How to deal with a prior year CT adjustment

How to deal with a prior year CT adjustment

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Dear AW

For one of my new clients the directors decided to change the accounting policy for income recognition in 2013.  It was too generous before and not industry standard (although not exactly wrong).  I have put together the 2013 accounts, and have amended the prior year accounts to reflect the situation as if the policy had been applied in the prior year as well.

Obviously the tax return for 2012 was prepared on the basis of the preceding year's policy.  

As I'm relatively new to this there are still a couple of areas where I'm green in knowing what the easiest/best way to approach a given situation is.

The situation here is that I'm not sure how to adjust the prior year.   The change takes the company from a taxable gain (£10k-ish) on which they paid CT to a tax loss (£20k-ish) in 2012. The company has posted a further tax loss in 2013.  The client clearly wants their money back from 2012.

I've already searched on AW for prior posts, and the feedback seems to have been - make an adjustment in the current year calculations so that it is picked up by HMRC and applied to the prior year.   I'm using BTC CT Advanced (don't ask me why Advanced - I was silly), and I couldn't find where to do that.

I called BTC support and they said the only way to do it was re-submit the 2012 tax return with the corrections in place.   As I didn't prepare the prior year I'm reluctant to re-prepare a whole year just to fix a couple of fields - or does anyone else use BTC CT and know how to do it without doing this?  Also, the prior year accounts weren't corrected, only the comparatives in the 2013 year.

Failing that, is writing to HMRC to correct the 2012 the best option - and if this is, what are the pitfalls of a letter vs resubmitting online?

Many thanks in advance!

Michael

Replies (12)

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By johngroganjga
27th Aug 2014 14:47

So are you treating it as a PYA in the current year's accounts?

If so the line of least resistance is just to claim it as a deduction in the current year's CT computation.  That's easy.

Then of course you claim to carry back the current year loss (as increased by the PYA) to the previous year. That's just a normal loss carry back claim.  Nothing unusual.

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By Michael Beaver
27th Aug 2014 15:35

Thanks John.

Any chance you use BTC?

I'm trying to figure out where you do that in the multitude of spreadsheets it spits out!

 

 

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By johngroganjga
27th Aug 2014 15:41

No I use TaxCalc.

But it's just a new line in the profit adjustment computation - where you start with the profit before tax in the accounts, then add back the depreciation and entertaining, then deduct interest, dividends and rent received.  It's just another figure to deduct.

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By Michael Beaver
27th Aug 2014 15:52

OK

Many thanks again JGA.   I'll give it a go!

 

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By User deleted
27th Aug 2014 16:30

You must have ...

... put in the comparartives for 2012 to prepare 2013.

Don't know how BTC works but in IRIS it takes seconds to run an amended CT600, and if you insert the tax already paid it will spit out the refund due. I always do this as a matter of course anyway to double check either a) last years tax comp was correct, or b) I have put the comparatives in correctly!

Whether you do as a PYA in the current year or not, as you have losses in 2013 you need to carry back, the easiest to get the refund is to submit a revised 2012 CT600 showing either the larger loss carried back or the smaller loss carried back and revised profit for 2012

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By johngroganjga
28th Aug 2014 09:31

I don't think it is necessary to submit a revised 2012 CT return.  You just need to show the loss carry back claim on the 2013 return and remember to tick the box saying "A repayment is due for an earlier period".

HMRC will do the rest.

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By adam.arca
28th Aug 2014 10:12

It might matter in this case though

2012 was originally +10k and has become (20k) and this is augmented by 2013 losses.

If the PYA is entered in the 2013 comp, 10k of loss can be relieved against the prior year and the balance c/fwd.

If an amended 2012 return is prepared, upto 20k of loss can be c/back depending on the profits in 2011.

I'm with OGA in (nearly) always doing this via an amended return although I don't have Iris and it isn't the work of a minute unfortunately.

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By johngroganjga
28th Aug 2014 10:40

Yes I agree that if there is merit in carrying a 2012 loss back to 2011 the route of submitting an amended 2012 return will have to be followed.  But otherwise there will no point.

Remember that the work involved in amending the 2012 return is more than usual here as the OP did not complete the original return.

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By Michael Beaver
28th Aug 2014 12:36

Many thanks, all!

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By User deleted
28th Aug 2014 12:58

@ John ...

... depends on your software, with good software it should not take more than 10 minutes to post up the 2012 accounts and submit a revised CT600 and tax comp, and you will need to post up 2012 for the comparatives anyway, and assuming you have last years comp from old accountants replicating that should be easy.

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By johngroganjga
28th Aug 2014 13:13

Not sure what you mean by "post up the 2012 accounts".  No-one is saying the 2012 accounts have to change or be re-submitted.  Just the tax return.  Yes of course with good software it doesn't take very long to replicate an existing return done by someone else.  I didn't say it did.  I just said it took longer than merely going in to change one figure in an existing return. 

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By User deleted
28th Aug 2014 17:22

What I mean is ...

... in IRIS I would post the 2012 TB to Accounts Production, else I do not have comparative figures, from there all I need do is put in the CA's, which takes seconds as I can just put in totals, then I can run a computation to see if agrees to what old accountant did, this takes abour two minutes and I do it anyway just to make sure i have got everything in correctly.

Then all I need do is add a line on the computation along the lines "reduction in income due to incorrect accounting policy being used", insert the amount of tax already paid (IRIS will carry back 2013 automatically to 2012). I can then run an amended return and file.

As I say, apart from running the amended return for prudence I always recreate last years computation anyway to ensure last year was correct (or that I have entered things properly) - I find quite a number of returns by previous accountants have been incorrect, or at least not the most beneficial, AIA has been omitted etc. etc.

I wouldn't amend the prior year accounts per se, amend in the current year with a note explaining the effect on the comparatives.

The additional work is 5 minutes, 10 tops, over what i would do anyway, but then that is the beauty of a fully integrated software suite, makes it well worth the price.

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