Tax points

[neilsolaris]

I have a simple question regarding VAT and income or corporation tax.

If you're VAT registered and using accrual accounting, the basic tax point can be overridden by the actual tax point if an invoice is issued within 14 days of providing the service.

Now, regarding income or corporation tax, what about the following scenario? The financial year ends on 31st December, and the VAT quarter runs from October to December. A service is completed on 25th December, and the invoice is issued and dated 2nd January. The tax point for VAT is 2nd January.

However, if the invoice is settled in the new year, I would use accrual accounting to move the income (but not the VAT) to the previous year. This means the VAT is taxed in the new year, while the corporation tax is applied to the previous year.

I believed this approach was correct until I recently read something suggesting otherwise. Could someone please clarify this for me?

Many thanks.

 

[Bobbo]

Sounds correct.
What did what you read suggest? And where did you read it?

 

[neilsolaris]

Thanks very much, that's reassuring to know. I'll have a search to see where I read the dodgy info. It was from one of the accountancy sites, giving info to potential clients. It was saying that all off it should follow the same rules, not just the VAT part.

Edit: I picked Dec 25th out of the air, I'm not sure what services would be required on that day....maybe delivering presents?!

 

[Daybooks]

Thanks very much, that's reassuring to know. I'll have a search to see where I read the dodgy info. It was from one of the accountancy sites, giving info to potential clients. It was saying that all off it should follow the same rules, not just the VAT part.

Edit: I picked Dec 25th out of the air, I'm not sure what services would be required on that day....maybe delivering presents?!

If you are using the accruals concept, defined as:

“Net profit is the difference between revenues and expenses not the difference between cash receipts and cash payments. This is the accruals concept and requires the matching of expenses against revenues.”

… then if you have supplied the goods or services prior to the year end but invoice later ( and into the new period ) but within fourteen days (as per guidance below ) then you should account for the income in the prior period.
https://www.gov.uk/hmrc-internal-manuals/vat-time-of-supply/vattos360

This is normal and does mean the VAT is accounted for in the latter period.

I have known some who advocate accounting for the VAT at the same time as the income on the basis that the VAT will become due.

Unqualified this is dangerous, unnecessary and adds complications. If the invoice was not raised within the fourteen days then the basic tax point would take effect and the VAT would be due in tha period. However if the invoice is raised (preferable even if not mandatory) then the VAT liability would fall due in the latter period. Accounting for it earlier would then be wrong and require reconciliation to the VAT control account - simply to ensure you don’t pay for it twice!

In practice whether the income is provided for in the previous period is probably down to a number of factors. The main two being materiality and simple consideration.

 

[neilsolaris]

Thank you for the advice. The guidance link seems to pertain only to VAT. Regarding income, I understand your point about materiality. However, I've forgotten the percentages that determine materiality in this context. Additionally, what factors should be considered in a "simple consideration".

 

[Daybooks]

Thank you for the advice. The guidance link seems to pertain only to VAT. Regarding income, I understand your point about materiality. However, I've forgotten the percentages that determine materiality in this context. Additionally, what factors should be considered in a "simple consideration".

The guidance is only about VAT as intended - ref 14 days. Materiality is subjective; there is no percentages as such. By simply consideration all I meant was simply remembering to consider whether to provide for it or not. It is easily overlooked in unaudited accounts. Checklists and full balance sheet reconciliations with prior year comparatives are worth their weight in gold at year end.

 

[Newchodge]

Arte yopu suggesting that VAT accounting and aqccounting for corporation tax or self assessment must match? I don't think that is true.

 

[neilsolaris]

The guidance is only about VAT as intended - ref 14 days. Materiality is subjective; there is no percentages as such. By simply consideration all I meant was simply remembering to consider whether to provide for it or not. It is easily overlooked in unaudited accounts. Checklists and full balance sheet reconciliations with prior year comparatives are worth their weight in gold at year end.

I see, thanks. Fortunately the accounts I do the bookkeeping for is very simple, so there aren't that many year end accruals.

 

[neilsolaris]

Arte yopu suggesting that VAT accounting and aqccounting for corporation tax or self assessment must match? I don't think that is true.

No, I was not. I was checking my understanding of it was correct, and it seems it was.

 

[MyAccountantOnline]

I have a simple question regarding VAT and income or corporation tax.

If you're VAT registered and using accrual accounting, the basic tax point can be overridden by the actual tax point if an invoice is issued within 14 days of providing the service.

Now, regarding income or corporation tax, what about the following scenario? The financial year ends on 31st December, and the VAT quarter runs from October to December. A service is completed on 25th December, and the invoice is issued and dated 2nd January. The tax point for VAT is 2nd January.

However, if the invoice is settled in the new year, I would use accrual accounting to move the income (but not the VAT) to the previous year. This means the VAT is taxed in the new year, while the corporation tax is applied to the previous year.

I believed this approach was correct until I recently read something suggesting otherwise. Could someone please clarify this for me?

Many thanks.

The accounts have to show all income receivable and expenses incurred in the accounting period without VAT (assuming the company doesnt use the FRS scheme).

So in your accounts to 31 December you'll include as work in progress the work invoiced on 2 January excluding VAT.

In the next year when the funds are received and VAT is paid the net amount will match (contra) your WIP figure brought forward.

 

[neilsolaris]

The accounts have to show all income receivable and expenses incurred in the accounting period without VAT (assuming the company doesnt use the FRS scheme).

So in your accounts to 31 December you'll include as work in progress the work invoiced on 2 January excluding VAT.

In the next year when the funds are received and VAT is paid the net amount will match (contra) your WIP figure brought forward.

Thanks for your advice. What accounting entries would you use to show work in progress?

What I do, after I've entered the invoice, is to create two journal entries, using the accruals account, to move the income from the new year to the old year (obviously not the VAT, just the income). I do the same for any expenses I need to move. Is that different to what you are prescribing?

 

[MyAccountantOnline]

Thanks for your advice. What accounting entries would you use to show work in progress?

A journal entry to debit WIP and credit sales with the net WIP figure at the end of the year and if the system you are using doesn't have automated reversing journals the opposite entry on day 1 of the new year.

 

[neilsolaris]

A journal entry to debit WIP and credit sales with the net WIP figure at the end of the year and if the system you are using doesn't have automated reversing journals the opposite entry on day 1 of the new year.

I see, thanks. Well, that's similar to what I do I think. It seems to me that the work in progress account is a type of accruals account, isn't it? I'm using QuickBooks Online. and nobody set up a work in progress account, but there is an accruals account. I'll check if automatic journal reversals is possible though.

 

[MyAccountantOnline]

I see, thanks. Well, that's similar to what I do I think. It seems to me that the work in progress account is a type of accruals account, isn't it? I'm using QuickBooks Online. and nobody set up a work in progress account, but there is an accruals account. I'll check if automatic journal reversals is possible though.

It's been a while since I used QuickBooks so I'm not sure what account codes come as standard or if it has automated reversing journals but no I wouldnt use accruals.

Accruals are liabilities and are used for expenses.

Work in progress is an asset, it would generally be close to debtors in a chart of accounts/list of nomnal codes.

 

[neilsolaris]

It's been a while since I used QuickBooks so I'm not sure what account codes come as standard or if it has automated reversing journals but no I wouldnt use accruals.

Accruals are liabilities and are used for expenses.

Work in progress is an asset, it would generally be close to debtors in a chart of accounts/list of nomnal codes.

I see, I get it now, thanks for that. I can always create a WIP account, and class it as an asset account.

We rarely have this situation arising, normally it's expenses I need to adjust. This is good to know for next time though.