This tax year or next…..that is the question

It’s almost the end of the tax year and some of you may be wondering how to deal with those receipts that come in around this time of year and how to account for them. In accounting terms this problem is known as ‘cut-off’ and literally means to look at your receipts and make a cut off point and decide which tax year they fall into.

This equally applies to limited companies whenever their year end falls, as the principle is the same.

The trick is to work out when you ‘earned ‘the receipt. So, if you did the work relating to the receipt on the 28th March 2012, and raised the invoice then, but your customer didn’t pay you until the 28th April 2012, this would be treated as income in the tax year ended 5th April 2012 because it was earned  then,  even though you didn’t get paid until the next tax year.

Most importantly:

• Don’t hold on to cheques and delay banking them to get the income into the following tax year. If you are doing your accounts correctly, include income in your accounts when you earned it which is not necessarily when you banked the money.
• Don’t delay  sending out your invoices to push the income into the next tax year either. Accounting rules which are required to be used by HMRC mean that where the work is completed before 5th April 2012 but invoiced afterwards, this will in the majority of cases be treated as income in the 2011/12 tax year.

Whilst this may seem pedantic, it makes sense really, as otherwise no-one would raise any invoices towards the end of their financial year, because of the additonal income and hence potentially higher tax bill as a result, and of course it can amount to tax evasion which as we all know is not a good thing.

The only exception to this is where the amounts are small in relation to your total income as they would not make a significant difference to your accounts.

This guest blog was written by Lorraine Dale from Rightway Accounting Services