Should I pay income tax (2014) on a payment I did not receive until 2015?

[PatrickJ]

Hi,

I registered as self employed in 2014 but most of that same year I was unemployed. I had five jobs in total. By my second job I had a visit from Revenue (still scratching my head as to why) but I was assured it was merely a review. The person from the Revenue wanted to know was I running my affairs as a cash based business or a sales based business. I told them I was operating a cash based system. Cut a long story short I was bullied into running a sales based business and subsequently paid VAT on all sales including the ones I was not paid for.

My question is - out of the five jobs I was only paid for four of them in 2014. Should I pay income tax on all five?

The outstanding job was paid in 2015 so I am presuming I should not have to pay income on this amount until 31/10/16? I have already paid the vat on this amount.

 

[Joe_90]

A number of questions arise:

1. Why did you register for VAT?

2. When you registered for VAT did you elect for cash receipts basis for accounting for VAT?

3. You appear to be confusing the basis for accounting for VAT with how to calculate your sales for your accounts.

Your sales for accounting purposes are based on sales issued during the accounting period. The amount not paid is called debtors and if you feel that some of these debtors will not pay you then you make a provision against these called a bad debt provision.

 

[PatrickJ]

Thanks Joe,

1. Big mistake registering for VAT. Business was not as lucrative as I thought it would have been.
2. I was pressured by the revenue visit to elect for an invoice basis of accounting.
3. Yes.

When I submitted my income tax for 2014 I did not mention this unpaid debt in 2014 to my accountant because I wasn't paid. The debtor however did pay me in 2015. Should I have mentioned this to my accountant? It was for a relatively large sum and I was skeptical I would have to pay income tax on that amount in 2014 when in reality I was not paid until this year.

 

[cremeegg]

I don't buy this.

I have never heard anyone suggest that the Revenue bullied or pressured them into an invoice basis of accounting for VAT.

The requirements for the cash basis are clear, your turnover must be less than €2m. If your turnover is more than that or even approaching that you should be using a good accountant who take care of all this for you.

 

[Joe_90]

I'd imagine the OP did not elect for cash receipts basis of accounting for VAT then when the Revenue visited they pointed out that he had not elected for cash receipts basis for VAT and told him that it was invoice basis.

You omitted to tell your accountant but as you were accounting for VAT on an invoice basis they should have seen the outstanding invoice.

 

[Branz]

Your sales for accounting purposes are based on sales issued during the accounting period. The amount not paid is called debtors and if you feel that some of these debtors will not pay you then you make a provision against these called a bad debt provision.

This ignores the very legitimate use of cash accounting as opposed to accrual accounting for small businesses.

Its use depends very much on the business but it is not correct to imply that ALL accounting must be on an accruals basis.
For a small business, bad debt provisioning is not realist as one then has to distinguish between specific provisions and general provisions and the different tax and accounting treatment that this approach requires.

Regrettably the OP does not sate the business he is in, which would help form a more reasoned set of replies.

Cut a long story short I was bullied into running a sales based business and subsequently paid VAT on all sales including the ones I was not paid for.

Mystifying at the very least.

 

[Joe_90]

This ignores the very legitimate use of cash accounting as opposed to accrual accounting for small businesses.

Its use depends very much on the business but it is not correct to imply that ALL accounting must be on an accruals basis.
For a small business, bad debt provisioning is not realist as one then has to distinguish between specific provisions and general provisions and the different tax and accounting treatment that this approach requires.

As far as I'm concerned the accounts should be prepared on an accruals basis, the VAT basis is irrelevant.