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Newth Talks Tax - Tax writer of the year John Newth solves your tax questions

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4th Jun 2007
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Balance sheet or not?

On 19 December 2006 Brian asked whether it was a statutory obligation to file a balance sheet with the business accounts when sending in a self assessment return.

Dave gave the simple and direct answer of ‘no’. However, I would like to expand on this issue. There has been some controversy regarding what one should send in with the self assessment return, particularly in the early days of SA. Some accountants took the view that it was not necessary to submit ‘paper’ accounts any more, but simply to fill in the various boxes on the SA return. Others took the opposite view, and I am one of them. Others have always taken the view that it is not necessary to file balance sheet in the case of a small and simple business, including members Gerard Somers and John Ascough. The justification for this point of view is that if one includes a balance sheet, then the inspector is entitled to ask questions about it. Once again I do not agree with this view.

My view is that one should provide HMRC with as much information and accompanying documents as possible in order to avoid the possibility of a targeted enquiry or a ‘discovery’. The more information supplied, the less likely it is that an inspector will want to ask any questions when they are not certain about something in the business accounts. Remember, that the only way of HMRC raising a query is to institute an Enquiry under section 9A, TMA 1970.

There are some basic items that are shown in a balance sheet that give an overall view of the business. Plant, machinery and motor vehicles are typical examples. So also is the level of debtors, creditors and work in progress (and now work completed on contracts following UITF 40). The level of cash at bank and in hand and perhaps also moneys in deposit accounts also adds to the picture of the business.

Perhaps the most telling item on the balance sheet is the entry ‘drawings’. The inspector will focus on the gross profit percentage and level of drawings when considering an SA Enquiry, before they undertake any Business Economics Exercise. If there is a valid record of drawings, going back several years, and drawings demonstrate that the taxpayer has sufficient living means, this is good evidence that is in favour of the taxpayer.

I would recommend the use of a balance sheet every time, even if it only contained the capital account, annual profits and drawings. That is unlikely, as most businesses will have some capital expenditure, a bank account and cash in hand, apart from work in progress, debtors and creditors. Good written evidence is always beneficial in the continuing sparring match with HMRC.

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