Claiming expenses from last tax year

Teti

Hello,
I recently completed my self-assessment return for 2017-2018. I work on a couple of individual projects per year alongside my paid employment. I incurred expenses for one of these projects during the 2017-2018 but the payment was late and I only received it in the 2018-2019 tax period. Because I intend to declare this payment in the 2018-2019 return, I also thought I should do the same with the expenses that are related to this project, even though they incurred in 2017-2018. However, I am now thinking I made a mistake, as HMRC may not accept these expenses due to the fact that they will be from the previous year. I called at the helpline and the MRC advisor was really unhelpful. Initially, he suggested that there would be no problem declaring the expenses next year and then on my insistence, because I could not find any written confirmation on this in the website, he advised that I could do either. Do you have any advice on this? Ideally, I think it would be best to amend my 2017-2018 form but I then read as well as that this may be more problematic and I am not sure what is best to do. Many thanks in advance.

Pennywise

You have to be consistent with all transactions. If you use the cash basis, then you have to account for income and expenses PAID in the year. The alternative is the accruals basis where you have to account for work done in the year (paid or not, invoiced or not) and likewise all expenses need to be accrued/prepaid. You can't mix and match.

Sounds like you were on cash basis last year, i.e. included expenses as they were paid in year but didn't include income as it wasn't paid in year. That's absolutely fine - it's the cash basis. As long as you applied the same logic for all other income and expenses, you were right. So, this latest year, you include the sale because it was paid in this year, but you don't include the expense because it was paid/included last year. That's correct for the cash basis.

I think you're thinking too deep and confusing yourself with matching ins against outs, which is irrelvant for the cash basis - that's the accruals basis where you match.

Not surprised the HMRC helpline were also confused - very few of the call handlers properly understand the difference between cash and accrual accounting and if they don't understand it, they'll just give out duff information to callers. Like the guy who told one of my clients that they could claim the full cost for a van in the year of purchase that was on a lease purchase - because "buying on lease is as good as buying in cash" - some of them are pretty hopeless!

Teti

Thank you very much for the prompt reply and the advice. I do indeed use the cash basis as self-employment is not my basic source of income. If though under the cash basis scheme, I have to account for income and expenses PAID in the year, then from what I understand I may have a problem. This is because I paid for all expenses in 2017-2018 but did not include them in the tax return for the 2017-2018 year as I was under impression that I could only include them for the tax year during which I received the payment that is related to those expenses, i.e. 2018-2019. The more I think about this the less sense it makes (the way I did this, it was simply because I always incurred expenses and received the related payment in the same tax year and this was the first time this happened) but when I called at the HMRC, the advisor did indeed advise that it would be fine to declare the expenses in 2018-2019. And when I asked him to send me information from the website confirming this, he could not do this. I maybe over-thinking this but I do the return on my own and I would like to get it right.

Pennywise

You need to submit an amendment to last year's return to include the costs paid in that year. Strictly speaking, you can't claim them in this later year as they weren't paid in the later year.