Tax Enquiry

[cyberbird1]

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I do my own company (limited) accounts and received a letter from the taxman asking lots of questions and asking for copies of invoices and bank statements.

I sent him what he asked for and now one of the things that has come up from his reply is that I have not been preparing accounts using the concept of "income earned" and "expenditure incurred" which he says is generally how accounts should be prepared. I've always been a bit vague on when to include a commission or expense and took the easy option of working from the banks statements.

I always thought that if this was wrong then it would be a toss-up whether I had paid too much or too little tax in any given year and that the revenue wouldn't be interested. Now that the matter has come up I'm less relaxed about it because it's going to be a right pain working everything out (over 3 or 4 years).

One thing that gives me some hope is that he says "generally". Does that mean that there are exceptions? Given the nature of how the affiliate networks generally hang on to payments until they've been paid and don't ask for invoices (in most cases) or send you copies of anything, then could I ask to be treated on the basis that commission is only earned when it is received?

Anybody know anything about this?

[hrbs]

I do my own company (limited) accounts and received a letter from the taxman asking lots of questions and asking for copies of invoices and bank statements.

I sent him what he asked for and now one of the things that has come up from his reply is that I have not been preparing accounts using the concept of "income earned" and "expenditure incurred" which he says is generally how accounts should be prepared. I've always been a bit vague on when to include a commission or expense and took the easy option of working from the banks statements.

I always thought that if this was wrong then it would be a toss-up whether I had paid too much or too little tax in any given year and that the revenue wouldn't be interested. Now that the matter has come up I'm less relaxed about it because it's going to be a right pain working everything out (over 3 or 4 years).

One thing that gives me some hope is that he says "generally". Does that mean that there are exceptions? Given the nature of how the affiliate networks generally hang on to payments until they've been paid and don't ask for invoices (in most cases) or send you copies of anything, then could I ask to be treated on the basis that commission is only earned when it is received?

Anybody know anything about this?

Hi

There was a debate when I pointed this out last March as many had been using the cash basis for their accounts like you.( Dividend payments - maximise your basic rate ) .

The Inspector is referring to the accruals basis of accounting. It is one of the fundamentals of accounting and is used by the overwhelming majority of businesses. HMRC are particularly keen on enforcing it because it stops businesses withholding payment/receipt until a more advantageous tax rate applies, or by paying uncommercially early for a service to get a tax deduction in a higher tax rate period if tax rates are falling.

I would suggest that before you re-do your accounts, you have a chat with an accountant as they may be able to suggest a cost effective way of doing so. It should be quite straight forward for an AM savvy accountant.

I recommend you obtain network account balances/reports at the end of each accounting year to prove to HMRC the accrued commissions and also track the reversal rate for those commissions. The reversal rate can then be used in future accounts as an informed estimate at the year end of commissions that have been earned but will not be paid.
Where possible, keep the data available so that you can track the year end commissions to the subsequent bank receipts to head off other areas of enquiry from HMRC.

Similarly for any expenses usually paid after incurred (advertising etc) that were incurred before the year end but paid/invoiced after.

On what basis have you prepared your VAT returns?

The tax effect of the Inspector's enquiry will depend upon how your business has grown over recent years.

If you would like some help with this, feel free to PM your email and then I can look into your situation with you in more detail. Initial advice/recommendation is always free to a4u members.

If any body else is in this situation, I would strongly suggest that you get advice before you send your invoices and bank statements to HMRC as they could use the bank statements to investigate the payments, in particular their business relevance etc.

Good luck!

Regards

Keith
Fixed Fee Accountants and Tax, VAT, Payroll Specialists providing proactive, professional service to small businesses - HRBSaccountants.com