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Long Term Debtors and Tax

Long Term Debtors and Tax

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We have substantial debtors that will pay over a 5 year period. We recognise the income in say year 2005, but we will only receive payment over the next 5 years.

We will have a profit against the revenue, but no cashflows to pay the tax bill?

All of our contractual obligations are fulfilled in year 2005.

Am i missing something obvious.

Urgent thoughts greatly appreciated.
Richard Jones

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By Richard Willis
27th Apr 2006 09:27

WHOOPS!
Hi Richard

As a commercial, rather than practice, accountant, I fear that this is solely down to poor cash planning. Unless the practice chaps know of a wheeze, I reckon that you shouldn't have entered into such agreements without working out how they were to be financed.

Being devil's advocate; I guess you will find the cash to pay salaries etc., so why should the tax man wait for his money.

If you are SERIOUSLY strapped, to the extent that to pay up will jeapordise the company, then you could throw yourselves at the feet of the compliance team to see if they will allow you to pay over time. I'm not sure, though, whether this constitutes 'making an arrangement with your creditors' which, if it does, could open up a whole can of worms!

You could, also, try to find a finance house that will buy the debts at a discount. This will depend on how well they are secured and/or the status of the debtors, e.g. UK/Overseas, B/Ex, etc.

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By neileg
27th Apr 2006 11:15

I agree with Richard W
Your business model seems strange. If you have done all the work in year 1 you are giving your customers 5 years credit. UITF40 will require you to recognise the income in your accounts in year 1, anyway, so there's not much you can do about it.

If HMRC were to give you 5 years to pay the tax, they're just helping to finance your customers, aren't they?

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By Anonymous
27th Apr 2006 11:25

Clarification
Just to clarify, the rate that we get paid ties into the stream of income that our clients receive.

They are receiving a monthly fee from say 500 clients - we get 10% of that fee.

I am aware that we could securitize, but I am surprised that there is no tax treatment that recognises some debtors are extremely long-term.

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By Anonymous
28th Apr 2006 17:17

Review contractual position
I would re-visit the contract. If you are getting 10% of revenues, then presumably your invoiced value is based on a projection of the income for the next five years. If the income falls short what happens? If you have to credit the shortfall then perhaps you are legally only billing on account at the moment and the contractual right to the income would fall in each year as the definitive amount becomes known. In that case you could spread the income over the contract.

You may need legal advice on when the income becomes contractually yours especially if you want evidence that you sought professional advice to demonstrate to the Revenue that you gave this due consideration.

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By Paul Soper
30th Apr 2006 13:30

Royalty surely?
This certainly sounds like a royalty agreement in which case the income would only arise as, and when, there was a legal entitlement - the fact that it is linked to future receipts would reinforce this and if the clients get nothing you get 10% of nothing which is...

It does not sound like an agreement to pay a definite known sum over a five year period which would force income ecognition earlier. Why then are you recognising the income now if it is unknown?

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By Richiejjj
02nd May 2006 15:19

Contractual obligation is known
Thanks for your thoughts, just to futher clarify.


Neil/Paul: We are not participating in a future revenue stream, that is just the basis of our commission calculation.

The amount is definite.

Andy: We have performed our duties and could literally sit and watch tv with the monies hitting our bank each month, we have no further obligations or duties to perform.

There is a contractual obligation for each individual 'member' to pay our client a fixed amount monthly for five years. The client can only recognise this income each month - however, as we have performed our duties it is only prudent to match the income against the costs of the current period.

I appreciate your further considerations

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By neileg
02nd May 2006 10:14

I agree
If you are participating in a future income stream, you account for this when you become entitled to it, not up front. Depending on a careful examinination of your contracts, it would seem that your accounting policy is the problem, not the tax system.

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