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Processing OLD Ltd Co. expenses from 4 years ago

Should old expenses that should have been claimed years ago be reported differently to "current" exp

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My question relates to the preparation of annual accounts for a small UK limited company.

We have receipts for expenses that should have been claimed years ago and were not. The expenses were paid directly by one of the employees and not submitted on an expense form (i.e not refunded to them) in the year the expense was incurred.  Some of the receipts go back to 2016. The receipts are for a range of items, for example:

  • Travel - air fare,train fare
  • Accomodation - hotels
  • Software (bought wholly for company use)

Should these receipts simply be recorded in the accounts in exactly the same way as they would be if the expense was incurred in the "current year" and refunded to the employee at the time?  Is there some special requirement / different way or recording and reporting these?

Some of the receipts include VAT (which also obviously wasn't reclaimed at the right time).  Could/should this VAT just be capitalised now?

Thanks in advance.

 

 

Replies (49)

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By johngroganjga
12th Apr 2021 14:46

The question of what the employee can claim from the company is a matter between them and the company, and its expenses policy, and not your concern.

If, and only if, the claim is allowed by the company you account for the expenses then in the company’s books, and the VAT on them, in the normal way.

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Replying to johngroganjga:
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By TheresMoreToThisThanArithmetic
12th Apr 2021 15:59

Thanks, John.

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By Tax Dragon
12th Apr 2021 15:02

What John said.

As an aside, I wonder whether the employee has shot him/herself in the foot vis-à-vis tax neutrality of being repaid the expenses. If so (I'm just thinking out loud here, probably talking wallops of cod) then it might affect whether and/or how the reimbursement* of the expenses is reportable to HMRC.

*If any.

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Replying to Tax Dragon:
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By TheresMoreToThisThanArithmetic
12th Apr 2021 16:02

Thanks, TaxDragon.

I assume your aside is referring to how the indivdiual might report them (on their tax return, for instance). Interesting point. Any answers/suggestions on that also welcome but I suspect "more detail" would be necessary for more clarity to be given.

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Replying to TheresMoreToThisThanArithmetic:
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By Tax Dragon
12th Apr 2021 17:21

I was surmising that, as the expense is not current (of course, tax relief may have been claimed in 2016) but the income is, there's likely a tax charge on reimbursement. From the employer's viewpoint, that means that any reporting exclusion based on the employee's expense and reimbursement netting off cannot apply (although maybe it wouldn't have anyway for the expenses you noted... as I said, I was musing, not looking up). Possibly (although I really haven't thought about this!) that means you have to consider whether PAYE applies.

Isn't this sort of thing partly what you have an accountant for? They'll look, not just muse. (Or should, anyway.)

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Replying to Tax Dragon:
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By Tax Dragon
13th Apr 2021 15:21

Given my comments below, about the expense being in-year from the company perspective, I should clarify that, when I said

Tax Dragon wrote:

I was surmising that, as the expense is not current (of course, tax relief may have been claimed in 2016) but the income is,

I meant the expense and income from the point of view of the employee. Irrespective of when the company had a liability, the employee does not have employment income until it is received. (Earlier dates may apply for directors.)

And, whereas in Hazel's scenario it's possible (I think) that there may be no specific reporting requirement vis-à-vis a BIK or similar, in the OP's case I should imagine (although I am still not reviewing this) that the payment would very much need to be reported to HMRC. By the company.

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By paul.benny
12th Apr 2021 17:37

Failure to claim expenses for a long period is a bit of a red flag, especially as it sounds like there are some fairly large sums involved. With a large volume of claims, it's all too easy to not to review properly - but I'd give a bit more careful scrutiny to ensure they are genuine business expenses that were properly incurred..

It's potentially quite a lot of of money to be out of pocket for a long time. Has the employee taken a similarly casual attitude towards stuff belonging to the employer?

I'd also be reminding all employees that expense claims should be submitted promptly and maybe introducing a cut-off time of, say 3 months.

It might also be worth investing in a proper expense system.

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Replying to paul.benny:
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By TheresMoreToThisThanArithmetic
12th Apr 2021 17:42

Thanks,Paul. Some good points.

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By tom123
12th Apr 2021 18:38

Is the employee 'connected' with the employer in some way?

Fairly sure all the staff I have ever had to run payroll / expenses for are normally on the button with regard to getting their money back :)

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Replying to tom123:
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By Paul Crowley
12th Apr 2021 18:44

I would assume connected party
No external employee would wait that long unless having previously been denied the claim by prior manager is now trying to claim from new.

As above a bit of a red flag.
Employer should proceed with extreme caution

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Replying to Paul Crowley:
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By Tax Dragon
12th Apr 2021 19:58

I'd assumed a connection too. Didn't see how it affected (any of) the answers (given).

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By Paul Crowley
12th Apr 2021 20:29

'I'd also be reminding all employees that expense claims should be submitted promptly and maybe introducing a cut-off time of, say 3 months.

It might also be worth investing in a proper expense system.'
Waste of breath if a director or his associated person

Considered VAT?

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Kitten
By Hazel Accounts
13th Apr 2021 10:51

I am also interested in the answer to the accounts side of this question - I believe the answer would depend on whether the amount is material in the context of the accounts. I have this issue myself (for a client) where the supplier (minicab account used by Director) recently contacted them about old unpaid invoices from about 3 years ago. After much checking it has been ascertained the invoices are genuinely due and have now been paid, but whether to show them as an expense in year paid or as a prior year adjustment is the question. The amount has possibly become "material" now as turnover has dropped as the business winds down (helped along by Brexit and Covid) although it wasn't 3 years ago when incurred.

With regard to VAT I believe there is a 4 year time limit to claim input VAT. If it is not reclaimable then the cost in the accounts is simply the gross amount and treated as expense or capital along with the item it belongs to.

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Replying to Hazel Accounts:
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By TheresMoreToThisThanArithmetic
13th Apr 2021 11:57

Hazel Accounts wrote:

...... I believe the answer would depend on whether the amount is material in the context of the accounts ..... but whether to show them as an expense in year paid or as a prior year adjustment is the question

.

Yes, I think you've refined my question.

Are you concluding the following?
-- Show them as an expense in the year paid if the amount is NOT material
-- Show them as a prior year adjustment if the amount IS material

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Replying to TheresMoreToThisThanArithmetic:
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By Tax Dragon
13th Apr 2021 12:01

Your scenario is different. PYA cannot conceivably be in point in your scenario.

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By TheresMoreToThisThanArithmetic
13th Apr 2021 13:46

Different in which respects?

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By Hazel Accounts
13th Apr 2021 12:47

Yes, that's what I mean.

I'm not sure why Tax Dragon thinks PYA wouldn't apply? Surely if you had known about those expenses they would have been an accrual if unpaid at the accounts date.

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Replying to Hazel Accounts:
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By paulwakefield1
13th Apr 2021 13:03

I agree. A PYA could be at issue here. Since our fiery friend loves a citation, try FRS102 10.19 & 10.20. Ah for the good old days of the FRSSE and SSAPs.

Bit worrying that such a claim could be material though!

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Replying to paulwakefield1:
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By TheresMoreToThisThanArithmetic
13th Apr 2021 13:53

paulwakefield1 wrote:

Bit worrying that such a claim could be material though!

I didnt mean to make you worry :)

Can you explain why this would be a concern?

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Replying to TheresMoreToThisThanArithmetic:
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By paulwakefield1
13th Apr 2021 14:10

TheresMoreToThisThanArithmetic wrote:

paulwakefield1 wrote:

Bit worrying that such a claim could be material though!

I didnt mean to make you worry :)

I can cope :-)

Quote:

Can you explain why this would be a concern?

Only that it is surprising that an individual can clock up a level of unclaimed expenses that are material to the accounts with nobody noticing that they hadn't been claimed.

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By TheresMoreToThisThanArithmetic
13th Apr 2021 14:41

paulwakefield1 wrote:

TheresMoreToThisThanArithmetic wrote:

I can cope :-)

I never doubted it, really. But I'm pleased to hear it confirmed.

Yes, I see that would be worrying. It's not material in the case in hand but I wanted to clarify the point made by Hazel Accounts.

Not material ==> No PYA, show as expense in the year paid. == Not worrying :)

And there I'll rest unless someone throws up a new case.

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By Tax Dragon
13th Apr 2021 14:51

TheresMoreToThisThanArithmetic wrote:

Not material ==> No PYA, show as expense in the year paid.

No PYA in your case either way as what you have is an in-year employment expense. (With the possible exception of the software - your description there is unclear.)

The expense in Hazel's case is an earlier-year supplier expense.

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Replying to Hazel Accounts:
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By TheresMoreToThisThanArithmetic
13th Apr 2021 13:50

Hazel Accounts wrote:

Yes, that's what I mean.

I'm not sure why Tax Dragon thinks PYA wouldn't apply? Surely if you had known about those expenses they would have been an accrual if unpaid at the accounts date.

They weren't known about and therefore not an accrual.

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By Tax Dragon
13th Apr 2021 14:01

The difference between the two scenarios, as I perceive it, is:

in Hazel's, there was a contract between the company and the service provider (the minicab firm) in the year to which the expenses relate;
in the OP's, there was no such contract.

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Replying to Tax Dragon:
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By paulwakefield1
13th Apr 2021 14:23

If the business has a liability to reimburse the claimant now then they must have had a liability at the time the cost was incurred.

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By Tax Dragon
13th Apr 2021 14:38

Why so? There's no liability if there's no claim (at least, I've never known any employer reimburse unclaimed expenses), which, logically*, means there's no liability until there's a claim.

*I know I know, apply law not logic. Care to feed another citation to the fire?

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By paulwakefield1
13th Apr 2021 14:46

There is a liability even if it is not yet payable.

I would refer specifically to FRS102 2.15 (b), 2.20 and 2.21.

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Replying to paulwakefield1:
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By Tax Dragon
13th Apr 2021 15:02

Thank you. While I see those citations as supporting my view (i.e. the present obligation does not arise until the employee claims the expense), I am used to reading tax law, not accounting standards, so if y'all say I am misunderstanding it, I will accept that.

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By paulwakefield1
13th Apr 2021 16:42

The present obligation to reimburse the employee (assuming it is a legitimate business expense) will arise either legally or constructively when the expense is incurred.

I would further refer you to FRS102 2.27 a) and the word in bold in particular. :-)

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By Tax Dragon
13th Apr 2021 17:13

Liability. A present obligation of the entity arising from past events...

I still don't see a present obligation to pay anything until the submission of a claim by the employee is in the set of past events. No present obligation, no liability.

(In tax language - I'm a bit more familiar with that - I might say that the liability is conditional on the employee claiming the expense. A conditional liability is not a liability unless and until the condition is fulfilled.)

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By paulwakefield1
13th Apr 2021 17:23

On that basis many accruals in accounts would disappear. Would you only recognise a liability for, say, electricity when it was billed?

I note your opening line but it needs to be read in conjunction with 2.20. The present obligation is upon the business to pay the employee for expenses that the employee has incurred on behalf of the business. The fact that the employee is bone idle/dumb/incompetent or insane does not remove or delay the recognition of the obligation in the absence of specific claim time limits.

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By Bobbo
13th Apr 2021 17:52

Electricity is accrued for because the electricity has been used and there is an underlying contract between the user and the electricity supplier.

The past event is the usage of the electricity and the present obligation is that they have to pay for that in accordance with the contract.

Looking to OP's suggestion of an employee's late claim for expenses, i'm not sure I can agree with the following:

paulwakefield1 wrote:

The present obligation to reimburse the employee (assuming it is a legitimate business expense) will arise either legally or constructively when the expense is incurred.

Whilst my employer will reimburse expenses I claim they will not do so unless an appropriate person has authorised the claim. Unless I have asked for 'permission' for a certain planned expense to be reimbursed (e.g. equipment for wfh for the last year), my employer has no idea how much my expense claim will be until I submit it.

I'm sure expenses policies are drafted to ensure that the employer does not incur a legal liability to reimburse an expense until a valid claim has been submitted and they have authorised it.

As for a constructive liability, I can see the logic there. Generally an employer would be aware their staff were travelling to client ABC Ltd and would expect to receive a claim for their travel costs.

But then you hit FRS 102 2.27 (b) "the item has a cost or value that can be measured reliably." If the employer does not know how much the cost will be then they cannot measure such amount reliably.

Do we get into fun discussions about whether this employee incurred these expenses as an agent of his employing company??

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Replying to Bobbo:
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By paulwakefield1
14th Apr 2021 09:04

Sorry - got distracted by other matters yesterday but, returning to the fray...

Clearly the employer should only accrue for legitimately incurred business expenditure. However that accrual should be made if the expenditure has been incurred even if the time to pay has not yet crystallised.

"Reliably" is not the same as exactly. Accounts contain many estimates which can be measured reliably but not exactly. And, in most cases, one would know anyway from post year end claims (not in the OP's case of course). Indeed it would be rare that an accrual for expenses would be needed as most employees are pretty quick to get claims in and late ones are usually immaterial anyway.

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By Tax Dragon
14th Apr 2021 09:24

I'm heading back to tax questions (and tax work) today, so you'll see less of me in here - although I have to say that this accounting debate is more interesting! - and this will be my last post on this thread.

paulwakefield1 wrote:

...accrual should be made if the expenditure has been incurred...

Incurred by whom? By the employer, presumably. Does the employer incur an expense as the employee incurs it? Yes, if the employee is acting as agent for the employer (Bobbo's point). But, generally, that will not be the case. In the general case, in my view (and Bobbo's other point), the employer does not incur a cost unless and until an employee makes a valid claim for reimbursement. (There are two expenses, and two moments of incurring an expense: an employee one and an employer one.)

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By paulwakefield1
14th Apr 2021 09:52

The distinction is that the moment the expenditure by the employee is incurred (on the basis that it is a proper business cost), there is a constructive obligation on the business to pay. It doesn't matter whether the employee is technically acting as agent or not so long as the business practice is to reimburse such expenditure which one would imagine would be the case! The production of a properly completed and authorised expense claim may be a requirement to crystallise the payment (the phrase "not to be unreasonably witheld" springs to mind) but the liability already exists.

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By TheresMoreToThisThanArithmetic
14th Apr 2021 09:53

Tax Dragon wrote:

I'm heading back to tax questions (and tax work) today, so you'll see less of me in here - although I have to say that this accounting debate is more interesting! - and this will be my last post on this thread.

Well, that's a shame. It's been a pleasure eaves dropping on your debate with Paul. Always a pleasure to observe fine minds unravelling complex matters. I'll have to check out some of your other threads, maybe even a tax one.

Thanks.

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By paulwakefield1
14th Apr 2021 10:37

Yes - it has been fun. Not sure my mind qualifies as "fine" though; Tax Dragon's very definitely does.

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By Tax Dragon
13th Apr 2021 17:52

paulwakefield1 wrote:

I note your opening line but it needs to be read in conjunction with 2.20.

Thank you. (This sort of thing... deeper background accounting knowledge... my lack thereof... is why I shouldn't comment on accounting matters... and conversely I guess why I find myself shaking my head in disbelief at some of the tax comments in here :¬p)

I take your point on supplier costs. If that is comparable, I'll concede the argument. In fact, even if I could distinguish on the basis of point of contract (which I was about to try to do), I think you have another analogy that pulls any such contract argument from under my feet - wear and tear/non-contractual repair. Wasn't there a case of (I think) a commercial airline that used to have very lumpy repair expenditure (planes are beggars to maintain) but smoothed this out, so to speak, with accruals? I recall it from a tax viewpoint, as HMRC was not happy, but the accounts evidence was that it complied with (obviously pre FRS102) UK GAAP. So... I resign (with all suitable retractions to previous comments, vis-à-vis PYAs).

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By Tax Dragon
13th Apr 2021 17:54

Tax Dragon wrote:

So... I resign (with all suitable retractions to previous comments, vis-à-vis PYAs).

Based on Bobbo's comment, maybe I resigned a winning argument!

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By paulwakefield1
14th Apr 2021 09:23

Not in my view :-)

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By paulwakefield1
14th Apr 2021 09:22

The aircraft point is interesting. Really from FRS12 (I think - memory may be defective) onwards, it was made clear that you cannot provide for a future cost if there is no present obligation i.e. the cost was potentially avoidable. This also developed into capitalising separate components with different lives to the main asset (e.g. engines, major inspections and overhauls) and depreciating them over that life when replaced.

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By Tax Dragon
14th Apr 2021 13:13

Sorry... tax work right now really is dull... a morning's worth too much!... so I'm breaking my word and coming back here for lunch.

Sadly, doing so makes me realise that we agree on FRS102. That takes all the fun away :-(

The (first) question (before one gets to Bobbo's third point, which really is out of bounds for me) is simply whether...

paulwakefield1 wrote:

the moment the expenditure by the employee is incurred (on the basis that it is a proper business cost), there is a constructive obligation on the business to pay.

Paul is certain that there is; I incline (without certainty) to a different view. But it seems to me that our respective leanings might be in part a result of our upbringings... our paradigms (hey, that's my hattrick!) Paul the accountant sees a chance to accrue. Dragon the taxperson sees the claim, the whole claim, and nothing but the claim (oh, and/or maybe a condition in want of a fulfilment).

I also note the parenthesised "on the basis that it is a proper business cost". Are we on opposite sides of the same circular argument? At least, Paul's logic seem to go round in a circle: what's a proper business cost if not (a constructive obligation to pay) a liability? (My inclination is to think it's not a business cost, proper or otherwise, until the employee makes a claim. It's the claim that creates the obligation. As I acknowledge, that inclination could be because it's simple, and we tax types like to keep things simple. Doesn't mean it's right.)

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By paulwakefield1
14th Apr 2021 13:54

Aha. So, donning my St George costume (rapidly acquired from the local fancy dress store), battle recommences.

"Proper business cost" was just to preclude anything that has nothing to do with the business such as said St George costume or employee's brand new washing machine.

Let's try another approach: in another era, employee flies to New York twice on genuine business trips pre year end. In the first case, he begrudgingly pays for it personally and, having winged about it, he then pays for the second trip on his sparkly new company credit card. By a strange coincidence, expense claim for first flight and the credit card statement containing the second flight, land on the overworked FDs desk on the same day after the year end. Do you accrue none, one or both flights at the year end?

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By Tax Dragon
14th Apr 2021 14:46

Did the employee tell the airline s/he was paying using a sparkly company credit card? I recall a thread in here no long ago in which Lion said he used to enjoy doing that "just to see the looks on the petrol station attendants' faces" (maybe more a paraphrase, that, than an actual quote).

(Edit: for the avoidance of doubt, I don't really think that's relevant - except in the weird world of the inhabitants of NIC ivory towers. What may be relevant is that there's an obligation on the employer to pay the credit card company, not the employee. I get, Paul, that you are equating the receipt of a statement from the CC Co with the receipt of a claim from the employee. The question - and we really are going round in circles - is what is the event that triggers the obligation to pay. We've already agreed that's the question, I think. We just don't see eye-to-eye on the answer.)

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By paulwakefield1
14th Apr 2021 14:58

I agree - we are going around in circles. I see your view but disagree with it!

My final shot is that, irrespective of all other arguments, substance over form rules (not to mention poor old Prudence). And the substance is that the business is going to have to pay up and so should recognise this and it is prudent so to do.

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By Tax Dragon
14th Apr 2021 15:16

Ah well, other accounting rules may render our whole debate moot. You'd know much more than I about that. (Actually, I take it as a great compliment that I haven't had a barrage of "get an accountant, thicko!" type abuse from the gallery here. Had this been my first appearance in this forum, I wonder whether that would have been different.)

So before you go... a question, if I may. If a particular employee has a habit (as in the OP) of not submitting expense claims, does that influence any of substance, form or prudence? (Or, indeed, liability.) Maybe s/he claims only half of what s/he could. Maybe less. (Why? 100 possible reasons. Maybe just can't be faffed with small amounts. Or maybe she's the daughter of the business owner....)

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By paulwakefield1
14th Apr 2021 16:45

Good question. Maybe (but usually not). The moment where accountancy becomes an art rather than a science.

If they are small amounts, they are going to be immaterial to the business and one wouldn't bother accruing (FRS do not apply to immaterial items - well that is a simplification but will do for now).

Strangely the thing that keeps popping into my head with your question is the other thread about suppressing expenses to get a bigger mortgage.

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By Tax Dragon
14th Apr 2021 17:08

paulwakefield1 wrote:

Good question.

Yay! At last! :-)

Fraud wasn't one of my 100. If ever I didn't claim an expense (and there were times when I couldn't be bothered with say putting that 2 mile detour on the way home on the timesheet and the (surely deliberately annoying, maybe for this very reason!) expense claim process), it was partly that laziness (but coupled with a feeling of goodwill to the boss).

Though as paul.benny mentioned a red flag earlier, and the amounts here sound more than 90p... maybe it should be 101.

Thanks for getting back to me anyway. I probably should sign off here. And be happy leaving accounting questions to accountants in future. And even happier with

paulwakefield1 wrote:

Good question.

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By paulwakefield1
14th Apr 2021 18:02

I doff my hat, wish you good day and also sign off. :-)

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