Tax point: invoice date or invoice payment date?

[chromate]

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Hi all,

Say my accounting year is 1st Jan - 31st Dec, and I invoice a client on 30th Dec 08, but it isn't paid until say 10th Jan 09, do I include it on my 08-09 self assessment tax return, or 09-10 tax return?

I can't seem to find a definitive answer anywhere. Maybe because there isn't a definitive answer? The date the payment is received makes most sense to me, but may not be correct?

Similarly with cheques. Should they be taxed at the date of the cheque, or the date the cheque is cashed? I get a lot of USD cheques, so if it is the date the cheque is issued then it would be a nightmare to work out, as the exchange rate would be different at the time the that cheque is cashed. So it would be impossible to enter the correct amount if the date cashed isn't used?

Cheers,

Richard.

[hrbs]

Hi all,

Say my accounting year is 1st Jan - 31st Dec, and I invoice a client on 30th Dec 08, but it isn't paid until say 10th Jan 09, do I include it on my 08-09 self assessment tax return, or 09-10 tax return?

I can't seem to find a definitive answer anywhere. Maybe because there isn't a definitive answer? The date the payment is received makes most sense to me, but may not be correct?

Similarly with cheques. Should they be taxed at the date of the cheque, or the date the cheque is cashed? I get a lot of USD cheques, so if it is the date the cheque is issued then it would be a nightmare to work out, as the exchange rate would be different at the time the that cheque is cashed. So it would be impossible to enter the correct amount if the date cashed isn't used?

Cheers,

Richard.

Hi

Income is taxed when earned, not when paid. You can find out earnings from your network reports. The amount earned but not paid at your year end is shown in your accounts balance sheet as a debtor. Similarly costs incurred but paid not at the year end will be included in your accounts as a creditor.

In the following year's accounts the above amounts are taken off the next year's figures as brought forward debtors/creditors and the new debtors/creditors at the end of the next year are added on, so you are not double taxed on the income (or get a double deduction for the costs incurred but not paid at the year end).

To convert USD to GBP at the year end, use the HMRC official exchange rates at HM Revenue & Customs

HMRC's helpsheet 222 "How to calculate your taxable profits" is at http://www.hmrc.gov.uk/helpsheets/hs222.pdf.

Profits which arise from carrying on trades, professions and vocations cannot usually be worked out by simply adding together the cash receipts of the business and deducting expenses paid out. This would show the business’ cash flow, but it would not usually be a proper measure of its profits.
To arrive at the profits it is necessary to draw up accounts using the methods which accountants have developed for dealing with income that has been earned but not received, expenses which have been incurred but not paid or paid but not fully used, and so on.

The cash basis is not the correct way to produce your accounts. HMRC may consider that not using the correct basis is tax avoidance i.e. by keeping profits within the basic rate band using the cash basis whereas if the correct basis was used, the tax payer would be a higher rate tax payer.

HMRC also have a help sheet on filling in the self employment pages at http://www.hmrc.gov.uk/helpsheets/hs229.pdf.

The "tax point date" is a date used for VAT purposes and is not the same as when earnings are taken into account for income or corporation tax purposes.

Regards

Keith

[chromate]

Thanks Keith! A lot of useful information there.

So, say a USD cheque for $100 was issued on 01/01/09 but I don't cash it in until 01/02/09, what amount do I record for the purposes of my self assessment tax return, as the exchange rate will have changed?

I could look up the exchange rate when the cheque was issued and work out its value at that point. But when I pay it in, the cash I actually receive will be a different value due to the exchange rate change?

Say the exchange rate moves in my favour, and the value of the cheque is worth more at the time I pay it in than its value when it was earnt. If I record the amount at the point it was earnt, instead of its value when it is cashed, surely I would not be paying enough tax on it?

[pollensa]

So, say a USD cheque for $100 was issued on 01/01/09 but I don't cash it in until 01/02/09, what amount do I record for the purposes of my self assessment tax return, as the exchange rate will have changed?

I could look up the exchange rate when the cheque was issued and work out its value at that point. But when I pay it in, the cash I actually receive will be a different value due to the exchange rate change?

Say the exchange rate moves in my favour, and the value of the cheque is worth more at the time I pay it in than its value when it was earnt. If I record the amount at the point it was earnt, instead of its value when it is cashed, surely I would not be paying enough tax on it?

I use Sage Accounts s/w which deals with this for me. As you say if you receive payment in a different month the exchange rate is likely to be different & you will have been paid more or less than the amount you invoiced. In Sage these amounts go into a separate nominal code called 'Exchange Rate Difference' and at the end of the year you may have made a loss & this is then shown as an expense or a gain and this is added to your income and Yes you do pay tax on it. I run a Ltd company & this is what my accountants do on my annual accounts but I should think it works the same if you are a sole trader.

Hopefully Keith will confirm.

[chromate]

Thanks Pollensa. This is basically the advice I was given on another forum too, so looks to be correct.

They also said that due to the low value of the cheques I receive ($300 max) that I would probably be okay just using the received amount when the cheque is paid in, but apply that value in my accounts on the date the cheque is received.

However, I'll probably use the foreign exchange difference thing, just to be on the safe side.

There's also a 'hybrid basis' which would probably make things easier, where the received amounts are accounted for on the date they're received, but expenses are accounted of on the date they incurred (rather than paid). But I can't find any more info on this beyond one line on the HMRC website.

"tax doesn't have to be taxing". yeah. right.

Cheers, Rich

[hrbs]

Hi Rich

They also said that due to the low value of the cheques I receive ($300 max) that I would probably be okay just using the received amount when the cheque is paid in, but apply that value in my accounts on the date the cheque is received.

You can use the actual value received but as the income was earned before the year end, you have to include it in that year's income. It will then be taken off the subsequent year's income when you do that year's accounts so that it is not taxed twice (as in my earlier post).

There's also a 'hybrid basis' which would probably make things easier, where the received amounts are accounted for on the date they're received, but expenses are accounted of on the date they incurred (rather than paid). But I can't find any more info on this beyond one line on the HMRC website.

The hybrid basis did not apply to traders such as yourself and was for professions such as barristers. It doesn't apply to anyone anymore.

As a general point, when researching the HMRC website take care that what you are reading is relevant to your circumstances and relates to the right tax year.

Rules change from year to year and can apply to different types of business and a lot of HMRC's website contains old guidance. In particular, the online manuals give historical background to the Inspectors.

HMRC's self assessment helpsheets are a good place to start as they are usually written in (semi) plain English and are specific to each tax year.

Regards

Keith