Should you include tax liability in creditors?

Accruing tax in sole traders accounts

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I took over a client from a chartered accountant. He had included £18000 in creditors and drawings for tax presumably to make the drawings look better.

I used to have a boss who used to accrue tax in accounts of sole traders. I dont bother but just wonder if other accountants do it.

They must complete accounts then put them onto a tax program work out the tax then accrue it in the accounts even if its not a 5th April year end.

Any views on this?

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By Peter Kilvington
04th Jan 2019 15:13

As far as I am concerned creditors relate to amounts owed by the business in connection with the trade while the capital represents the amount the business owes or is owed to by its owners. The tax owed in an unincorporated is a personal liability and so I would put the amount in the capital account. I might have a separate line showing tax instead of putting the amount into drawings.

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Teignmouth
By Paul Scholes
04th Jan 2019 16:11

I used to do the accounts for both a partnership and sole trader where the proprietors wanted to make sure that they could see the tax accruing in the books and put money by to pay it. The partnership showed it as a tax reserve, ie as a second capital account, with the debits to drawings, and the sole trader as a creditor, again debit drawings.

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ALISK
By atleastisoundknowledgable...
04th Jan 2019 16:34

Never have, never will.

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By JDBENJAMIN
04th Jan 2019 16:52

If it's not a business tax, leave it off. I would never put personal tax in sole trader accounts. The amount payable is affected by lots of things irrelevant to the business, so it is misleading to include it.

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paddle steamer
By DJKL
04th Jan 2019 17:21

Used to do it for partnerships, but that was back in the day when the partnership received the tax assessments covering all partners rather than the partner individually receiving and it was pretty habitual that the partnership would actually remit the tax due re each partner. (A right pain sorting re the prior year provision if the file notes were not very good, as sometimes was the case)

I see no harm in so doing, the flexibility of sole trader and partnership accounts is that whilst the amount assessable to tax requires to be per GAAP the rest of the accounts are pretty much open season e,g. our property partnership accounts, as an example, show a sort of Gross Profit being Rentals Received first less Non Recoverable Property Upkeep Costs, less Leasing Costs less Property Factor Costs (That is a Scottish factor not selling the debts) with what would have in effect been Gross Profit then described as Net Rents Receivable.

Certainly when we were selling the residential properties (2011-2015),with pretty chunky CGT liabilities re same, I would provide for tax to let the bank know the sort of number that would need paid over, but we were also providing the bank with the accounts for the main Limited company and it would have been pretty illogical to send them one set year ending say 31.12.12 with tax provided and one set with no tax provided.

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By Tim Vane
04th Jan 2019 18:18

Seems to me that including personal tax on sole trader accounts means they are not UK GAAP compliant as they don’t give a true and fair view of the business entity shown in the accounts. Not that it matters much but I just wouldn’t do it as it smells wrong.

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Replying to Tim Vane:
paddle steamer
By DJKL
04th Jan 2019 20:54

I am not convinced the balance sheet needs to be GAAP compliant, merely the tax adjusted figures from the P & L, provided these are adjusted I really do not see the problem.

I could make an argument that not showing the tax liability arising from the economic activity of the business would itself not be displaying a true and fair view of the business.

I appreciate the liability is the individual's but there are bits of company accounts that do not really display legal form already i.e, preference dividends as interest and preference shares as liabilities.

In addition if say the partnership agreement stated that partners might, in any year, draw sums which paid their tax arising from the partnership activities, one then gets into the question of contingent liability and its recognition.

It is maybe an age thing, it was quite common to have tax accounts within partnerships back in the 1970s and 1980s, maybe why I do not find the idea that strange.

A lot of my accountancy textbooks from that time went out but I might somewhere have an old Carters . I certainly think I have some 1970s partnership accounts prepared by Peat Marwick re my father's firm that I think had a tax provision, recognition of partner tax liabilities in professional partnerships was pretty common and helped prevent partners becoming overdrawn on current account.

The example I gave more recently re our partnership disposing of investment properties is salutary, we sold these over five years triggering large gains, to not provide for that tax would have been totally misleading re presenting the cash requirements of the business.

We recognised our last gains in the accounts year to December 2015, the cash was in the partnership bank in that year but the CGT re that accounts year was payable in large part in January 2017. Given the tax due was greater than our normal rental profits (we sold circa £9m of properties over the five years ) to not recognise the liabilities this action had triggered would imho have been even more misleading and less true and fair than recognising.

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