self employed questions - The Book-keepers Forum (UK)

lor · Guru

self employed questions

Shamus · Forum Moderator & Expert

Hi Lorraine,

Funnily enough I was reading something about bankrupts continuing to trade on accountingweb yesterday which makes it nice and easy to know where to point you to as this was quite an interesting discussion.

http://www.accountingweb.co.uk/item/164394

The help sheet for calculating profits if full of useful information about basis periods :

http://www.hmrc.gov.uk/helpsheets/hs222.pdf

If they've been made bankrupt though surely their first basis period will be from 15th Feb 2010 to 5th April 2010, then Year start to year end.

i.e.

15/02/10 - 05/04/10
15/02/10 - 14/02/11 (inclusive of overlap)
15/02/11 - 14/02/12

This isn't a limited company is it as that's quite different.

I've only actually dealt with limited companies so basis periods for sole traders are not my bag at all. Fingers crossed someone with more practical knowledge will confirm (or not) the above.

all the best,

Shaun.

BudgetB · Guru

Once you are made bankrupt you can generally continue trading, and your new trading period starts from the day after you were made bankrupt. Your client should have been issued with a new UTR for post bankruptcy so you'll need to make sure the tax return is submitted under that number.

The periods that Shaun has quoted is right, although at 5/4/10 you could then opt to run from 6/5/10 to 5/4/11 at that point instead so it ties in with tax years.

lor · Guru

thank you, both for your replies, budgetB did you mean "then you can opt to run from 06/04/2011 - 05/04/2011"?.

Also the actual accounting period is Feb 10 - Jan 11.

lor · Guru

This is confusing me slightly, I have asked the client for the period of his last tax return, it's not completely tieing up. I see what you both are getting at. I have a feeling that his accounts have been made for the incorrect period, not sure, hopefully I will get to the bottom of it!.

-- Edited by lor on Friday 27th of May 2011 12:57:06 PM

Shamus · Forum Moderator & Expert

methinks that this client is hiding something from you Lorraine.

Many people end up bankrupt due to circumstances beyond their control but some take that route by choice as it's cheaper than paying creditors. If this client is in the latter category I would make sure that you get your fee's up front for this one or you might end up bottom of the pile of the next batch of creditors when they do it again.

lor · Guru

Shamus, thank you for the warning, I think I will have some funds upfront!.

lor · Guru

my head is spinning a little, just about to come off lunch (full time job), will have to think about this later!. His wife traded from Accounting period - June 10 - May 11, this goes over the tax period lol, aaarrgghh! would that mean that the return would be filed for a longer period than what is necessarily required i.e. june10-may11?. Or should I go back to the client and tell them they need to redo their finals accounts to match the tax year.

-- Edited by lor on Friday 27th of May 2011 01:07:13 PM

lor · Guru

aaaaaaaaaaaarrrrrrrrrrrrrrrrggggggggggggggghhhhhhhhhh! sorry! feel frustrated! - have 2 fitness classes booked tonight will get frustration out then, did boxercise last night, god that felt good! lol!!!

Shamus · Forum Moderator & Expert

Hi Lorraine,

it's all down to basis periods rather than tax years. (so no reason that accounts cannot run from Feb to Feb. It's just the first year where overlaps need to be built in if you are not keeping to tax years).

So was his wife trading in the same business?

How does that sit with the period when the husband became bankrupt, which was when?

Assuming that the wifes and the husbands businesses were quite seperate is the client trying to sneak a "do one set of books, get one done free" on you?

These are the first books after coming back from bankruptcy aren't they?

Sorry, I've probably got more questions here than you have!

Helz · Senior Member

Hi

The accounting period can run for whichever 12 month period the individual decides on - the tax period obviously runs 6 Apr - 5 Apr. Self employed sole traders & partnerships are (normally) taxed on the profits for the accounting period that ended during the tax year. So if his accounting period runs to 14 Feb 11, his profits to 14 Feb 11 are used in his April 11 return.

This link may help http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073789469&type=RESOURCES

Would also agree that funds upfront sound like a good plan!!

lor · Guru

Shamus wrote:
Hi Lorraine,

it's all down to basis periods rather than tax years. (so no reason that accounts cannot run from Feb to Feb. It's just the first year where overlaps need to be built in if you are not keeping to tax years).

So was his wife trading in the same business?

How does that sit with the period when the husband became bankrupt, which was when?

Assuming that the wifes and the husbands businesses were quite seperate is the client trying to sneak a "do one set of books, get one done free" on you?

These are the first books after coming back from bankruptcy aren't they?

Sorry, I've probably got more questions here than you have!

The wife's business is completely separate from his.

I will definitely charge for the guys return and his wife's, 1st stop accounts don't do BOGOF lol.

I will ask for the fee upfront as their history is an alarm bell ringing.

Questions Shamus are very good, makes me think more about what I am doing.

They are the 1st set since bankruptcy as he has said he didn't file returns for about 4 years, then hmrc said they want the money quite quickly, he said i can't afford to, so hmrc said, you will have to become bankrupt.

If at any point anyone in this forum thinks this guy is trying to pull the wool over my eyes, feel free to say, this is my first client of this kind.

Mmmm, i have spoken to the client in the meantime, and he keeps saying that he isn't doing anything dodgy, I have suggested he puts his accounting period up to 5th april 2011 for him and his wife and he has agreed to do so with no problems at all about doing it, so I think I will do the return on that basis.

Thank you so so much, I can't say in words how much I appreciate your answers and insights to my situations!.

Many many thank lor

-- Edited by lor on Friday 27th of May 2011 08:06:38 PM

lor · Guru

Helz wrote:
Hi

The accounting period can run for whichever 12 month period the individual decides on - the tax period obviously runs 6 Apr - 5 Apr. Self employed sole traders & partnerships are (normally) taxed on the profits for the accounting period that ended during the tax year. So if his accounting period runs to 14 Feb 11, his profits to 14 Feb 11 are used in his April 11 return.

This link may help http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073789469&type=RESOURCES

Would also agree that funds upfront sound like a good plan!!

Thank you defo fee upfront, thank you so much for your input, I believe the accounting period will now change to 5 april 2011 , then start again 6th april 2011.....

-- Edited by lor on Friday 27th of May 2011 08:03:33 PM

lor · Guru

I have been thinking, I should have next week a set of accounts running from 15 feb 10 - 5th apr 11, what I have been thinking is that he should have had a return submitted for the period 15 feb 2010 - 5th apr 2010 (09/10 tax year) - which should have been submitted by 31st jan 2011??? surely???.

This is his first return since bankruptcy but as far as I know there should have been a return filed for the short period.......I would have thought he would have had a fine, but he hasn't mentioned that??.

Many thanks Lor

-- Edited by lor on Saturday 28th of May 2011 01:37:18 PM

Peasie · Expert

This may seem a bit too obvious but given this person's record in the past with HMRC, have they definitely informed them they are trading again and so been sent a tax return to fill in?
Do they have a new UTR as in Jenny's (BudgetB) post above?

EDIT : And if they haven't informed them then that will be another fine they have to look forward to.

-- Edited by Peasie on Saturday 28th of May 2011 02:11:42 PM

lor · Guru

Hi Peasie, he told me that he has spoken with hmrc about it.

Helz · Senior Member

He didn't have an accounting period that ended in the period 15 Feb 10 - 5 Apr 10, so what would you expect him to have put on a return up to 5 Apr 10? It would have been nil!

Think you are dwelling too much on the tax year and need to look more at the accounting period.

Peasie · Expert

I always thought the first return was to the 5th April - regardless of when the financial year end is. They have special rules for the first few years.

gbm · Guru

We usually run the first trading period to 31 March/5 April, as otherwise it can create problems.

Don Tax · Expert

Hi, a friend and I did the AAT business taxation unit last year, and she, in particular said it gave her ever so much confidence in her dealings with businesses. I see there's a Self Assessment Diploma with the ICB which also looks interesting.

In 1997 I had to get to grips with basis periods, and I still have to refer back to my notes and SAT2 manual when doing overlap relief etc.

I don't think anyone has suggested the HMRC help notes at :-

http://www.hmrc.gov.uk/worksheets/2010/sa103f-notes.pdf

also, attached; particularly page 16.

"They are the 1st set since bankruptcy as he has said he didn't file returns for about 4 years". When you register as agent, you can perhaps request a copy of the last return filed, and then you will know better what needs doing.

I always find it tidier to take accounts at least to a month end, but avoid having all clients on 5th April.

Hope the above helps.

lor · Guru

hi all, are you saying then to leave the period as it is ? - Feb 10 - Jan 11 for the guy and
june10-may11 for his wife? - thank you so much for your guidance!

lor · Guru

this thread is starting to confuse me, sorry, I take it you can pretty much do either one, go with the accounting period already set or go with the tax year, if you are going by the accounting period then you generally have an overlap as shamus has put above. I find it is better to go with the tax year if able to do so.

lor · Guru

gbm wrote:
We usually run the first trading period to 31 March/5 April, as otherwise it can create problems.

me too... is it possible to change an accounting period without causing too many probs, ie. from 1/2 to 31/01, then the following year aligned with the tax year - or would this require contacting hmrc beforehand. I am wondering as all my clients so far have pretty much been start ups, learning curve!

-- Edited by lor on Sunday 29th of May 2011 01:28:14 PM

lor · Guru

been reading this: http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073792234&r.i=1073792136&r.l1=1073858808&r.l2=1085093907&r.l3=1074001737&r.s=sc&r.t=RESOURCES&type=RESOURCES

Shamus · Forum Moderator & Expert

Hi Lor,

it just refers you back to HS222 which was in my first post.

Ok, this seems to be getting a little lost so lets take an example.

Joe bloggs trades from 01/07/98 to 31/12/2003. Accounting period is to end on 31/08 each year.

The following shows the relationship between the accounting and basis periods.

lor sheet.png

This borrows heavily from an example given in the BPP study text for ACCA paper 2.3.

And yes, it does mean that if people set up self employed without considering their period end dates properly they are subject to double taxation on early profits.

Hope that it helps makes accounting vs basis periods a little clearer.

kind regards,

Shaun.

P.S. edited because the picture disappeared

-- Edited by Shamus on Sunday 29th of May 2011 04:11:54 PM

-- Edited by Shamus on Sunday 29th of May 2011 04:17:31 PM

Don Tax · Expert

Hi Lor,

Find out the exact date and year he was made officially bankrupt by HMRC. You are free to choose to take the accounts to 5th April following that (bankruptcy) date.

When he said that his accounts are from 15 feb 10 - 14feb 11, he may have been referring to the old accounting date, prior to bankruptcy. Ask for the most recent sets of accounts to establish if this was the case.

Was there a previous accountant? If so, it is best practice to write to them to see if they have any reasons why you should not take the appointment. Ask the client beforehand if the previous accountants have been paid in full. You can request from them a copy of the accounts, tax computations and a breakdown of debtors and creditors.

If the most profitable month of the year is March, you might choose to use an earlier accounting period (say 28 Feb) to always postpone paying tax on the best month.

If, after reflection you prepared accounts from 15.02.10 to 05.04.11 then you would have a 415 day period.

If he made say £20,000 in this period, then the formula for the 09/10 tax return would be £20,000 / 415 x 50 days = £2410 profit. This is the Year 1 rule known as Actual Year Basis. On the 10/11 tax return the formula would be £20,000 / 415 x 365 = £17590. This is the Year 2 rule - 12 months to the accounting date.

There are separate boxes for accounting period and tax basis on the self-employment pages of the self assessment.

-- Edited by Don Tax on Sunday 29th of May 2011 04:19:43 PM

lor · Guru

Thank you Shamus, it is making sense 100% now, it is simple when you think about it and understand it, just took a while to grasp it.

I really appreciate the amount of detail that has gone into this thread.

It is a little strange with the previous accountant, he said the guy started spending more time at a villa, he mentioned the name of them so i searched for them on the internet, found the no, thought I would call them to see if they actually answered the phone, it said number not recognised, I tried again same response. Looks like the accountant has disappeared.

lor · Guru

If, after reflection you prepared accounts from 15.02.10 to 05.04.11 then you would have a 415 day period.

If he made say £20,000 in this period, then the formula for the 09/10 tax return would be £20,000 / 415 x 50 days = £2410 profit. This is the Year 1 rule known as Actual Year Basis. On the 10/11 tax return the formula would be £20,000 / 415 x 365 = £17590. This is the Year 2 rule - 12 months to the accounting date.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------

I see where you are coming from and makes perfect sense, there hasn't been a return submitted for the 09/10 period profit. Not sure what I should do, do you see my problem?.

Don Tax · Expert

It may be that HMRC are not going to demand a 2010 Return, or that this has already been submitted under the old UTR, in which case the opening year rules may not apply. Find out the date of the bankruptcy -- I don't think you've actually said. Have a look at all the papers from the Official Receiver or other trustee to find out exactly where his tax affairs have been completed up to. There should be a contact address/phone number.

Alternatively, if you obtain the new UTR (and decide you want to act) the online client record should tell you what SA Returns are outstanding when you get the password from the client.

I should say it's a while since I've done this but i'm sure the Return for the year of bankruptcy has to be done manually, not online.

Don Tax · Expert

These links expand on SA requirements in the year of bankruptcy, but do ask your client for all official paperwork and if he has been making payments to the Receiver.

http://www.hmrc.gov.uk/manuals/sammanual/SAM106001.htm#IDA5QCQM

see: SA return for the year of bankruptcy

http://www.insolvency.gov.uk/freedomofinformation/technical/technicalmanual/ch73-84/chapter77/part4/Part4.htm

see: 77.35 Taxation in the year a bankruptcy order is made

...is liable to tax on his/her assessable income and profits from the end of the tax year in which the bankruptcy order was made unless there has been a change in the bankrupts source of income.

lor · Guru

Hi, thanks for your replies, I have applied for the password to be sent, currently online client is set as unauthorised client and it is asking for 10/11, I think I will await the password and see what I can discover from then on. Also regards to period required to file return, client has said it is from 1st feb 2010. i will keep you posted, sure I will have more questions in a week!!!.

Thank you so much for your help.

Theataccounts LLP · Newbie

Shamus wrote:
Hi Lor,
it just refers you back to HS222 which was in my first post.
Ok, this seems to be getting a little lost so lets take an example.
Joe bloggs trades from 01/07/98 to 31/12/2003. Accounting period is to end on 31/08 each year.
The following shows the relationship between the accounting and basis periods.

This borrows heavily from an example given in the BPP study text for ACCA paper 2.3.
And yes, it does mean that if people set up self employed without considering their period end dates properly they are subject to double taxation on early profits.
Hope that it helps makes accounting vs basis periods a little clearer.
kind regards,
Shaun.
P.S. edited because the picture disappeared

-- Edited by Shamus on Sunday 29th of May 2011 04:11:54 PM

-- Edited by Shamus on Sunday 29th of May 2011 04:17:31 PM

Great post there Shamus!