Fees in one FY for work in next

The Spinner · Mar 8, 2009

Hi all, I've got just 3 months' experience of being a sole trader and already I've hit a sticky finance issue.

I currently sub contract to a public sector agency that now wants to offer me a contract for the first six months of the 2009-10 FY. Yippee!

However, they want to pay my fees all up front now (to avoid losing the money as an underspend in the current FY). How can I account for this given that its not possible for me to earn the fees until the next FY (I'm completing the first contract they offered me). Do I really have to accept that this 6 months' fee must be taxed in the year I have to invoice for - and receive - the fee? I've calculated that it wouldn't really be worth my while taking the new contract if its to be included in this year's accounts as much of it would go in tax.

Has anyone any advice/experience of this?
The Spinner :|

taxattack · Mar 8, 2009

The Spinner said:
Hi all, I've got just 3 months' experience of being a sole trader and already I've hit a sticky finance issue.

I currently sub contract to a public sector agency that now wants to offer me a contract for the first six months of the 2009-10 FY. Yippee!

However, they want to pay my fees all up front now (to avoid losing the money as an underspend in the current FY). How can I account for this given that its not possible for me to earn the fees until the next FY (I'm completing the first contract they offered me). Do I really have to accept that this 6 months' fee must be taxed in the year I have to invoice for - and receive - the fee? I've calculated that it wouldn't really be worth my while taking the new contract if its to be included in this year's accounts as much of it would go in tax.

Has anyone any advice/experience of this?
The Spinner :|

This is not a problem. In the current year you take the amount of the contract already earned as income (if any), and the remainder will be deferred income, which will appear in next year's accounts, and be taxed accordingly.

BTW, it is not necessary for your year end to coincide with the tax year. It could be, say, September, although that does make things more complicated.

But an enviable scenario!

Chris

Maslins · Mar 8, 2009

What taxattack says is spot on. Basically you'll put the fees in advance as a liability in your accounts. (Double entry debit bank, credit defered income). Then, as you perform the work, release the liability to income (debit defered income, credit turnover).

Does make you question the public sector though. If they don't manage to spend all our taxpayer money in time, do they burn some just to meet targets?!

David Griffiths · Mar 8, 2009

Maslins said:
Does make you question the public sector though. If they don't manage to spend all our taxpayer money in time, do they burn some just to meet targets?!

Have you seen the way that local councils spend money in March, just to get it in the old financial year? I'm thinking particularly of construction work where they shovel money out of the door, asking for invoices in advance of the work even being started, and obviously paying without the work being done.

As an example of financial management, it's a disgrace.

dp0848 · Mar 8, 2009

My mother spent her career as a teacher and the latter years as a head. While a teacher she was always instructed to spend the excess budget before the end of the fiscal year and as a head she encouraged her staff to do like wise. If they did not then they lost the money. Mad system, absolutely mad. It would be funny if it was not our money they were spending.

KM-Tiger · Mar 8, 2009

Was going on even when I was at school (yes there were schools then!).

I remember my physics teacher saying that the budget was split into small items and large items, and money could not be transferred. So we got 100 magnets when we really wanted one spectrometer.

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Fees in one FY for work in next

The Spinner

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Maslins

David Griffiths

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KM-Tiger

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