Dates of self-employed work - which tax year?

twmc

Hi there,

I've got a question concerning self-employed tax payment.

To give a little context: for the last couple of years, I've been working as a full time employee and doing some self-employed work in my own time. Last year I was taxed on my full-time work via the usual PAYE arrangement, while my self-employed work was taxed via self-assessment and a Unique Tax Reference number.

However, as of the end of March 2012 I quit my job to go travelling. Due to the timing, this will mean I've got a full year of full-time earnings over the tax period 2011-12. That's fine.

But for the period 2012-13, I'll have very little full-time tax to pay as I'll have been out of the country until December 2012 and without employment until around February 2013. So, when it comes to doing my 2012-2013 tax return, I'll have a big reduction in my annual earnings and so would expect the sum of my full-time and self-employed work to be below the Personal Allowance of £8,105.

Now the problem: I did a self-employed project in early 2012. In advance of the work starting I issued an invoice in March and received a purchase order also in March. The work was completed/delivered on April 8th 2012 and the payment was received in June. Now, my question is: which of these dates determines the tax year that the income would go into? Clearly, it would be better for me to be able to count this in the 2012-13 period as it would be below the PA threshold and go untaxed. If it goes in 2011-12, however, it'll definitely be taxed.

If it's the case that the PO determines that it's in 2011-12, is there any way this can be changed? I imagine not for obvious reasons, but then I don't know how flexible these things can be given that it would more accurately reflect how and when the money was earned.

Thanks in advance for any help you can offer!

chrismac1

The standard wording for 90% of clients on income recognition is:

"Turnover represents the value, net of value added tax and discounts, of goods provided to customers and work carried out in respect of services provided to customers."

It's quite common, for example, to have a project which covers say 5 weeks. Say 2 weeks before year-end and 3 after, but invoiced and paid for on completion say 5 weeks into the new year. In this case you bring the work-in-progress for the 2 weeks before the year-end into the accounts.

So strictly the work done on your project up to 5 April should normally come into things. But it dpends on the nature of your business. For example, if I were your accountant, how much would you pay me for 50% of a tax return? Or 80%? In other words for something like a tax return, there is no commercial value in even 99% of the work done, only the final item signed off and submitted.

So you may be able to exercise commercial judgement in your definition of income recognition to get the answer you first thought of! Note, though, that once you go down that income recognition policy route you should consistently stick to it year after year.

twmc

That's really useful, thanks. Fortunately, the project is such that I can quite reasonably split the work into the 10% of time for which I was paid to visit a site before April 5th and the 90% of time where the value is only present on completion (after April 5th).

What's also interesting to me as someone who's still a disorientated novice is that this level of grey-area exists. At what point would I be made to justify this? Would I get a phone call if they didn't agree with my judgement or if this the kind of thing that I only have to explain if I'm audited?

Thanks again for your help - I think what you said seems very reasonable.