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Lost Cash

Trader has lost cash from Customer

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Never comne across this one before.

Trader completed job for £3k approx and was paid in cash by the customer the cash received was recorded in the books.

At the end of each month the trader counts the physical cash and cross checks the figure to the books.

At the end of the month the cash was short by £3k and the trader thinks he has misplaced/lost the cash from this job.

How should this be treated in the books?

Presumably VAT is due on the sale as the money has been received by customer.

Is there any VAT/Tax Relief on this "loss" or should it just be treated as drawings?

Any thoughts would be appreciated.

 

 

Replies (19)

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By BudgetB
06th May 2021 11:36

Yes VAT would be due as the customer paid the bill, to not declare it would be fraud. Probably a learning curve here for your client to stop accepting cash! I don't think you could claim any type of tax relief for misplacing the money as it's not the responsibility of HMRC to make up the shortfall for careless behaviour.

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By SteveHa
06th May 2021 12:30

I agree no tax concessions. Your client may find it down the back of the sofa, under the mattress, in the wrong coat pocket etc.

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Replying to SteveHa:
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By Hugo Fair
06th May 2021 13:18

... or that it somehow transmogrified into a (losing) lottery ticket or betting-slip.

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By [email protected]
06th May 2021 13:20

Record the sale and receipt of payment from the customer

Record the "Missing" cash as drawings

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By Truthsayer
06th May 2021 13:38

The money was received, so it was not a bad debt, and losing it was not a business expense. Whichever way you look at it, it is taxable.

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Red Leader
By Red Leader
06th May 2021 16:33

But if the cash was stolen, it would be a deductible sole trader expense I think.

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Replying to Red Leader:
ALISK
By atleastisoundknowledgable...
06th May 2021 18:43

Maybe the left hand stole it from the right hand.

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Replying to atleastisoundknowledgable...:
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By frankfx
06th May 2021 19:08

atleastisoundknowledgable... wrote:

Maybe the left hand stole it from the right hand.

Sinister!

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Replying to atleastisoundknowledgable...:
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By Hugo Fair
06th May 2021 19:34

Hopefully not from the red right hand, or there'll be tears before bedtime.

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Replying to Red Leader:
Stepurhan
By stepurhan
07th May 2021 08:15

I believe you are correct, but they would have to be able to provide proof it was stolen.

"I put it down and it isn't there anymore, so it must have been stolen" won't cut it.

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By fawltybasil2575
06th May 2021 20:06

@ 2156806 (OP).

(1) VAT is payable on the proceeds.

(2) Income Tax. Whether tax relief is available depends upon the "status" of the cash, when it disappeared. In reality this depends upon what the client was intending to do with it. If he was intending to bank it, or use it to pay business expenses (or a mixture of the two) then it was "business cash", when it disappeared; and hence it is a legitimate business expense and tax relief is accordingly available on it.

If however, he had decided to use it to pay for personal expenses (this would appear to be less likely in these days, when most persons would normally pay for personal items by bank card) intending therefore to record it in his accounting records as Drawings, then (since it has "left the business") it is Drawings and hence not allowable for tax purposes.

Basil.

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paddle steamer
By DJKL
06th May 2021 23:11

Firm I was with once had a client who "lost" one week's banking from his shop, the story he gave was it was in a bag in the back of his car, he forgot about the bag, traded in the car for a new one and the garage had no record of the bag with the cash when he remembered and went back to them- pretty sure we treated it as drawings, it had the smell of "the dog ate my homework."

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Replying to DJKL:
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By Hugo Fair
06th May 2021 23:45

The homework must have 'gone off' badly to result in that stink.

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By Tax Dragon
07th May 2021 06:59

Lots of oversimplification in this thread. (You'd never guess it was an Aweb discussion!) For VAT, maybe that works this time (trader has lost money he was, in effect, holding on trust for the Treasury; it's likely his responsibility to make good that loss).

For income tax, the starting point (as above) is that the profit is taxable. The question is whether the loss is then allowable.*

You know this much already, clearly, from your OP. You may even have read the law (s34(1)(b) ITTOIA) and BIM, starting at 45850, which provides a rather fuller analysis than you have had here. If not, you should.

Negligence of the business owner isn't specifically discussed, but there has to be, if not a certainty, at least a considerable risk that the principles discussed at 45855 (and in the cases mentioned therein) apply, with the result that the loss is not allowable. (I haven't revisited the cases and don't remember them well enough to conclude either way.)

Please read this comment - indeed, please in general read any comment by Tax Dragon - as being a pointer, a thought, not as an answer. I don't tend to leap straight to an answer. Or vote.

*Well, maybe before you get to that... whether the loss is insured. And, as Basil says, if the money was drawn from the business prior to being mislaid, then there's no business tax question to ponder at all. Wife taking the money from his coat pocket would count as drawings.

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By bernard michael
07th May 2021 09:16

Ask his wife if she found it when tidying his trousers

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Replying to bernard michael:
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By Tax Dragon
07th May 2021 10:28

Hopefully before the rinse cycle.

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Replying to Tax Dragon:
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By Hugo Fair
07th May 2021 10:52

Despite your highly pertinent post at 06:59 this morning ... now you've joined in the levity. But why only introduce money laundering at this late stage? :-)

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By fawltybasil2575
07th May 2021 12:01

@ 2156806 (OP).

It would useful if you could add to this thread, with more specific facts (my post yesterday refers).

Whilst it would be not normal for me to say so on AWEB, I would respectfully suggest that your question SHOULD be very simple to answer if you could embellish your question with more facts.

Your initial question was of course, strictly speaking, not whether the lost cash was or was not allowable for tax purposes, but how it should be recorded in the accounting records (albeit impliedly you would wish to know whether it ultimately qualifies for tax relief). The direct answer to your question is therefore a note (in those records):-

“Cash shortfall found on xx/xx/xxxx (upon reconciling cash held in xxxx box with cash balance per accounting records) assumed realistically to relate to cash received on xx/xx/xxxx re invoice no. 123 to XYZ Ltd”.

This narrative would assist in the unlikely event of subsequent challenge by HMRC arising from submission of Tax Return for 20xx/xx.

As Tax Dragon states, the legislation is in S.34(1)(b) ITTOIA 2005, ie:-

"34Expenses not wholly and exclusively for trade and unconnected losses
(1)In calculating the profits of a trade, no deduction is allowed for—
(a)expenses not incurred wholly and exclusively for the purposes of the trade, or
(b)losses not connected with or arising out of the trade."

If therefore you are the acting accountant (engaged to prepare Financial Statements and Tax Return) your obligation is to ensure that those Financial Statements and Tax Return, are (to the best of your knowledge) correct.

In order to fulfil that obligation, you should obtain further detail (from the client) re the loss of cash. If you are then satisfied that the loss which has arisen WAS “connected with or arising out of the trade”, then the Loss should be shown in the Profit and Loss Account and no adjustment for that Loss should be made on the Tax Return.

If however you ascertain, from the client, that the cash was lost AFTER its being withdrawn by him from the business (I would surmise, from the limited information supplied by you thus far, that this is unlikely) then it should be treated as Drawings (I assume that the business is not incorporated).

If, having questioned your client, he STATES that it must have been stolen by an employee, or by another third party, BUT you are NOT satisfied with his explanation, then you should NOT either (i) append your Certificate to the Financial Statements or (ii) prepare a Tax Return which gives tax relief for the cash loss.

Many years ago I had a client (cash trader-hot dog stalls) who carelessly left a bag of cash (around £3,000 from memory) in the front seat of his car, and the cash was stolen. Since he was a reliable client, I had no hesitation in treating that cash loss exactly as I have outlined above.

Frankly, the amount at issue in your client’s case is relatively small, and I would not envisage any problem if you are satisfied with his explanation (whether he was careless in relation to the cash is NOT a factor, as indeed it was not in relation to my former client).

As regards the VAT matter, I say again that, the goods/services having been supplied, VAT is definitely to be accounted for in the normal way.

Basil.

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By I'msorryIhaven'taclue
07th May 2021 12:25

Hasn't your client found his £3k yet? Tell him to look behind the gin bottle!

A friend told me how her builder husband finished a cash job the night before they were going on holiday, hid the £15k in a safe place somewhere round the house, and came back from holiday two weeks later unable to recall where exactly he'd stashed it. They searched high and low, ripped the place apart; he thought they'd been robbed, and acted like a bear with a sore head for many days until Monday morning arrived, whereupon he discovered the entire wadge in his toolbox.

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