Self Employed, UITF40 and GAAP confusion!

keithshaw

I filled in my first tax return online last year and it was fairly painless. I decided to have a go at the 07/08 one early so I could forget about it but it looks like something new has come in which affects me.

I'm a self employed programmer and get contracts to do certain pieces of work. It now sounds like where a contract spans the tax year I need to modify my turnover by how much of the contract work is done in that tax year. I had an ongoing contract at the end of the 06/07 year and I've got an ongoing contract now so I think I need to make a few changes.

From what I've read (HMRC helpsheet 238 and some other stuff) it sounds like I need to work out how much of the contract I was doing at the start of the year was completed in 06/07, then use that value as the 'adjustment income' which will somehow get added to my tax return. The proportional amount earned from the 2nd part of the contract spanning the two years gets written down as 07/08 turnover like normal. Then for the contract spanning 07/08 and 08/09 I just use a proportional amount as turnover for each year.

Does this sound right so far?

The adjustment income can now either be applied wholly to my 07/08 amount or I can spread it according to their rules, which will likely be 3 equal payments over the next 3 years. Is that right too? Do I need any kind of special notes or working out in my accounts or is it ok as long as it's clear how I've worked everything out?

The amount of money involved isn't large (10k contract, 2.5k paid in 06/07, 7.5k paid in 07/08 with the work about 50-50 over the two years) but the last thing I want to happen is to do it wrong and end up getting fined or whatever.

Hopefully somebody who has experience of this will be able to provide some pointers.

Thanks!
Keith.

keithshaw

OK so having just typed that it's clarified it a bit in my mind and I've been through HS238 again and I think I understand it a bit better now. It sounds like it's been introduced to stop somebody having little tax to pay in one year, then a huge amount the next year if they're working on a big contract, so rather than having that big extra amount on their shoulders straight away they're letting the person spread that amount over the coming years. Then all work from now on will be recorded in the GAAP system with contract work having a proportional amount brought forward to ensure it doesn't happen again.

For my case it doesn't really change a lot, the turnover for 07/08 will be less and I'll have an adjustment value which I add on and pay over 3 years. I was worried that the value for the adjustment would get added to a previous years tax which would mean I ended up paying tax on it at a higher rate, since I earned more that year.

Hopefully I've not got the wrong end of the stick.

MoneyMagician

UITF 40 is about the value to include in your accounts for contracts for services where the work is not finished at your accounting date.

This unfinished work is called 'work in progress'. It does not affect contracts started and completed in full in one accounting period.

UITF 40:
• requires the business to bring into turnover the value of work done under the service contract. Revenue or income builds up over the life of the contract, rather than when the work iscompleted or the client is invoiced
• means that some individuals and firms will bring income into account at a time earlier than before.

Effectively this means that you will need to make an estimate of the work you have outstanding as at your accounting date - so if you're halfway through a £100 contract you would declare £50 as turnover, with the remaining £50 to be declared in the following tax year.

Hope this helps.

MoneyMagician.