Sole Trader Basis Periods

jilt

I have just taken on a new client, a sole trader who's year end is 31st May. I wrote to his previous accountant requesting clearance and info and all I received was a sheet of paper containing a trading account and a balance sheet for year ended May 2009 which had been typed on a old manual typewriter.

I contacted HMRC and requested a copy of the last filed tax return, 2008-2009 which has now arrived. The figures on the tax return are the figures for his accounts for year ended May 2009. Now unless I'm having a dumb moment and need to return to school, accounts for year ended May 2008 should have been on the 2009 tax return.

No date was entered to say what date the accounts were made up to on the last tax return, intentionally or not I don't know obviously. I don't know what to do. If I go back and change the previous years surely this will spark an investigation. Anyone been in this situation and if so what did you do and what were the consequences?

Monsoon

Rather you than me love!

You are indeed correct, the accounts for the period ended May 2009 need to go on the 2009-10 tax return. And you say they have already gone on the 2008-09 return? Oh dear!

I think the net result of this (ignoring slight differences in personal allowances and tax rates for the minute) will be the overlap profit will be wrong.

How long has this guy been trading and has the old accountant got a note of overlap profit? The old accountant needs to provide all carry forward figs including overlap profit so there is absolutely nothing wrong with going back and asking him. Ask him whatever you need!

While I don't normally advocate talking to HMRC, this might be the best course of action to see what they say. But they might just say all years need doing correctly... How about you request all tax returns (without telling them why at first) and see what the first ones say?

Trouble is, if you get it right going forwards, somehow this poor chap will be taxed twice and I don't think it can get included as overlap profit. I hate overlap profit.

What you mustn't do is spend too much time without being paid. Fixing something is a different thing to just doing the end of year - but in this case fixing (or at least making a decision) will need to happen before you can do the year end.

I'd be interested to hear other peoples opinions and indeed how you get on!

Jenni

jilt

Many thanks for your reply Jenni, I am dreading going back to this guy and explaining what’s happened.

I’m also dreading calling his previous accountant, going on the state of the accounts, I use the term loosely, and invoice I think he’s about 90 with a pre-war typewriter!

Will HMRC check out the previous accountant and his other clients? God I've opened up a right can of worms. Next question, if I go back to the client and explain the situation and he doesn't want me to correct it or talk to HMRC, I would of course refuse to do his accounts but is this a money laundering case, should he be reported? Or am I blowing it all out of proportion? :ohmy:

Monsoon

If there has been no intention then there is no MLR - it's a mistake. By instructing a professional, the taxpayer has taken due care. There would only be a MLR issue if, say, you spotted something that meant he'd underpaid tax, told him about it, and he said "Tough, I'm not paying." That would then become deliberate and likely reportable.

Edit: whoops, that's what you said. Remember that just getting it wrong isn't necessarily a MLR case.

Taking a purely pragmatic view, if the worst comes to the worst, hope the other accountant has PII as if any additional accountancy fees and penalties/interest come up, this is how they should be paid.

Don't tell the accountant you think he is wrong yet. Don't tell the client you think the old accountant is wrong yet. I'd call the AAT MIP advice and see what they say.

I'd also sit on it for a day, too. I honestly don't know what I'd suggest, I'd need some time to mull it over!!

Edit: You could always refund him and decline the appointment!

JodieR

This sounds like it could get complicated, but before you panic too much, if you think about it, assuming that the old accountant never accounted for overlap profits and the accounts have consistantly been filed in the prior year to the correct one, then so long as the profit in the accounts to 31 May 2009 is greater than 10 twelths of the profit in the first year of trading (and this is quite likely), then there shouldn't be an underpayment of tax. Yes, you will probably need to repair previous returns but I doubt it'll result in a big bill for your client, he may even end up with a rebate!

burg

One possible solution is that for the 2009/10 return you prepare accounts for the period 1 Jun 09 - 31 Mar 10 (or 5 Apr 10) if you prefer. This will mean you are preparing accounts suitable for the tax year in question. You will also eradicate any potential overlap profits. Yes there may be a timing difference with previous years and the taxes due. Short of going back over all years since the commence of trade I don't see any other quick fix.

Monsoon

burg wrote: »

One possible solution is that for the 2009/10 return you prepare accounts for the period 1 Jun 09 - 31 Mar 10 (or 5 Apr 10) if you prefer. This will mean you are preparing accounts suitable for the tax year in question. You will also eradicate any potential overlap profits. Yes there may be a timing difference with previous years and the taxes due. Short of going back over all years since the commence of trade I don't see any other quick fix.

I like this one Ian. It also makes things much easier going forwards.

jilt

Thanks for all your replies guys. Sorry it's taken me a while to come back, we left the office early yesterday as my mum in law came out of hopital yesterday and infortunately she's had to go to a care home. have only just come back into the office, been to the home as she wasn't too well this morning. Because of this I haven't spoken to either the accountant or the client about it yet.

Jenni I can't call the AAT MIP advise as I haven't got a licence yet, am hoping to apply in August, depends on my MAC exam result.

Ian that's a great idea, so you think would it be ok to do that, and then use the tax year as his basis period from this tax year onwards? Would you choose that option if it were your client? I'd obvoiusly have to tell the client what I was doing and why, but it would save the tax on any overlap profits. To be honest I don't know how many years he's been trading so I don't know how many tax returns would need re-submitting.

burg

I think I would do this based on the information you have put on here. It's the simplest method I can think of. Yes it isn't technically correct as you should go back and adjust things. However that may not even be possible depending on how many years to go back. You may even find that it was a loss in year 1 and no overlap profits have been paid anyway.

Obviously your choice with what to do but I can't think of anything that would be simpler.

jilt

Thanks Ian, first of all I'll ask how many years he has been trading, and then ask what sort of profit he made in the first year, but I think I will go ahead with your sugestion. I'll let you know what happens.

Thanks again, to all of you.

Jill