Taxman wants to see balance sheet

MT writes: I am a self-employed plumber with a small workforce and submit my accounts to the Inland Revenue. Few questions have ever been raised but my tax inspector has changed and the new one has asked for a balance sheet. He says I should not be using the cash basis for my accounts but should be bringing in monies owed to me as well. Has the law changed as surely I should not be taxed on money I have not received?

Answer

The inspector is entitled to ask for details of your debtors. For accounting periods beginning before April 7, 1999, except for individuals carrying on a profession or a vocation, accounts should have been prepared on an earnings basis. Your business is classified as a trade, so your accounts should always have been prepared on an earnings basis, which would involve your income being adjusted to take into account debtors and creditors as well as stock and work-in-progress. So while you will be taxed on income not received at your year-end you will also receive tax relief on your trade creditors. Normally these monies will have been received or paid by the time your tax has to be paid. Should one of your debtors not pay, relief may be claimed in a subsequent accounting period. There has been a change in the law so that for accounting periods beginning on or after April 7, 1999, accounts must be prepared on an earnings basis whether your business is a trade, profession or vocation, the only exception being for some barristers. Where accounts are prepared on the earnings basis as a result of the change in the law (for a profession or vocation) it may result in a rise in profits, so there are transitional provisions that allow the higher profits to be spread over a 10-year period. You will not be able to take advantage of this as your accounts should always have been prepared on an earnings basis.