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Journal
I would post the journal to where the original entries would have been if the bookkeeping had been correct so debit sales and credit VAT - obviously any reduction to income for VAT errors is tax allowable.
Considerations re final accounts
Depending on what type of entity, you will need to consider at some point:
1. Accounts disclosure
2. Tax return disclosure
If the sum is significant re the overall business then the last thing you want is an HMRC enquiry as a result of reported lower GP%/ Lower net profits.
If a company I would take a close look at the FRSSE ( I presume qualifies) if not ,and you have a bit of discretion re disclosure, I would consider whether the adjustment ought to be shown either as a separate line in the P & L or in a note. Certainly for a sole trader/partnership I would be thinking of making use of the white boxes on the tax return if material.
If for a company I think, from memory, the definition permitting a prior year adjustment is currently fundamental not material,though I think the new FRSSE (2015) in progress may change this. (Someone else on here will be far better on disclosure etc than I am, these days Accounts disclosure etc sends me to sleep)
What kind of entity ?
Absolutely, definitely, unequivocably a reduction in profits.
How to show it depends on what sort of entity it is ?
So is it a company or unincorporated business or what ?
Court of Appeal
Do make a note that the Court of Appeal has recently heard a case (Sub One Ltd T/A Subway), and its decision is due any time. This may result in the assessment being invalid.