Just taken on a new client (subcontractor) that requires a tax return completed.
This is the first tax return the client has needed to complete. (previously he was employed)
The client (who seems trustworthy) explained to me that for the first 6 months of being a subby he never kept any receipts for tools/materials/fuel etc, as he didn't know he had too (I do actually believe him)
Anyway since finding out he was required to, he has giving me a fairly good file of expenses broken down into month order.
The subby has worked for the same contractor for the whole year, so I do have the full years income of sales/CIS tax etc.
My question is, can i calculate an estimate of what the missing 6 months worth of expenses would have been based on the 6 months of records i do have.
I was going to find the average for the 6 months of info i have & then multiple the average by 6.
I've looked at the sales invoices (type of work, location) are the same throughout the year, so in theory the expenses should be pretty much the same throughout the year.
I've just spoken to HMRC, explained the above situation and asked if the estimate based on a full six months records would be ok, the chap i spoke to wouldn't give a yes or no, just kept on repeating it was down to myself & client to come to a conclusion as what expenses should be claimed, but at one point did actually say is was ok to estimate but once i asked for confirmation, he wouldn't commit a straight answer.
Can anyone suggest what they would do in this situation.
Hi, you have little choice after making a good effort to obtain invoices, bank statements etc. If the expenses are minimal so too will be the potentially lost revenue (PLR) and thus the curiosity of HMRC. An Inspector would need to point out errors in your treatment. The main thing is that your claims are reasonable based on the circumstances at the time - a large piece of equipment in the 6 months you have, would probably not have happened earlier too.
Attach your calculations or enter them in the additional information of the self employment pages. There is little for them to gain by launching an Enquiry as you will have already undertaken reasonability tests (unless they have information that you don't). It will increase the small likelihood of HMRC attention but the worst of penalties will have been prevented by unprompted disclosure. Even then, I do not see how they could justify any penalty where there is no PLR, but that never stopped them before.
Read the Help Sheet associated with the 'Provisional' box 20 on page 6 of the core return but this should not be ticked if you consider your estimates accurate. Briefly explain your method and the reforms made to record keeping. A good one is opening a business bank account but perhaps over-egging it for your client. Include any good reasons why the records were not kept and emphasize the ones that were: EG. Sales records are complete and the tax deduction certificates. A balance sheet will also reassure HMRC that youre well on top of things even if you never prepare one for him again. Make sure any private use adjustments are accurate and all figures prudent.
Keep the big picture in mind. For instance, Is there any chance that he ought to be regarded as an employee, and ask him to level with you now of any skeletons in the cupboard. Put a specific statement on the P&L for his signature stating your extrapolation methods. These pages may be useful in preparing for any HMRC curiosity.
