Which period to declare tax for?

w00kie

Hi all, am brand new here. I've looked through the fora for an answer but can't seem to find it, perhaps someone can help or point me to the right thread if it's already been discussed?

I'm 30, I've been working full-time, but also in December started doing a bit of freelance work in the evenings and weekends and such. The end of tax year is coming up and suddenly I've got shedloads of freelance work on in March.

My question is, if I send the invoice BEFORE the end of the tax year, but receive the payment AFTER, which year do I declare it for? It'd help if I could declare it for this year, as it'd make things easier next year in terms of potentially going over the threshold... but obviously I don't want to unwittingly break the rules

Any help greatly appreciated!

Ste_C

You declare it in the tax year the work was invoiced.

Pennywise

Ste_C wrote: »

You declare it in the tax year the work was invoiced.

Just to clarify it is the tax year in which the work was done - invoice and payment dates don't make a difference.

Pring

You guys sure about that? I phoned Inland Revenue last week to ask the same question and was told I declare it at the time that the money is received.

Cook_County

The accruals method of accounting is the only valid method of accounting in the UK. Did you get the name and job title of the Inspector you spoke with? Are they confirming in writing?

Ste_C

Phoning the inland revenue helpline to ask for help is about as useful as phoning a monkey in the amazon rainforest.

John_Pierpoint

BIM74001 - Abolition of the cash basis: background

Historical overview

For many years the Revenue had a practice (most recently published as SP/A27) under which businesses which count as ‘professions’ or ‘vocations’ could, subject to certain conditions, compute their profits for tax purposes on a ‘cash’ or ‘conventional’ basis, rather than the ‘earnings’ or ‘accruals’ basis which traders and companies must adopt. Many professional businesses, including some of the largest firms of accountants and solicitors, used this practice. It is important to remember that this practice did not apply to traders.

On the cash basis receipts are recognised as income of the period in which they are received and expenses as outgoings of the period in which they are paid. Thus all debtors, creditors, stock and work in progress are excluded.

Broadly, on an earnings basis, income is recognised in the accounts when it is earned, that is when the services had been fully performed whether or not payment has been received. Expenses are recognised in the accounts when they are incurred rather than paid. This means that debtors and creditors are recognised and there can be a bad debts’ deduction. Other adjustments are made to match expenses with income. The costs incurred that are used to earn profits in a later accounting period are carried forward. The charge in the profit and loss account in the period is offset by including a closing work in progress valuation.

The conventional basis is neither a cash basis nor a full earnings basis. On the conventional basis debtors and creditors are included but work in progress is omitted.

Finally there is the hybrid basis. This is a basis which is neither a conventional basis nor a cash basis. Receipts are recognised when received but expenses are recognised when incurred. There is no adjustment for work in progress.

For tax purposes the computation must now be on a basis that gives a true and fair view - see BIM74010. Other than for Barristers or Advocates in the first seven years of practice (see BIM74020), the cash basis is no longer available.

Pring

Cook_County wrote: »

The accruals method of accounting is the only valid method of accounting in the UK. Did you get the name and job title of the Inspector you spoke with? Are they confirming in writing?

It was a "Technician" at the Edinburgh office... looks like they got it wrong then!

John_Pierpoint

:DHe/she must have thought you were a young barrister?!:D

PlutoinCapricorn

I did some work as a sole trader in March, the invoice date is before the 6th April but I have not been paid yet. However, I will still declare the amount on my self-assessed return for 2008/09, as by the time the tax for that year is due I will have long since been paid.

I am sure that HMRC has put this in writing somewhere...