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WIP for builder

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Client is a general builder (sole trader), currently constructing a house to be sold on in Partnership with someone on a project.

Client was a subby usually under CIS. This time they've joined for this project only.

At Year End 31.03.21, £80k spent on materials, £20k in subbies and £10k in other fees. Not near completion, no one lined up to purchase, sale estimated Jan 2022.

I think WIP should be used. Client's partners accountant says £110k loss first year, all profits on sale in YE 2022. Split loss 50/50, offset against other Sole Trader income. Also thinks WIP has just the same impact.

Can anyone help me with the correct legislation please, I'm working in a small practice where the boss seems reluctant to help my knowledge and im studying currently. FRS 102 section 23 didnt really help me unless I am blind.

TIA

 

Replies (29)

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By Tax Dragon
12th Nov 2021 15:18

Stock?

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Replying to Tax Dragon:
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By jwill76
12th Nov 2021 15:50

Tax Dragon wrote:

Stock?


To the balance sheet? Or Opening and closing on P&L?
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By Bobbo
12th Nov 2021 15:29

What about the cost of the land on which this house is being built? Where is the cost of that?

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By jwill76
12th Nov 2021 15:42

Cost of land and any CGT is being dealt with by the other accountant. Owned and purchased by the other partner from information provided so far

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By David Ex
12th Nov 2021 15:57

jwill76 wrote:

Cost of land and any CGT is being dealt with by the other accountant.

I’m seriously struggling to see any CGT here!!

Who thinks CGT is in point??

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Replying to David Ex:
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By jwill76
12th Nov 2021 16:05

David Ex wrote:

jwill76 wrote:

Cost of land and any CGT is being dealt with by the other accountant.

I’m seriously struggling to see any CGT here!!

Who thinks CGT is in point??


Just the notes I was provided, the Land isn't the point in question here for the Partnership anyway
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Replying to jwill76:
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By David Ex
12th Nov 2021 16:14

jwill76 wrote:

Just the notes I was provided, the Land isn't the point in question here for the Partnership anyway

I’d read it as the partnership was undertaking the development on its own behalf in which case the profit would be a trading profit chargeable to income tax. The landowner may or may not be subject to CGT rather than IT depending on the specifics.

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By CJaneH
12th Nov 2021 15:34

No loss has been made, as yet! WIP = costs incurred at least.
WIP could include the sole traders time and create profit for year.

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By Paul Crowley
12th Nov 2021 15:53

+1
Assuming not on a cash basis

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By CJaneH
12th Nov 2021 18:13

I said could not would for that reason

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By Paul Crowley
12th Nov 2021 18:58

I agree
But stock is not recognised on a cash basis tax return, payments are.
Hence the loss described in OP is a genuine cash basis loss

BUT no sideways relief so not that good an idea.
@OP
Look up the cash basis rules as a learning excercise
Demonstrate that client's partner's accountant needs to rethink this stuff

I have never yet used cash basis accounts and never intend to
But do use that basis for landlords rent income

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By David Ex
12th Nov 2021 16:03

jwill76 wrote:

Can anyone help me with the correct legislation please,

 

The starting point for taxable profits (not on a cash basis) are profits computed according the principles of commercial accounting, or some such wording.

This is HMRC’s take.

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim31095

If your boss won’t help you, always worth reading HMRC’s manuals (bearing in mind they are HMRC’s interpretation).

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RLI
By lionofludesch
12th Nov 2021 18:56

I'd stick WIP in the accounts, definitely.

If this were the only project, that might leave a small loss. Presumably the business has expenses that wouldn't be reflected above the gross profit line. I'd expect gross profit to be zero.

Take all that with a pinch of salt bearing in mind the facts are scanty.

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Replying to lionofludesch:
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By Paul Crowley
12th Nov 2021 19:01

Agree
Cash basis comes with just so many downsides
Not sure is you can use it on a partnership with if either partner have other trades on normal basis

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By lionofludesch
13th Nov 2021 11:08

Paul Crowley wrote:

Agree
Cash basis comes with just so many downsides

Im this case, I dunno, Paul.

If they were on Proper Accounting, there probably wouldn't be any significant loss anyway, so have the partners really lost out ?

Probably not. Not by much, anyway.

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By Tax Dragon
13th Nov 2021 02:30

Sorry, I'd read it same as Bobbo and David.

Is the other accountant doing the partnership return? So you don't have much choice then do you? You take the figures given. As Paul says, cash basis loss cannot be set against other income.

When does the partnership get paid?

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Replying to Tax Dragon:
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By TASG
17th Nov 2021 10:21

See TMA 1970 S12ABZB (3) "If there is a dispute between the person mentioned in subsection (1)(a) or (b) and any one or more partners in the partnership about whether what is given in a partnership return is correct as to the matters mentioned in that subsection, a party to the dispute may refer it to the tribunal for determination."

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By jwill76
15th Nov 2021 10:42

Thanks all
Our firm is doing the Partnership Return, and giving the partnership split to the other accountant. The partnership is getting paid when the house sale completes around Jan 22.

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Replying to jwill76:
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By Tax Dragon
15th Nov 2021 11:13

So what's stopping you include WIP?

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By lionofludesch
15th Nov 2021 12:05

Tax Dragon wrote:

So what's stopping you include WIP?

Earache from an accountant who has promised his client an immediate tax rebate?

Just guessing, like.

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Replying to lionofludesch:
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By Tax Dragon
15th Nov 2021 12:23

Well, the other accountant's client is probably the nominated partner (just guessing, like). What would you have done, had you been the partnership's accountant, if the nominated partner instructed you to use the cash basis?

Btw, Roland's point below is well made. I think a similar thought was in my head at 2.30 on 13th. I don't remember (a lot has happened since then - not enough of it sleep), but the question I asked looks a bit 'leading'.

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By lionofludesch
15th Nov 2021 12:43

Tax Dragon wrote:

Well, the other accountant's client is probably the nominated partner (just guessing, like). What would you have done, had you been the partnership's accountant, if the nominated partner instructed you to use the cash basis?

Depends whether he had a casting vote.

But, from a tax point of view, as I said earlier, I don't think it makes any odds*. The entire profit is taxable in the year of sale.

* Apart from some small expense claim which maybe doesn't fit into WIP.

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Replying to jwill76:
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By lionofludesch
15th Nov 2021 11:13

jwill76 wrote:

Thanks all
Our firm is doing the Partnership Return, and giving the partnership split to the other accountant. The partnership is getting paid when the house sale completes around Jan 22.

Well, surely you're in the box seat here.

Prepare the accounts as you wish, including WIP. But the other partner's accountant needs to be reminded that, if the accounts are to be prepared on a cash basis (which is what he seems to be suggesting), losses can only be carried forward, which seems to negate any tax advantage which I infer, correctly or incorrectly, that he might be seeking.

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By Roland195
15th Nov 2021 11:29

Are all parties certain that they are actually in partnership here opposed to jointly working on a project. Does any formal partnership agreement exist?

Does the other "partner" still own the land/building that this work is taking place on?

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By Ammie
17th Nov 2021 10:53

All direct costs associated with the development must be WIP, to be carried forward for matching against the revenues on completion of sale. The same principle as general stock. A retailer wouldn't deduct all stock purchased as cost of purchases.

The accounts should only reflect non direct admin costs, so I would expect a small loss.

Any other treatment will provide a false, certainly not true and fair, view of trading activity.

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By jwill76
18th Nov 2021 09:54

Yes one partner still owns the land. There is an official agreement for the partnership in place according to the boss here.
Cash basis is what the other accountant wants to do, no reasons confirmed as to why now. This has been the only job for them both in the year, no offsetting of losses required.

The partner who uses them seems to be happy with it and has no care to the fair view of trading on paper, as 'I know what the profit in this job is, otherwise I wouldn't have been doing this'.

I think I'll be doing this the way I think is right and let the boss deal with it!

I appreciate all your help so far, its nice to know a place to bash out the thoughts in my head with people who understand!

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By lionofludesch
18th Nov 2021 10:08

If there's no opportunity or intention to use the "losses"sideways (or back), then I'm not sure what the fuss is about.

WIP or cash basis - it's going to come to the same thing. Pretty much.

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Replying to jwill76:
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By Roland195
18th Nov 2021 10:35

I think you may want to attempt to try to get your boss/partner to give the matter more thought as it sounds like a disaster in the making:-

1. If the original land/building is still in the ownership of Partner B, how does the partnership plan to sell it?

2. How exactly are profits to be measured & split 50/50 (regardless of accounting treatment used) without reference to this? Was it valued immediately before work commenced?

3. Without going too much into it & properly researching, Partner A looks like to be engaged in trading while I'm not sure what Partner B is doing so Capital Gains Tax may be more relevant. Much will hinge upon the actual existence of a partnership.

Are there the usual trappings of a partnership? Is there a bank account? What name are invoices under?

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By jwill76
18th Nov 2021 11:27

Partnership Agreement, joint bank account, supplier accounts and invoices in the Partnership name.

Im not sure as to the plans on selling the land. Im aware the other accountant is dealing with CGT implications following this however with said partner.

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