HMRC compliance aspect check advice
Discussion
Looking for some guidance/help from accountants here.
HMRC have sent a letter asking for clarification about a delayed income which my accountant has put down as irrecoverable debt for year 2014-15.
I'm a healthcare provider and a practice I worked for was/is in some financial difficulty, they told me they would try to get me what they owed but they weren't certain. I told my accountant the situation and told her that I wasn't in a rush to receive the money as I have a good relationship with the practice but I didn't really want to pay tax on an income that I may not receive as she advised If I did pay the tax I wouldn't be able to recoup if I didn't get paid. I said if I did receive the money I would just pay with the following year tax (15-16) to be filed by end of this month and that was ok'd by the accountant.
About 6 months later I did get a back payment, I'm still doing work for them but they're still behind on payments.
Where do I stand? To be honest I didn't realise she was putting it down as an irrecoverable debt, I thought there was the option to somehow defer income, looking at HMRC rules this doesn't seem an option with self employed. I'm happy to pay that amount but I'm still in the same position for the following year return. My payments are behind but now feel that I have to pay HMRC to keep them happy even though there's not guarantee I'll get what's owed to me later.
I've only been self employed for about 3 tax years and am fairly green when it comes to HMRC and self employed rules. I do use a "specialist" accountant for my field but I feel they've not really given me the best advice thus far.
HMRC have sent a letter asking for clarification about a delayed income which my accountant has put down as irrecoverable debt for year 2014-15.
I'm a healthcare provider and a practice I worked for was/is in some financial difficulty, they told me they would try to get me what they owed but they weren't certain. I told my accountant the situation and told her that I wasn't in a rush to receive the money as I have a good relationship with the practice but I didn't really want to pay tax on an income that I may not receive as she advised If I did pay the tax I wouldn't be able to recoup if I didn't get paid. I said if I did receive the money I would just pay with the following year tax (15-16) to be filed by end of this month and that was ok'd by the accountant.
About 6 months later I did get a back payment, I'm still doing work for them but they're still behind on payments.
Where do I stand? To be honest I didn't realise she was putting it down as an irrecoverable debt, I thought there was the option to somehow defer income, looking at HMRC rules this doesn't seem an option with self employed. I'm happy to pay that amount but I'm still in the same position for the following year return. My payments are behind but now feel that I have to pay HMRC to keep them happy even though there's not guarantee I'll get what's owed to me later.
I've only been self employed for about 3 tax years and am fairly green when it comes to HMRC and self employed rules. I do use a "specialist" accountant for my field but I feel they've not really given me the best advice thus far.
Babw said:
HMRC have sent a letter asking for clarification about a delayed income which my accountant has put down as irrecoverable debt for year 2014-15.
I do use a "specialist" accountant for my field but I feel they've not really given me the best advice thus far.
Do you really "use" the accountant? If so, why have you had a letter from HMRC, as opposed to the accountant receiving that letter? Presumably the accountant put it down as irrecoverable because you said it was irrecoverable - they don't usually invent this stuff of their own accord.I do use a "specialist" accountant for my field but I feel they've not really given me the best advice thus far.
So an irrecoverable debt got recovered. What's the big deal? So long as YOU genuinely believed it was irrecoverable at the end of 2014/15.
Sounds like you might have "customer issues" rather then "accountant issues".
I'm not trying to blame the accountant but try to gain an understanding of the issue prior to talking to them tomorrow. I only received the letter on the 30th of December.
The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
Babw said:
I'm not trying to blame the accountant but try to gain an understanding of the issue prior to talking to them tomorrow. I only received the letter on the 30th of December.
The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
Yep, she should have netted against sales & nobody would have been any the wiserThe letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
Babw said:
I'm not trying to blame the accountant but try to gain an understanding of the issue prior to talking to them tomorrow. I only received the letter on the 30th of December.
The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
"Irrecoverable debt" is usually referred to as "Bad Debt".The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
The tax rules are that SPECIFIC i.e. identifiable) bad debts ARE offsetable against business profits.
General provisions for bad debts are notoffsetable.
If a specific bad debt was written off correctly in teh year it was deemed to be bad but it was recovered (or partially recovered) later, then the correct accounting and tax procedure is to account for the recovered debt in the year it was recovered.
Eric Mc said:
Babw said:
I'm not trying to blame the accountant but try to gain an understanding of the issue prior to talking to them tomorrow. I only received the letter on the 30th of December.
The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
"Irrecoverable debt" is usually referred to as "Bad Debt".The letter states something along the lines of "you claimed irrecoverable debt as a business expense but irrecoverable debt cannot be put as a business expense". The only issue I could possibly have with the accountant is if she put the amount down where there was prior guidance it can't be put there.
Of course I know it's not an ideal situation getting paid late but that's the situation and I don't have any issue with getting paid late personally from this particular customer as they've been a mentor for me and they're going through tough times at the moment.
The tax rules are that SPECIFIC i.e. identifiable) bad debts ARE offsetable against business profits.
General provisions for bad debts are notoffsetable.
If a specific bad debt was written off correctly in teh year it was deemed to be bad but it was recovered (or partially recovered) later, then the correct accounting and tax procedure is to account for the recovered debt in the year it was recovered.
Naturally, as you then know the proper situation for that financial year and you should correct the accounts accordingly.
In reality, if the amount is relatively small, HMRC would not be too concerned. Obviously, if it is significant i.e. a large proportion of the sales/income for the year, then as soon as the correct situation is known, the accounts should be adjusted.
Ironically, with HMRC loudly advocating that as many small businesses start accounting for their activities using the simplistic "cash basis", bad debts wouldn't be an issue.
Indeed, the Making Tax Digital initiative will only work if most small business stop preparing accounts to normal accounting principles.
In reality, if the amount is relatively small, HMRC would not be too concerned. Obviously, if it is significant i.e. a large proportion of the sales/income for the year, then as soon as the correct situation is known, the accounts should be adjusted.
Ironically, with HMRC loudly advocating that as many small businesses start accounting for their activities using the simplistic "cash basis", bad debts wouldn't be an issue.
Indeed, the Making Tax Digital initiative will only work if most small business stop preparing accounts to normal accounting principles.
The accounts would only need amending up to the time the accounts are signed, not when submitted to HMRC if later - I don't believe there is any obligation to reopen and change accounts once signed.
The outstanding monies should have been provided as a specific bad debt and if eventually paid written back (and taxed) the following year.
David
The outstanding monies should have been provided as a specific bad debt and if eventually paid written back (and taxed) the following year.
David
Under general accounting principles, there is the concept of a "Prior Year Adjustment" which allows for transactions that should really have been in the previous or earlier accounts to be processed in the current accounts.
The main requirement is that the adjustment is declared as a separate item in the accounts with a note to the accounts explaining what why the adjustment was necessary. That is more likely seen in limited company accounts.
In these circumstances, even though the adjustments are made in the most recent accounts, amended Corporation Tax returns may need to be submitted for earlier years. That is a separate exercise.
The main requirement is that the adjustment is declared as a separate item in the accounts with a note to the accounts explaining what why the adjustment was necessary. That is more likely seen in limited company accounts.
In these circumstances, even though the adjustments are made in the most recent accounts, amended Corporation Tax returns may need to be submitted for earlier years. That is a separate exercise.
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