With 31 March looming as the end of many businesses’ financial year, there’s always the prospect of paying too much tax, It doesn’t need to be this way.
One of the biggest issues is the importance of writing off bad debts. It seems almost every year we have a client for whom we prepare the annual financial statements, who has a large amount of money owing to them.
When we get the results for the year we find there is a big profit, which has been inflated by an excessive accounts receivable figure. Discussion reveals some of this money is never going to be collected.
Can we fix the problem?
No. The law will not permit us to write off bad debts back-dated to the previous year. The client has to pay the tax and wait until next year to get these bad debts written off.
In the end the result is the same but in the meantime our client has to pay his tax earlier than would have been necessary.
Look at the debts owing to you. Are there some you have been pursuing and who won’t pay you? Have you taken every reasonable step to get paid?
If yes, you must physically write off the bad debt before balance date, if you want to reduce your accounts receivable and hence your profit and tax. It depends on the system you are using as to how you go about this. If it's a very basic system like keeping copies of the invoices you have sent out, just write on your copy the words “written off as a bad debt on…” and insert the date. Do this now. It is not something you want to overlook.
You should tell us the amount you have written off as Inland Revenue likes us to record this separately.
Can you continue to try to collect a bad debt?
Definitely yes. If you’re lucky enough to get some money it becomes part of your taxable income.
(See also ‘Get your debtors right)
Big changes to PAYE on the way
- On 3 November 2016, Inland Revenue announced changes to PAYE effective from 1 April 2019.
- Monthly schedules are to be abolished.
- PAYE information is to be filed on a payday basis.
- Dates for payment of PAYE are to remain the same with the option of paying on a payday basis.
- All information is to be filed electronically unless total PAYE deductions are less than $50,000.
- Payroll subsidy is to cease from 1 April 2018.
Get your debtors right at 31 March
Clients use all sorts of systems for keeping a tally on the money owing to them. From a tax perspective, the figure at balance date needs to be accurate.
Assuming a 31 March balance date, all work done up to 31 March which is capable of being charged must be included as income. For income tax purposes holding some of your invoicing over until April does not necessarily mean you can ignore it. You don’t have to actually send out an invoice but you do have to add the amount into your accounts receivable figure for tax purposes. You won’t be taxed twice because once we have put in a figure for the amount owing to you, we then deduct it in the next year’s accounts. If work cannot be charged because it is not quite complete, it doesn’t get included in your accounts receivable.
Some businesses have work in progress, which is partly completed work. They must value this on the basis of the amount of material which has gone into jobs in progress and the value of the wages they have paid to do that work. Any other direct costs should also be included such as hire of equipment.
Don’t deduct money received in April, until you have finalised the total owing to you at the end of March.
Professionals, who have supplied partly completed work (not invoiced), do not need to include these services in their annual accounts unless there is a right to make progress claims.
For further information, please dont hesitate to contact us on (03) 379 0829.