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Theft of money from tills & recovered - when assessed?

My client had an employee between September 1995 and September 1998, when she was sacked for being found stealing money from the tills. Software was used to try and establish via gross profit margins expected from this trade to those achieved what the likely amount of money stolen was. It came to around £27,000 over the 3 years and she plead guilty in court to it.

The money will be received in tranches by my client and when the first one was received in 1999/2000, I notified the Inspector of Taxes, advising him of the situation and that the tranches would be carried back to the tax years 1995/96; 96/97; 97/98 and 98/99, when we knew the money was taken and effectively sales under-declared for these periods.

The Inspector insists that the money received should be assessed in the year of receipt, when my client is a higher rate taxpayer. Over the previous years when the theft took place he was a basic rate taxpayer. The Inspector says he knows of no legislation which would allow him to re-open earlier years. Can anyone help on this one as to what the correct treatment of it should be.
Duncan M Strachan

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Bad debt provision accounting policies
I think my memory of 'something in VAT regulations' related to the tax point for vending machine cash boxes and it sounds from other postings that this does not extend to tills.

The tax rate issue, however, is not about whether sales are understated, which they clearly were. It is about provisions for bad debts. If they should have been provided and allowable, then there is no error in previous assessments. You can argue that it is normal to apply hindsight in estimating the appropriate provision. Using this, whatever you provide now is the amount that should have been provided previously.

However the hindsight normally only extends from the period end to the date the accounts are approved. I would suggest this sounds more like normal accounting practice.

One way of clarifying the position would be to include accounting policy notes in the accounts (Sole trader accounts should show material accounting policies if they are intended to show a true and fair view). With different wording you could decide the policies are.
Bad debts: Provision is made in full where a court case is going to be required before the money is collectable.
Bad debt recovered: Where debts have previously been provided, debts are not considered recoverable unless money is actually received before the accounts are approved.

Under SSAP2, you can select any acceptable policy and this is an acceptable prudent policy. Under FRS18 you need to select the most appropriate policy, which is more difficult. I still think you can argue this is the most appropriate policy because estimating recoverable amounts is not sufficiently reliable in circumstances such as this.

This would push the taxable date forward nearly as far as the Inspector is suggesting.

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Which is best?
Have you worked out how much interest on DI income and on VAT will be payable compared to interest on VAT for just 6 months until the provision for bad debt is valid? Any prospect of some of receipts in future years being taxed at 22%? Does this come close to the difference between 23% and 40% tax? If little is actually received, the inspectors suggestion may be better than trying to carry it back.

The worst scenario that should be avoided is recognising a debtor in the current accounts and the inspector arguing for 'follow accountancy practice'.

These are only opinions and if I continue to be outvoted, don't pay too much attention to them.

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Follow accountancy practice?
I would have thought that:
If you are going to use the 'follow accountancy practice', then you need to prepare accounts showing a prior year adjustment and justify that there was a fundamental error and not just a change in an estimate of the amounts recoverable. Did you do the best that you could in earlier years?

I think I would agree that accruals overrides the idea of the relevant timing being when the till is emptied - I think there is something on this in VAT regulations which may help avoid interest on late paid VAT.

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Till receipts
Our experience of VAT investigations is that they do not recognise theft as a legitimate reduction in takings and always seek to gross up takings to what should have been in the till. On this basis it would seem that the "correct" takings should have been declared in the first instance , it then being irrelevant when the money is actually received . The tax point being point of sale , not whether or not the money ended up in the tills . There is clearly a case for error now that the problem has come to light and assessments should be amended for earlier years at the prevailing tax rates in my opinion

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