Is there a reason for this?

busiscoming2

My OH is a sole trader, he had some work done at a local company (family have known them for years) totalling about £200. He then did some work for them and they owe him approx £600.
Invoices have been sent and received, It was suggested to them that they just deduct what OH owes from their debt and pay him the balance. (We all use BACS) They have said to pay them and then they will pay him.
Can someone tell me why this might be? I did wonder if it was so their bank statements tallied with their books?

Acc72

busiscoming2 wrote: »

My OH is a sole trader, he had some work done at a local company (family have known them for years) totalling about £200. He then did some work for them and they owe him approx £600.
Invoices have been sent and received, It was suggested to them that they just deduct what OH owes from their debt and pay him the balance. (We all use BACS) They have said to pay them and then they will pay him.
Can someone tell me why this might be? I did wonder if it was so their bank statements tallied with their books?

Ok, so ...........

Husband owes company (£200)
Company owes husband £600
Net owed to husband £400

As you say, the company can simply pay your husband £400

However, as they will need to post a contra entry between their sales and purchase ledgers some companies prefer not to do this and prefer to stick to the "you pay me / I pay you" situation you describe.

The only thing I would say is that as the conpany owes your husband more, then they should pay you first and not the other way around ! - although I am sure all will be ok (as you know the company) and you can just swap payments.

Notmyrealname

It is quite simple. If HMRC decide to audit them they would have to explain why they only showed £400 going out of their bank when they have claimed £600 as an invoiceable expense for that transaction. HMRC could then decide they owe tax on the £200 difference and fine them for accounting irregularities as well.

It is far safer for everyone just to pay the bills they've been given rather than coming to arrangements like this.

busiscoming2

Notmyrealname wrote: »

It is quite simple. If HMRC decide to audit them they would have to explain why they only showed £400 going out of their bank when they have claimed £600 as an invoiceable expense for that transaction. HMRC could then decide they owe tax on the £200 difference and fine them for accounting irregularities as well.

It is far safer for everyone just to pay the bills they've been given rather than coming to arrangements like this.

Thanks, I thought this must be the case.

Acc72

Notmyrealname wrote: »

HMRC could then decide they owe tax on the £200 difference and fine them for accounting irregularities as well.
.

That is incorrect.

A contra payment/receipt is an everyday (legal / legitimate) occurrence for many businesses.

It is just that some people/companies like to keep their assets and liabilities separate whilst others are happy to off-set the two.

LadyMissA

Most companies do a contra and it is perfectly legal to do so as long as your books are all in order.

JCS1

We do quite a few contras between sales and purchase ledger - we have a form that is signed off between the 2 departments, and also get email confirmation from the client involved. Perfectly normaly and legal to do.