Is prior year adjustment required as well as amendment of tax returns

Is prior year adjustment required as well as...

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I have just taken on a client (ltd company) to produce the 2012 accounts and CT return

The old accountant had recommended that Sales and purchases related to 2010 be written off in 2012 . Credit Notes have been raised.

The amounts are material and presumably I would have to carry out a prior year adjustment. Though the Sales and Purchase should net off leaving a £100K difference which if it has been inserted in 2011 would have wiped out last year 100K profit.

How would the accounts be reinstated and what would be the double entry

Would the CT 600 have to be amended though 2012 they are expected to make a significant loss and will be carried back which will mean all of last year tax being refunded to them.

Replies (16)

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By johngroganjga
10th Jul 2013 18:39

What do you mean by writing off sales and purchases? Do you mean writing off old unpaid trade debtors and writing back old unpaid trade creditors?

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Replying to lionofludesch:
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By sash100
10th Jul 2013 18:58

Correct

johngroganjga wrote:
What do you mean by writing off sales and purchases? Do you mean writing off old unpaid trade debtors and writing back old unpaid trade creditors?

Yes correct

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By johngroganjga
10th Jul 2013 19:05

Thanks. Are the debts being written off because they are irrecoverable or because they were never debts in the first place but introduced as an accounting error. And are the creditors being written back because the suppliers have issued credit notes, or because they were never liabilities in the first place?

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By sash100
10th Jul 2013 19:56

Never debts

Yes most were never debts in the first place neither debtors or creditors. 

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By johngroganjga
10th Jul 2013 20:18

OK. Then there was a fundamental error in the previous accounts so you have a PYA in the 2012 accounts. For tax purposes that will be a loss in the year in which is is recognised, namely 2012. You don't need to change the 2011 accounts or the 2011 tax return.

Presumably you know that with a PYA you amend the comparative figures as well, and put 'As re-stated' at the top of every column of figures in the comparatives which contains amended figures. The PYA should be net of tax.

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By sash100
11th Jul 2013 11:28

thanks

Thanks for the reply

Yes, I am aware of the change of the amended comparative figures but confused what the entries should be.  Is it just changing the Sales, purchases, AP and AR and retained earnings

Should I put a note in the accounts too explaining the reason and amounts for the adjustment ?

How does the PYA affect the Tax Return for 2012 ?

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By johngroganjga
11th Jul 2013 11:46

Yes you'll need a note to explain the reason for the adjustment.

As you say that the errors were in 2010, the 2011 P&L account will not change, but the balance sheet will.  You just need to rework the 2010 and 2011 figures as if the error had never been made, and that will tell you how to change the 2011 comparatives in the 2012 accounts.

You'll obviously have to put the PYA on the 2012 tax return to get relief for it.  You'll have to bring it in as an adjustment in the computations as it will not of course be included in the result for the year that you start your computation with.

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By sash100
11th Jul 2013 15:22

Tax Return

Fine understood for the PYA.  

I have been told I have to amend the 2010 tax return as the accounts filed was incorrect. I just don't think my client would agree to both the PYA and amendment of tax return.  Though it does need to be done.

Many Thanks for your help and advice - much appreciated.

 

 

 

 

 

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By johngroganjga
11th Jul 2013 15:29

No you don't have to amend the 2010 tax return.  The correct way to deal with a material error on previous years' accounts is a PYA in the accounts for the year when the error is discovered.  Tax relief on the adjustment is claimed on the 2012 return.

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By brumsub
16th Jul 2013 07:58

Amend fundamental errors

If the PYA is as a result of a change in accounting policy the corporation tax adjustment should be treated as occurring on the first day of the accounting period when the change in accounting policy occurs.                                                                                                                                Where you have fundamental accounting errors they should be taxed in the year in which the error occurred. This would involve amending previous year's corporation tax returns.

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By johngroganjga
16th Jul 2013 08:37

@brumsub
What is the authority for your view. I have dealt with a number of cases where PYAs have appeared in clients' accounts to correct fundamental accounting areas and these have always been taxed, or allowed for tax purposes, in the year in which they are recognised in the accounts. HMRC have never challenged or questioned this treatment, or even suggested that there was an alternative. That included one case where the accounts including the PYA were subject to a full enquiry.

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By brumsub
18th Jul 2013 08:33

HMRC guidelines

The provisions are stated in HMRC manuals BIM 34000 et al, specifically BIM 34070 and BIM 34135. It will also depend on what items you are amending.

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By sash100
18th Jul 2013 17:26

What is correct ?

Do I need to amend the 2010 tax return ?

If I make the adustments in 2012 - it shouldn't matter to HMRC since there is no loss of tax to them though having found a number of errors the client might make a small profit after all

Maybe HMRC may argue loss of interest and perhaps penalties should apply due to incorrect tax return.

 

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By johngroganjga
18th Jul 2013 19:13

In spite of what the HMRc guidelines say I would deal with the PYA on the 2012 tax return to avoid the cost and inconvenience of amending 2010, unless HMRC raise the point, which in my opinion is probably unlikely.

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By sash100
19th Aug 2013 16:09

where does the prior year adjustment go on the 2012 tax return

Sorry for this very late reply.

I really do not want to go back to the 2011 tax return since neither have I quoted for the cost and neither will the client pay.

While brumsub maybe technically correct. There isnt any loss to HMRC apart from maybe interest on the additional tax to pay.

Which boxes need to be amended ?

 

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By johngroganjga
19th Aug 2013 16:27

As an adjustment in the computations.

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