HMRC compliance aspect check advice
HMRC compliance aspect check advice
Author
Discussion

Babw

Original Poster:

1,060 posts

176 months

Monday 2nd January 2017
quotequote all
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.


anonymous-user

84 months

Monday 2nd January 2017
quotequote all
has your client payed the invoices that were outstanding or later ones?

From what you have described I can't see what the accountants have done wrong.

Babw

Original Poster:

1,060 posts

176 months

Monday 2nd January 2017
quotequote all
They've payed the outstanding ones but sometime later (after the end of that particular tax year).




anonymous-user

84 months

Monday 2nd January 2017
quotequote all
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.

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".

anonymous-user

84 months

Monday 2nd January 2017
quotequote all
Well in that case you can show the paid invoices in this year's accounts.

Show HMRC what they want to see and they will be fine.


It's not your accountant's fault your client pays late so I am not sure what they could reasonably be expected to do different.

2 sMoKiN bArReLs

32,033 posts

265 months

Monday 2nd January 2017
quotequote all
Babw said:
They've payed the outstanding ones but sometime later (after the end of that particular tax year).

But before you filed your accounts? (which is usually some time after the year end. If so I'd say you are on a sticky wicket, if not these things happen.

Babw

Original Poster:

1,060 posts

176 months

Monday 2nd January 2017
quotequote all
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.

2 sMoKiN bArReLs

32,033 posts

265 months

Monday 2nd January 2017
quotequote all
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 wiser

Eric Mc

125,718 posts

295 months

Monday 2nd January 2017
quotequote all
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 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.

2 sMoKiN bArReLs

32,033 posts

265 months

Monday 2nd January 2017
quotequote all
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 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.
Unless the debt was recovered between finishing the accounts & filing them with HMRC?

Eric Mc

125,718 posts

295 months

Tuesday 3rd January 2017
quotequote all
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.

sumo69

2,164 posts

250 months

Tuesday 3rd January 2017
quotequote all
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

Babw

Original Poster:

1,060 posts

176 months

Tuesday 3rd January 2017
quotequote all
Thanks for the input all, generally very helpful.

Eric Mc

125,718 posts

295 months

Tuesday 3rd January 2017
quotequote all
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.