It’s all in the timing
Small businesses have traditionally not had to worry about the accounting standards that companies have to use – SSAPs, FRSs and so on. They didn’t have to produce accounts that showed a ‘true and fair view’. Then in 1998 the law was changed so every trader had to calculate taxable profits using ‘generally accepted accounting principles’. That doesn’t mean a sole trader has to put in all the notes and details that a company does, but when you are working out the bottom line, you should do it the same way.
There have only been a few arguments in court about this over the years. In a recent one a building contractor booked a sale when the main contractor issued a valuation certificate – in effect, when his customer accepted that payment was due. HMRC argued that this was later than it should be – he should bring in work in progress as he did it, and he should record sales when he sent an application for payment. After all, he reckoned at that point that he ought to be paid, so he should reflect that in his accounts.
The Upper Tax Tribunal agreed with HMRC. Even a sole trader has to follow GAAP, and there was no justification in delaying the recognition of sales until the issue of a certificate.
It’s a reminder that all traders need to follow acceptable accounting policies, and also that HMRC look at them. If you are not sure when to bring income into your profit and loss account, we can advise you.