

Sorry, but we aren't here to give you guidance on falsifying your accounts (and I don't think your accountant would be that impressed either).

Desperate for a clear answer

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