Turnover of forex type trading co

[Maslins]

Hey all,

I've got a meeting with a potential client tomorrow who effectively does forex/futures/options trading. It's quite clearly not investment, as things are bought and sold within a short period of time and are definitely held for short term profit rather than long term capital accumulation.

The balance sheet position is easy, a broker statement is obtained for anything held at year end, but I'm not so sure about the P&L position.

The guy has told me he started with £15k & at the end of the year has £29k (after broker commissions etc). Is turnover simply the total gross value added cumulative across all investments (ie both turnover and costs fairly small), or does every transaction count as purchasing something and then selling it again for virtually the same (ie both turnover and costs huge)? Does that make sense?

Cheers in advance for your assistance on this.

 

[Zahidparvez]

I am not sure, but I think GP of all transactions is considered as turnover like commissions. I am sort of guessing it as I was in Forex business few years ago in an other country where there are very less legislations. As I mentioned earlier I am not sure and writing this to participate in this forum.

 

[Zeno]

Is he actually trading in currencies/securities or is he involved with spread betting?

 

[Maslins]

The below is a quote from the company, so I don't fully understand all of it!

"The company is seeking a profit by actively trading securities and financial derivatives, using a variety of short term strategies such as electronic market making and arbitrage.

Products traded in 2008/09 are mostly exchange-based, including futures and options on futures. Trading activity in subsequent years may occur in underlying securities such as stocks and bonds, as well as foreign currency (‘forex’) on the over the counter (OTC) market. Some commodity futures and commodity futures options transactions have already been made although delivery of underlying commodity will never take place due to all positions being closed out before delivery is possible.

Trading activities represent a deliberate and organized scheme of profit making involving the use of a six-monitor trading setup, several sophisticated strategies, resulting in thousands of transactions per annum."

Any advice anyone?

 

[Zeno]

The below is a quote from the company, so I don't fully understand all of it!

"The company is seeking a profit by actively trading securities and financial derivatives, using a variety of short term strategies such as electronic market making and arbitrage.

Products traded in 2008/09 are mostly exchange-based, including futures and options on futures. Trading activity in subsequent years may occur in underlying securities such as stocks and bonds, as well as foreign currency (‘forex’) on the over the counter (OTC) market. Some commodity futures and commodity futures options transactions have already been made although delivery of underlying commodity will never take place due to all positions being closed out before delivery is possible.

Trading activities represent a deliberate and organized scheme of profit making involving the use of a six-monitor trading setup, several sophisticated strategies, resulting in thousands of transactions per annum."

Any advice anyone?

Is this a quote from the company meaning your potential client or the company providing the system?

 

[Maslins]

Is this a quote from the company meaning your potential client or the company providing the system?

No, they're not providing a system. It's basically (as I understand it) a bloke who sits in front of his computer screen with lots of numbers flashing up. He occasionally, when the time is right, clicks "buy/sell", then seconds/minutes later clicks "sell/buy", hoping that in between whatever it was has moved in value they way he wanted it to.

So I think it is perhaps spread betting, but not sure.

Basically, if he buys an option for £10,000 and sells seconds later for £10,005, is that turnover of £10,005 & CoS of £10,000, or simply turnover of £5?...or perhaps neither?! Sadly it's his first year so I can't simply copy the prior years!

If, using the example above it's the £10,005 turnover, then the guy quite possibly requires a statutory audit (as he will buy & sell many times with negligible movement each time)...which doesn't seem right considering the small total movement.

 

[Zeno]

I will be honest here Chris and say I'm far out of my comfort zone.

If he were trading in baked beans, then we would have to show the purchase and sale of each tin. (Sorry, not trying to be a patronising arse, just my line of thought). I cannot see why trading in anything else should be different? (Assuming he is actually trading...)

Maybe a look through his paperwork will reveal more?

 

[Maslins]

I will be honest here Chris and say I'm far out of my comfort zone.

If he were trading in baked beans, then we would have to show the purchase and sale of each tin. (Sorry, not trying to be a patronising arse, just my line of thought). I cannot see why trading in anything else should be different? (Assuming he is actually trading...)

Maybe a look through his paperwork will reveal more?

Cheers for your thoughts, I think your thoughts are basically the same as mine (ie not very comfortable, but aware you can't normally "net off" sales against purchases which is effectively what I'm suggesting doing ).

...but it just doesn't seem right, as like I said this would leave the company with enormous t/o & CoS, which seems really silly. But like you say, if a business bought & sold beans with negligible mark up but HUGE stock turnover, it would be in a similar position, and would clearly have massive t/o & CoS without any other figures being that high.

What about banks. If a bank lends £10k, and gets it back with £1k interest at the end of one year. The bank doesn't show £10k costs & £11k turnover, it only shows the interest. Although this is not exactly what the company I'm talking about is doing, it's perhaps closer than the baked beans tin... :|

Just jotting down my thoughts and would love to hear other people's views on this, and of course any further view from you Zeno

 

[Zeno]

Do you suspect that if all transactions form turnover then he will require an audit?

 

[Maslins]

Do you suspect that if all transactions form turnover then he will require an audit?

I don't know...though don't see how that would be a factor in how to treat the transactions! I only mentioned that as a potential impact on what is otherwise a very small business. Haven't seen any detailed numbers, all I know is they started with £15k & at the end of year 1 have £29k, and apparently there were thousands of transactions in between.

 

[Zeno]

I don't know...though don't see how that would be a factor in how to treat the transactions! I only mentioned that as a potential impact on what is otherwise a very small business. Haven't seen any detailed numbers, all I know is they started with £15k & at the end of year 1 have £29k, and apparently there were thousands of transactions in between.

Sorry Chris, just got my auditor's hat on.

Just another point though - If it is spread betting, then is that even a business?

 

[Maslins]

Sorry Chris, just got my auditor's hat on.

Just another point though - If it is spread betting, then is that even a business?

The guy set up a limited company a year ago to house the transactions, so I think it's too late to argue it's just a hobby that happened to make him a few quid :redface:

Is this really that rare a situation? I thought a few accountants on the forum would have at least vaguely similar clients?

 

[Zeno]

The guy set up a limited company a year ago to house the transactions, so I think it's too late to argue it's just a hobby that happened to make him a few quid :redface:

Is this really that rare a situation? I thought a few accountants on the forum would have at least vaguely similar clients?

Yes but it is the proceeds from gambling (if spread betting). Not usually taxable unless you are a bookie and no idea how this affects companies.

 

[Maslins]

I think proceeds from gambling are non-taxable unless you are a "professional gambler". Naturally it's very grey as to what that means, but I think by setting up a ltd company the guy has effectively admitted he's doing it as a business and that he's a professional (he used to work for Merrill Lynch).

He's happy that profits he makes are taxable, and I don't think I'm anywhere near knowledgeable enough on this to tell him I can convince HMRC it's non-taxable. I'm purely querying the top half of the P&L.

 

[Zeno]

I think proceeds from gambling are non-taxable unless you are a "professional gambler". Naturally it's very grey as to what that means, but I think by setting up a ltd company the guy has effectively admitted he's doing it as a business and that he's a professional (he used to work for Merrill Lynch).

He's happy that profits he makes are taxable, and I don't think I'm anywhere near knowledgeable enough on this to tell him I can convince HMRC it's non-taxable. I'm purely querying the top half of the P&L.

Sorry, I should have made clear that this applies only to the spread betting. There is no such thing as a professional gambler in the eyes of HMRC. If you think about it, for every taxpayer that comes out ahead and has a tax liability, there will be hundreds more trying to claim loss relief for their dodgy bets on horses etc.

However:-

If he is an ex-Merrill Lynch professional then it is more than likely that he is just day trading in which case I think the baked beans scenario applies.

Should be a great client for you...

 

[Maslins]

For those interested, after a lengthy chat we've come to the conclusion that it should be in effect just the movement in value that becomes turnover.

The main reason being the majority of transactions are derivatives, where nothing is ever actually bought. You purely speculate (not the right word, but you know what I mean) on the movement in value of assets, rather than actually buying then selling them.

This does mean that, in theory, you could get a negative turnover...in reality I certainly hope that although this may well happen on a few individual transactions during the year, I sincerely hope the net position at the end of the year isn't in this position. I'd be intrigued to see what Companies House would say to a set of accounts with negative turnover...

It seems HMRC have swathes of information on this topic (well, more whether it's gambling, trading, or investment rather than the turnover) and as usual, they don't really give a definitive answer. I think given the high number and frequency of transactions that the company clearly qualifies as trading. They basically say spread betting is normally considered gambling (hence non-taxable), but basically if you spend your working day doing spread betting, and you have systems in place to reduce the risk, then it may be trading (presumably in reality this means HMRC will argue it is trading if you make a profit, and isn't if you make a loss...)

 

[PR Wales]

Interesting stuff. Thanks fellas.

Ian