Self-employed - invoiced in March, paid in April - which tax year?

sarah_elton

Started self-employed work last year (this is in spare time, on top of full time employment so not a large volume of work).

Got my first ever tax return today, and having been dreading it I've read it through and it's easy in my case as it's such a simple business.

Anyway, just one thing I don't know and hoping someone can help. I'm on 30 day payment terms for a customer. I invoiced them 12th March, so will be paid around 11th April. Does this come in the 05-06 tax year or not?

I.e. Is it invoice date or payment date that matters?

Thanks in advance...

Cook_County

Generally speaking, almost all taxpayers must compute their self-employment income and expenses on an accruals basis (there are a few minor exceptions such as barristers in their first 7 years).

That said, this is not material in your case from what you have said unless your accounting year-end happens to be prior to 6 April 2006.

What is your chosen year-end?

sarah_elton

My accounting year just runs to tax year end, yes.

Erm, so from what you said..... which is it?!

Cook_County

Sarah - this is an unusual choice since typically real tax savings can be made by having other year-ends (eg 30 April). I believe I already answered your question, an accruals basis is nearly always mandatory.

Debt_Free_Chick

Agree with Cook County. "Accruals" means you have to include the work you've done, even if you've not been paid for it. This would definitely cover invoices issued, but not yet paid. It would also include "work in progress" - where you've done work, but have not yet invoiced it. You would need to put in an estimate of what you would have invoiced at the end of your year (5 April) for the work you've already done.

The money you've actually received is only part of what of what you've earned. In addition to money received, you must include (accrue) for work you've done, as you have "earned" the money for that work, but simply not collected or asked for it. Work in progress has a value to your business. The value is what you are going to be paid for it.

In the same way, you can include expenses you've incurred but not paid for. Let's say you ordered stationery and received in on 4 April, together with the invoice. But you don't pay the invoice until 7 April. As you had the goods and the invoice before 5 April, you should count that as a valid expense.

Of course.... you then need to deal with debtors & creditors in your accounts. "Debtors" is the total amount owed to you - simply add up all your unpaid invoices. "Creditors" is the money you owe - so add up all the invoices you've received, for expenses, but not yet paid.

You really need to do some research on this - as a start, you'll find there are people at your local tax office who can help with the basics. You can find out more about the HMRC Business Support Team here. There's also some useful information about other sources of help in this booklet

HTH

WHA

Cook_County wrote:

Sarah - this is an unusual choice since typically real tax savings can be made by having other year-ends (eg 30 April).

If your earnings and profits are rising as each month passes, which if you are a new start-up is probably the case, you really shouldn't rush into a 5 April year end. As said above, a year end of 30 April, or maybe 31 May or 30 June could well have major advantages for you by deferring the tax payment by a year, deferring the time when you become liable to make payments on account, and also give you a valuable planning opportunity to change the year end back to 5 April at a later date. You can always change a year end back to 5 April without the risk of HMRC challenge, but you need a good reason to make any other change.

It is standard practice in the good accountancy practices to opt for a 30 April year as a default and then change it only if there are good reasons for doing so.

This does tend to get complicated which is why a lot of people don't mention it. HMRC staff and even some accountants tend to shy away because it may get complicated and they can't be bothered with the sums (or just don't understand how it all works).

At this stage, I would hold back from making any final decisions and certainly hold back from submitting your tax return. I would let it lie for another few months, until say Summer, and then see how things look - i.e. whether profits in April, May and June or more, less, or similar to those for March and prior, and also review your options - i.e. are you going to continue your current job or you may have plans to leave employment and go full time s/e by then. You don't get anything for submitting the tax return early, but if you do so, you risk losing some valuable planning opportunities.

As an example, I took on a new client 2/3 years ago, who had prepared her own tax return and was just about to submit it when she thought she'd have it looked over by an accountant. She had chosen a 5 April year end. Her s/e income was very small indeed, so she didn't think there was much that could be changed and she was only self employed for around 18 months anyway. I analysed her income and profits month-by-month and found that by selecting a 31 December year end rather than 5 April, it actually reduced her tax bill by over £800 just by using the system to allocate her profits into different tax years. This is the sort of thing that the tax office don't tell you!!

Cook_County

DFC and WHA are 100% correct. There is just one extra ingredient courtesy of Gordon Brown; which is that with the new earlier tax return filing deadlines from 2008 almost all accountants are now suggesting a 30th April year-end just to make it all possible to meet the filing deadlines...

i_am_really_rich!!

Am really confused. I have always done my husbands tax return and worked Apr-March Tax year. Can we just change?......... I mean just like that . The idea of saving on tax appeals to me . We have got a tax return notice today. So could we theoretically say that his year ended on 31st December, so only pay tax this time from December - April and then next time April - December and then after that Dec - Dec. Hmm I think I need some clarification. Can someone help. Sorry to poach this thread... . is there perhaps a website that I could research this on before I submit the return. I should add that we are up to date with the tax appart from the July Account payment, which we have but I am keeping in my account until it's due

Cook_County

I suggest that you read pages 3-6 of IR222.http://www.hmrc.gov.uk/helpsheets/ir222.pdf

Getting professional advice is almost always a money-saver for the self-employed.

sarah_elton

Thanks all - cook_county, apologies - I didn't know for sure what you meant by accruals.

As for when my year ends, this is only a self-employed job on the side of main, full time employment. Income for tax year 05-06 was only £3.5k, and for 06-07 will be about £8k. And it's just income - I'm writing freelance and I know I could claim part of my electricity bill etc etc etc as costs, but to be honest given the amounts involved I just can't be bothered working it all out. I just see it as income I've not been taxed on, so just putting that down. Just wanted to check I was putting the right bits in the right year.

If I do grow it up and start making serious money out of it, I'll do the accounts properly and sort all this stuff out.

Anon

sarah - I'm no tax expert, but I would hold off with your idea of paying tax on all the amount because "it's just income." If it is income, you may also become liable to additional National Insurance contributions as well - remember that it is all expenses to do with your business that can be considered, including internet connection (for doing research), phone, % of some household bills, travel expenses, etc - probably equates to a reasonable amount of your income which you are intending handing over to the HMRC. It may be worth getting professional advice - I feel sure that there will be something written on the internet for freelance writers. It only takes a few hours each year (so long as you keep your records in order, which you have to do anyway for self-assessment).

Anon