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Newth Talks Tax: Using estimates in self-employed accounts

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30th Mar 2009
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Nick Farrow raised a query regarding using estimates in https://www.accountingweb.co.uk/item/177238">self-employed accounts as a result of data loss on a client's computer. He asked whether disclosure in the 'White Space' of the self-assessment return is required, or can one rely on reasonable and reliable estimation in order to avoid unnecessary disclosure.

Mark Lee explained that the purpose of disclosure in the 'White Space' is two-fold, as follows:

(1) To evidence that estimates have been used with due care etc. – so that in the event of the estimates becoming apparent at a later date, it is clear that there was no attempt to mislead. This could be important as regards the adviser's reputation with HMRC.
(2) To reduce the prospect of HMRC being able to raise a discovery assessment if they become aware of the use of estimates or of inaccuracies in future tax returns. This could occur perhaps because the figures are based on undisclosed estimates in the current year's tax return.

To achieve such protection from a discovery assessment, the accountant would need to explain the reason for using estimates and the basis for the reasonable assumptions made as regards each figure.

The general argument against making good use of the 'White Space' is that disclosure could prompt an enquiry. That might be true if HMRC routinely read the disclosures in the 'White Space'. As far as Mark is aware, HMRC only promise to read the 'White Space' entries after selecting a self assessment return for full enquiry. So there is nothing to be lost and only 'upsides' from making full disclosure.

Steve Holloway observed that the 'White Space' is our friend! He agreed with Mark, and had been using the 'White Space' in great detail, and had done so for the past few years. He has never had an enquiry as a result of anything he had written, but, as accountants know, if HMRC have been told something, then it should prevent a discovery assessment later on.

The views expressed highlight a sharp division of opinion between HMRC requirements and the opposing views of some accountancy practitioners. One point of view is that one should only provide the minimum amount of information. This would involve completing the self-employed boxes on the self assessment tax return, avoiding the preparation of a balance sheet unless absolutely necessary, and refraining from forwarding typed accounts and tax computations to HMRC.

The other point of view is that practitioners should provide everything possible to HMRC in order to explain matters and to protect their client. This includes preparing a balance sheet for only a small client, using the 'White Space' and forwarding accounts and computations to HMRC (even if they go into the bin!). I subscribe to the latter view and send as much information and explanations to HMRC.

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