Invoices raised vs payments received

kavvers

I wonder if anyone can give me any guidance on area that seems a little uncertain to me. I am a sole trader and a significant of my income is invoiced in one tax year and gets paid to me the following year. For 10 years I had always paid my tax on the amount of income I received in any year but I've changed accountant and he tells me I need to pay tax on work done / invoices raised for that year. Is there a correct answer to this?

It has big implications for me this year as I'd have to pay tax on invoices raised last year but pad this year, in addition to tax on income I won't receive til next year.

Thanks for your help.

dbran

Hi

I think your accountant is technically right as he is accounting for the income when it is earned and not when it is received. Also as tax rates could go up in the next budget overall you could be better off.

However as it is clearly going to cause hardship to you as you are effectively paying tax for two years in one (plus preliminary tax) it is not very helpful.

Regards

Dbran

betonit

dbran wrote: »

Hi

Also as tax rates could go up in the next budget overall you could be better off.

Do you think so? paye rates & levies?? Isnt the message from Brian that tax on income is maxed out.

BnA

It sounds to me like your accountant is right. I don't know if a sole trader is different, but for a limited company, your profit and loss and the tax that you owe on it is based on what you traded during the year and not your cashflow.

What I am unsure of though is when you are paying your taxes. Are you working a calender year and then paying tax the following October based on that year ?

Therefore, are you now going paying tax for the year 2008. If so, surely, all the invoices you sent during 2008 have been paid by now ?

kavvers

Yes, we are paying income tax now based on income 1/1/2008 - 31/12/2008 and, yes, most of that income is now in. I guess its time to cough up.....

thanks for your input.

Mr. Incognito

Payments received are taxable in the year to which they relate not when they are received that is the logic of the invoice basis.

AddUp

kavvers wrote: »

I wonder if anyone can give me any guidance on area that seems a little uncertain to me. I am a sole trader and a significant of my income is invoiced in one tax year and gets paid to me the following year. For 10 years I had always paid my tax on the amount of income I received in any year but I've changed accountant and he tells me I need to pay tax on work done / invoices raised for that year. Is there a correct answer to this?

It seems like you are confusing the "Cash Receipts Basis" for the payment of VAT on sales invoices with how your profit is arrived at for the purposes of calculating Income Tax.

If you are registered for VAT and on a "Cash receipts basis" you only pay VAT to the Revenue when you get paid by your customer. However for the purposes of calculating your profit (Income less expenses = profit) to determine what your Income Tax liability will be you include all sales whether or not you have been paid for them. What you have not been paid at your year end will be recorded as Debtors on your Balance Sheet. It is a good idea to get this sorted before the 31st of October 2009 as you will be taxed on the 2008 rates therefore avoid the dreaded Income Levy :mad:!! This is a regular mistake made by Sole Traders and could prove to be very costly if you are faced with a Revenue audit!!

Your new accountants are on the ball so don't be afraid to ask them for advice. They were quick off the mark in pointing out this potential time bomb. THAT IS WHAT YOU PAY THEM FOR.

Long winded but I hope it clears the fog

kavvers

Not registered for VAT but thanks for the input. I will embrace my accountant with more certainly tomorrow. Are you sure you're not my accountant?!

AddUp

I'm not an accountant. I do book-keeping for a living so am at the coal face every day. If you have the cash flow this year I would suggest paying the additional liability on your 2008 accounts as you will be facing a considerably higher tax bill this time next year with the income and health leavies.

Good luck with biting the bullet