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.
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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?
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?
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.
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.
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.
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.
@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.
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.
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.