Sitting on cheques and Tax

KJF_2

Just curious as to how the following scenario would be interpreted by the inland revenue.

Hypothetically, let's say I'm self employed and receive payment by various means. In 2005-6 I pay top rate of tax, in 2006-7 I'm going to do a lot less work, and so will only be in 22%.

On March 1st, I do work and am handed a cheque, which I could pay in that day (and so receive the money on March 7th or thereabouts) or I could pay in on April 15th. I would save 18% of that income from the tax differential.

Would paying the cheque in in the next financial year count as tax fraud?

WHA

Your business accounts and tax returns should be completed on the basis of the time the work was done, not the time you received/banked the payment. So what you suggest is no better than just putting cash in your back pocket - it is bordering on fraud in that your tax return, which you will sign, will be knowingly wrong. Of course, it is fairly unlikely that the tax inspectors would pick it up, but they could enquire into your tax return for either of the two years affected, so that doubles the risk of being caught, and then as there is an element of deliberate dishonesty, they would almost certainly be wanted their pound of flesh in penalties as well as the tax, interest and late payment surcharges.

KJF_2

Thought so, thanks.

tyllwyd

I'm useless with tax, so this is just a question - if your business's financial year end does not fall on April 5th, would that potentially make a difference?

LittleWoman_3

Financial years can end anytime - Income is earn't during a financial year - even if it is not paid! So when the year end falls does not matter - just when the money is "earn't" (and therefore due and not paid) during the "trading year".

vinecote

if you pocket the cheque and cash it in the new year this will reflect in your balance sheet as debtors.
bear in mind that if you have too many debtors one year and a lot less later the inland revenue may question why it has altered so grately.
inland revenue compare like for like year end against year end and any large changes will trigger alarms...

KJF_2

Your reply suggests that I pay income tax on the amount of money I've received in the financial year, rather than the amount of money I've earned in the financial year - is that true? That's not what others have suggested

vinecote

if you earned it in the year your money will appear in the turnover so you will pay income tax in the year it was earned but you will have it in your debtors as the money is still owed.
what you should do is to invoice them a bit nearer to the year end or preferibly after it ends.
if you got the money early before the year end without invoicing you could have put it on the next years and reflected it as a creditor but again this may look abit strange on your balance sheet but you may get away with it this way .