Tax and profits question

[LeeHayler]

Hi Everyone.

Im a self employed engineer. I was paid up front for about 50K's worth of work to which im currently finishing off the last job now. The job was invoiced on the 13th March and i was paid it on the 10th April. Ive still yet to pay about 25k of material for that job which i have only been invoiced for today. My profit and loss sheet is showing 90k profit for 25 - 26 tax year to which i have the money put to one side to pay the tax.
As all that falls under last tax years accounts, the materials im paying for now are being put down for this years accounts meaning im going to have excessive material costs.
is there any adjustments that can be done to my 25-26 tax year? or do i just have to suck it up and these materials will just go towards this new tax years accounts?

TIA

 

[DWS]

When did you receive the materials?
I take it from what you say about your income and invoices that you use Accrual accounting rather than cash accounting.
What method are you using for your VAT returns?

 

[LeeHayler]

Hi, basically i have to pay 11k for a gate thats being installed this week with other materials and labour costs mounting to 13k.. so 24k in total. The materials are coming next week and the job will be finished next week Ive already been paid the invoices from the main contractor which go towards 25-26 tax year accounts. My Vat is done every quarter by my accountant.

 

[DWS]

Hi, basically i have to pay 11k for a gate thats being installed this week with other materials and labour costs mounting to 13k.. so 24k in total. The materials are coming next week and the job will be finished next week Ive already been paid the invoices from the main contractor which go towards 25-26 tax year accounts. My Vat is done every quarter by my accountant.

So to state the obvious why are you not having this conversation with your Accountant, they will have better understanding of your business and which tax methods are used.
It sounds like you want to use a bit of both accrual and cash accounting which is not allowed, as I said your Accountant is the one doing the accounts so they will apply whichever method has been used to date.

 

[Lisa Thomas]

I agree this is one for your accountant. If you don't have one then I highly recommend you instruct one as mistakes can be costly. If you don't find one on here, DM me for a recommendation.

 

[LeeHayler]

I do have an accountant who ive messaged but she is on annual leave at the moment. I dont wish to use Both types of accounting as i know that cant happen. my question was about the implications of having a large material cost thats been carried into the new tax year and whether there was any process available to account it for last years tax year. it appears there isnt.

Anyway, Cheers for the help

 

[DWS]

I do have an accountant who ive messaged but she is on annual leave at the moment. I dont wish to use Both types of accounting as i know that cant happen. my question was about the implications of having a large material cost thats been carried into the new tax year and whether there was any process available to account it for last years tax year. it appears there isnt.

Anyway, Cheers for the help

I think you are looking at this the wrong way, if the work is still ongoing now in 2026/2027 then surely some of the Income must be for tax year 2026/2027, I personally would advise waiting for your accountant to return and speak to them.

 

[lmkeller14]

Timing and accounting method really matter here so I’d strongly suggest speaking directly with your accountant before filing anything.

 

[Paul Kelly ICHYB]

Isn't it swings & roundabouts?

Even if you account in different years, the net effect will be the same, won't it?

 

[DWS]

Isn't it swings & roundabouts?

Even if you account in different years, the net effect will be the same, won't it?

Not necessarily no, they might have large profits this year and in the higher tax bracket but the materials may bring them below the threshold to basic rate or next year they may have low profits and the materials waste their personal allowance, so no not swings and roundabouts.

 

[Paul Kelly ICHYB]

Fair (and obvious) comment!

 

[LeeHayler]

Not necessarily no, they might have large profits this year and in the higher tax bracket but the materials may bring them below the threshold to basic rate or next year they may have low profits and the materials waste their personal allowance, so no not swings and roundabouts.

Not necessarily no, they might have large profits this year and in the higher tax bracket but the materials may bring them below the threshold to basic rate or next year they may have low profits and the materials waste their personal allowance, so no not swings and roundabouts.

Not necessarily no, they might have large profits this year and in the higher tax bracket but the materials may bring them below the threshold to basic rate or next year they may have low profits and the materials waste their personal allowance, so no not swings and roundabouts.

Exactly that. My profits were high for the 25-26 tax year. As i was paid for all works in last years tax year, and still have 25k to pay for works still going on which were part of that payment means i will have 25k materials so far this new tax year which will go towards this years accounts.

 

[numbersrule]

Hi LeeHayler
As DWS has said, it all depends on whether your Accounts are being prepared on an Accrual Basis or on a Cash Basis.
Your posts so far do not make it clear. If you don't know then as the others have said, your Accountant will.

In the scenario where your Accounts are Accrual Basis then in that case you could treat the up front Invoice dated 13th March as a Prepayment ( ie an Asset on the Balance Sheet as opposed to Sales Income ). That way you can treat the funds as if they are income in the new Tax Year just like your Materials will be expenditure in the new Tax Year.

Or alternatively, if some of the Income was earned on work done in 2025-2026 in March then of course the Prepayment could reflect this by being a partial Prepayment rather than the whole £50k.

Conversely, if your Accounts are Cash Basis then as you received payment on the 10th April then that is in the new Tax Year anyway and so would be Income for 26-27.

 

[LeeHayler]

Hi LeeHayler
As DWS has said, it all depends on whether your Accounts are being prepared on an Accrual Basis or on a Cash Basis.
Your posts so far do not make it clear. If you don't know then as the others have said, your Accountant will.

In the scenario where your Accounts are Accrual Basis then in that case you could treat the up front Invoice dated 13th March as a Prepayment ( ie an Asset on the Balance Sheet as opposed to Sales Income ). That way you can treat the funds as if they are income in the new Tax Year just like your Materials will be expenditure in the new Tax Year.

Or alternatively, if some of the Income was earned on work done in 2025-2026 in March then of course the Prepayment could reflect this by being a partial Prepayment rather than the whole £50k.

Conversely, if your Accounts are Cash Basis then as you received payment on the 10th April then that is in the new Tax Year anyway and so would be Income for 26-27.

Hi LeeHayler
As DWS has said, it all depends on whether your Accounts are being prepared on an Accrual Basis or on a Cash Basis.
Your posts so far do not make it clear. If you don't know then as the others have said, your Accountant will.

In the scenario where your Accounts are Accrual Basis then in that case you could treat the up front Invoice dated 13th March as a Prepayment ( ie an Asset on the Balance Sheet as opposed to Sales Income ). That way you can treat the funds as if they are income in the new Tax Year just like your Materials will be expenditure in the new Tax Year.

Or alternatively, if some of the Income was earned on work done in 2025-2026 in March then of course the Prepayment could reflect this by being a partial Prepayment rather than the whole £50k.

Conversely, if your Accounts are Cash Basis then as you received payment on the 10th April then that is in the new Tax Year anyway and so would be Income for 26-27.

Thank you.. i am not sure which way my accounting is done. But i did briefly have a chat with her colleague today who said that the date will be from the date invoiced which was the 13th March, so all last years ty

 

[DWS]

Thank you.. i am not sure which way my accounting is done. But i did briefly have a chat with her colleague today who said that the date will be from the date invoiced which was the 13th March, so all last years ty

Not sure how you explained the situation to the colleague but if they are using the Invoice date then you must be using the accrual basis.
Yes you use the invoice date but as numbersrule says you must then use prepayments and accruals in the accounts to make sure the invoice reflects correctly for the period that the work relates to.