Client refusing to change basis period

Client refusing to change basis period

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We took on a husband and wife partnership early last year with a 31/3 year end. Their previous accountant did the 2011/12 accounts and we got the tax comps as part of the handover process.

They had just incorporated as a limited company and the incorporation date was 1/2/13. We therefore told them to make their accounts up to 31/1/13.

It took until November to get their Sage accounting records and even then there were masses of queries/anomalies. These weren't answered until mid-January, but then there were issues on certain expenses and we had to virtually frogmarch the husband round to us on 30/1 to get proper estimates in place of their figures. Only then did he tell us that they hadn't been trading as a company at all. Apparently they had to ask the FCA for permission first which wouldn't be forthcoming for a few months yet. Obviously he'd only just found out about this.

Too late to get the accounts made up to 31/3/13 (we'd already done all the work anyway) so he agreed to shorten their year end to 31/1/13 and we submitted the SA800 with a 306 day basis period, just to make the deadline. Their personal tax returns were also submitted on that basis.

However, the basis period had to be 12 months of course (up to 31/1/13) as the business is still trading, so it was necessary to pro-rata their 2011/12 figures by 59 days, amend their tax returns and re-submit the SA800. They're not happy about this, even after we explained about overlap relief, and are refusing to let us amend the returns. I've therefore dis-engaged them and someone else can have the pleasure of their custom next year (any takers?)

Thing is though, what should we do about the returns? I've given them until 31/3 to agree to us re-submitting them. After that they're on their own. But what if they don't? Should we inform HMRC? They should already know of course as the SA800 has a short basis period, but does it trigger any immediate action? Probably not.

Should we file a MLR report? Has a reportable offence even taken place? Obviously if they refuse to agree, it goes from being an error to a deliberate inaccuracy, but when does that actually occur?

Thoughts from practitioners with experience of this type of situation would be welcome.

Replies (12)

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By justsotax
12th Mar 2014 16:42

have i misunderstood...

but surely the 11/12 doesn't change (the basis period for that year was year end 31/3/12).  The only change is that 2 months of profit of that period 1/2/12-31/3/12 will be used to provide the 12 mths to 31/1/13 profit in 12/13 (with those 2 months being the overlap being created as a result)?  ...or do you mean amend the 2012/13 to take account of the additional 59 days (if this is the case...any reason why you didn't include the 59 days....or why your software didn't automatically account for it?)

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By User deleted
12th Mar 2014 17:22

If it is not a company ...

... the 12/13 tax will be on profits 01/04/12 - 31/01/13, i.e. 10 months - you have shortened the year end. SA is based on any accounting periods ending in the tax year, the 13/14 will either be taxed on 12 months to 31/01/14 or 14 months to 31/03/14 depending what account you prepare, overlap will not apply as no period taxed twice, unless there is any available from the original start of the trade? 

You don't say but the implication is the trade had been going sometime prior to the anticipated incorporation.

HMRC may well raise an inquiry if the change of year end is not for commercial reasons and may re-align for a 12 month period anyway in 12/13, especially if you revert back to 31/03.

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By thehaggis
12th Mar 2014 17:42

Basis Period

The basis period will be the 12 months to 31/1/13, with a 2 month overlap period,

The earlier return does not need adjusted.

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By User deleted
12th Mar 2014 18:37

OK ...

... long time since I done one, effect is the same though, taxed on 10 months so HMRC likely to ask questions to ensure not using change of date to artificially reduce tax. Commercial argument to justify would be to align with company ready for transfer of trade.

That said, if company incorporated 01/02/13, first ARD is 28/02/14 unless you have shortened it!

I don't think the OP intended amend 11/12, just 12/13, but post a bit clumsy with the wording.

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RLI
By lionofludesch
12th Mar 2014 18:50

Not sure what's happening here ....

Correct me if I'm wrong - but is the effect that there's one continuing self employment throughout?

If so,

2011/12 should be 12  months to 31 March 2012 (unchanged?)

2012/13 should be the ten months to 31 Jan 2013 + 2/12 of year to 31 Mar 2012 (ie. year to 31 Jan 2013)

2013/14 should be 12 months to 31 Jan 2014

 

Overlap relief to carry forward is 2/12 of year to 31 Mar 2012

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RLI
By lionofludesch
12th Mar 2014 18:51

Has an MLR offence been committed ?

If profits have been understated - I'd say yes.

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By cfield
12th Mar 2014 20:52

@justsotax

Yes, you have misunderstood. Of course we're not changing the 2011/12 year. We're just using it to amend the 2012/13 basis period.

We used Andica for the SA800. It accepted the short period because sometimes (as with a cessation which is what this was meant to be) it is correct.

There just wasn't time to work out the 59 days at the time with the deadline just hours away. We were quite busy that week, believe it or not! I don't think it was picked up on at the time anyway.

Nothing clumsy about my post, Mr OGA. Clearly I'm talking about the 2012/13 AP. I suggest you read BIM71060 Example 1 - then you'll see what I mean.

As for MLR, no offence committed at the time as clearly the clients were unaware then that the figures were too low. Since then they have been told but are still in the process of arguing about it. Soon they will realise or will have been given enough information for us to reasonably believe that they do realise. Then it will be reportable if they still refuse to comply with our advice.

My question is - should we tell HMRC separately, just to cover ourselves, if the clients refuse to allow the returns to be amended? 

 

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Replying to offshorejetsetter123:
RLI
By lionofludesch
13th Mar 2014 16:08

Yes

cfield wrote:

There just wasn't time to work out the 59 days at the time with the deadline just hours away. We were quite busy that week, believe it or not! I don't think it was picked up on at the time anyway.

As for MLR, no offence committed at the time as clearly the clients were unaware then that the figures were too low. Since then they have been told but are still in the process of arguing about it. Soon they will realise or will have been given enough information for us to reasonably believe that they do realise. Then it will be reportable if they still refuse to comply with our advice.

My question is - should we tell HMRC separately, just to cover ourselves, if the clients refuse to allow the returns to be amended? 

How long can it take to work out 59/366 of the previous year's profits ?  Seconds ?   Not picked up on - ah .......

You're right - no MLR offence has been committed whilst the clients were unaware.  But they are now.  Once they make that final decision not to report, then there's an offence.

Would I tell HMRC ?   Absolutely.  Your firm has assisted in completing a return showing only ten months' profits for twelve months' trading.

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Galaxian
By Galaxian
12th Mar 2014 21:00

Not a valid change of accounting date
Shortening an AP to meet a deadline is unlikely to be accepted by HMRC; Condition B of s217 ITTIOA 2005 requires a bona fide commercial reason.

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David Winch
By David Winch
12th Mar 2014 21:16

Telling HMRC
I don't think you can provide information to HMRC without the client's authority to do so.

David

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By User deleted
12th Mar 2014 21:21

I understood ...

"However, the basis period had to be 12 months of course (up to 31/1/13) as the business is still trading, so it was necessary to pro-rata their 2011/12 figures by 59 days, amend their tax returns and re-submit the SA800."

... but I would equally understand anyone who though you meant "re-submit the SA800" to refer to 2011/12 if they were just scanning rather than perusing, inserting "2013" between "the" and "SA800"would have removed all chance of mis-understanding/mis-reading!

Won't HMRC pick it up and adjust themselves. My understanding is the SA800 shows only the period ending in the tax year, it is on the individual tax returns the software should have computed the partners profits, IRIS certainly would calculate the 2/12 + 10/10 to get the 12 month profit on the individual SA100's..

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By justsotax
13th Mar 2014 16:52

I did

add the query regarding the tax year simply because it was (to me) unclear...not just because you didn't specifically refer to 2013 but also because I would expect tax software to automatically account for this.  That said being the last week of January is not a sufficient excuse for failing to calculate 2/12ths of a figure you already had (and entering that figure in one place on the Return).  If it was an oversight then fine I can understand that but having committed to doing the Return by the deadline it doesn't excuse errors - especially significant ones.  As for the amendment, my view is that the Return was incomplete/incorrect when you submitted it (with the info you had to hand - knowingly or otherwise),  It was completed in your firms name and should be amended to reflect that - whilst I would normally agree with David I cannot see how you cannot disclose this  

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