Income Tax payment accounting entries

Model500 · December 2008

Hi,
I am currently compiling the 2nd year accounts for my partner's business (sole trader) and during the 2nd year of trading, she paid out income tax, this being tax due on 1st year accounts and 50% of 2nd year accounts. I have entered Income Tax Liability for the second half of 2nd year accounts.

However, where do I account for the actual income tax paid during the year?
Sorry if I'm being a bit thick but I've never done this before.

By the way, an urgent response would be very much appreciated as my partner is expecting our first baby within the next 2 weeks and goodness knows where I'll find the time to finish everything off!!

Thanks in advance and a happy new year to you all

Bluewednesday · December 2008

If she is a sole trader then the income tax is not a business expense and not entered into the accounts at all.

Tax is only really entered into the accounts of a limited company.

Model500 · December 2008

Hi Blue,

Thanks for your speedy response. Your answer has left me a little confused though.

I have entered the Income Tax Liability figure onto her Balance sheet under 'Current Liabilities'. Is this incorrect?

Also, your response makes me think my partner should have taken extra drawings (she has been quite cautious, paying herself a very modest income and saving the rest in her business account for tax etc) from the business and paid the income tax from her personal bank account. Is this correct?

Help!!

Bluewednesday · December 2008

A sole trader is taxed on profit that they make - regardless of what they take as drawings. I think you are really confused between companies and sole traders. You shouldn't set up a current liability for the income tax paid as it is as you have stated a personal expense and not a business expense.

She can happily take the tax as drawings as the money is already hers - she will have already been taxed on it.

With sole traders they are taxed on all the profit they make whereas a director of a limited company is taxed on monies they withdraw from their company. Being taxed on the profits means there are no penalties in when and how much you withdraw from your profits.

Who has completed the tax return for your partner? Are you confident that all allowances have been claimed and that the tax will be correct?

Please feel free to contact me via pm if you would rather or post back here if you need more clarification.

Model500 · December 2008

Hi Blue

I think I understand what you are saying but just to clarify....

For income tax unpaid at the end of the financial year (in my partners case, 5th April 2008) I don't need to make an entry on the balance sheet because this is a personal expense. Is this correct?

For tax already paid out of the business bank account, all I need to do to balance the books is declare this as further 'drawings'. Is this correct?

I hope the answer to both of the above is yes!

In answer to your question, I have been assisting my partner to complete online tax returns using a P & L account and Trial Balance created from her Sales Invoice/Purchase Receipts and bank account records and also her other records such as Pension, personal bank account interest/shares/dividends. Allowances I have claimed relate to vehicles and equipment. So I am fairly confident most bases are covered, please feel free to make some general suggestions though!

Another question that has just sprung to mind is that as my partner is about to give birth and will not be working for the next six months or so, do I need to make an adjustment on the tax return for the estimated tax payable for the next financial year? Or should this just be left as is and claim back any overpaid tax.?

Thanks again.

Bluewednesday · December 2008

Yes and yes!!

If you are happy with the tax return that is fine, I wouldn't intefere!

There was a space on the tax return to reduce the payments on account, but if you've already completed the return there is a form SA303 which you can send in to reduce them. Be careful not to reduce them too much or you will end up paying interest in January next year, so err on the side of caution.

Model500 · December 2008

thats great. thanks for your help Blue, have a great New Year!

Poodle · December 2008

Hi Model

If you anticipate there being a problem with paying your tax then you migt want to consider contacting the business payments support line on 0845 302 1435 ato set up a payment arrangement for what will be due. You will be charged interest but once in the scheme there will not be any penalties.

I have had a nuber of claiments go down this route for the January payment falling due

Poodle

deanshepherd · December 2008

Hi Poodle

Do you know if surcharges are avoided if clients go down the instalment plan route?

Poodle · December 2008

Hi Dean

It's here

http://www.hmrc.gov.uk/pbr2008/bus-payment-addinfo.htm

But you have to enter into an agreement prior to the tax falling due and so i expect the line to be engaged for most of January!

Poodle

deanshepherd · December 2008

Thanks Poodle.

The penultimate paragraph offers some comfort:

"We hope that you will encourage your clients to use this service."

I may be quoting this to any Revenue personnel offering resistance!

Income Tax payment accounting entries

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