I have an SA client who went bankrupt towards the end of last year.
The Revenue have written to say that the tax on all 13/14 income will be treated as part of their bankruptcy claim.
Given that the accounts period end was October, what happens in practical terms? Do I report self employed income for the year to Oct 13 as would have been the case if the bankruptcy hadn't happened, or do I include the whole period to 5/4/14 and use up the overlap relief?
Many thanks in advance for all and any answers.
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Is he still trading?
Accounts for the year ended October 13 will go on 2013/14 return and all 2013/14 tax will be included in Bankruptcy. If he is continuing to trade there will be 2014/15 POA's as normal, which can be adjusted based on year end October 14 results and filing of 2014/15 return after 5/4/15.
If he ceased to trade in 2013/14 (after Oct 13) then all goes on 2013/14 return and use overlap as you would normally, although end result is all tax ends up in the bankruptcy.
I assume he was not VAT registered.
I have just done one of these.
Profits after bankruptcy need to go on SA and be treated as a commencement of trade in that year and any stock and fixed assets transferred at market value and cost respectively. No tax is payable for any profits of the tax year of bankruptcy so no tax will be payable on the profits after bankruptcy up to the end of the tax year. Trade ceases on the date of bankruptcy and all assets and liabilities, overlap, brought forward losses, capital allowances BAs and BCs disappear so you end up with a zero balance sheet. You don't need to prepare accounts or tax comp for period up to bankruptcy as they would have been making losses and there's no point as it all disappears. You need to get in touch with the relevant HMRC department for bankrupt tax payers and get them to confirm the treatment in writing. Also if the client paid any tax before the date of bankruptcy eg POA these become part of the net bankruptcy debt. Get a new UTR and make sure any payments post bankruptcy go against this. HMRC tried to take some of my client's post bankruptcy payments against the old one but we spotted this and got it changed.
Yes, still trading
Many thank for your answer. I've now found something at SAM106030 which confirms your advice.
I'm not looking to manipulate anything here but I am wondering why a taxpayer in this position wouldn't extend their period to 5/4/14 in order to generate tax-free income from date of bankruptcy upto the period end. Any thoughts, anyone?
I suppose there is actually a third possibility which is that profits upto the date of bankruptcy goes into the 13/14 return and thereafter into next year's return which will be taxed. In that case, presumably some overlap relief is utilised by the change in accounting date but the remainder is still available to carry forward because it is still the same taxpayer regardless of the fact their UTR is changing?
I think what I am asking overall is whether or not there is a definitive rule as to which date a bankrupt's accounts have to be drawn upto. If there is, my googling hasn't found it yet!
Cut off is date of bankruptcy
From the next day he is a completely new person.
All of the previous items cease to have any relevance.
e.g. day 1 1 January 14 if bankrupt on 31/12/13.
There is no overlap to bringforward as it is treated as a new business. Similarly all assets would now belong to the Receiver as well as debts.
You pick your accounting date as you would for any new business, either 5 April or stay with 31/10. As with any new business you do the necessary calculations - I would normally pick a date which produces the minimal tax in year one but as not including liability for 13/14 I would maximise the overlap created to benefit him later so stick to 31/10.