Unpaid invoices - interest rate and tax year

nacho66

Hi guys

I have two questions regarding unpaid invoices. I know there are some threads about this but couldn't find definitive answers

1) I have two unpaid invoices with the same company that I did some freelance work for. I didn't stated on the invoice anything about time limit to cover it nor about interest rate if it's not covered in time. I had pretty good relationship with that company before, did some work for them and usually there was no problem with paying the invoices. These two got delayed, I got partial payment but the total amount is now overdue by 5 months. Is it legally correct to contact the company and apply an interest rate at this stage? Eg. give them a deadline of end of a month and apply interest rate at the end of each month?

2) for invoices raised in 2012 but paid in 2013, which year does the tax from those invoices apply to? Revenue told me that what matters is the date of the income arriving at my account, unless it was a VAT invoice (I wasn't VAT registered last year, didn't reach the VAT threshold). An accountant said that it's the invoice date, not money transfer date, even if it's non-VAT invoice. So which one is it?
If revenue is correct and it would apply to 2013 tax, how is VAT sorted on those invoices? I'm registering for VAT this year so I'll be adding VAT to every invoice. But technically, those two invoices have already been risen last year so I cannot just reissue them with inc. VAT, can I?

Peterdalkey

If it were me, I would not be worrying about charging interest, my primary concern would be getting the money in!! If they do not intend to pay, it is irrelevant if the end amount due is never paid. I would issue a 7 day notice demanding payment or you will start collection litigation. If that does not work then do not be afraid to threaten to seek to have them liquidated, this requires a 21 day notice to be issued under section 213 of the Companies Act... very intimidating.

I would be inclined to go along with the Revenue position. the taxable dates for VAT and income tax come under completely different regulations/rules.


cheers

Peter

Peterdalkey

I would be inclined to go along with the Revenue position. the taxable dates for VAT and income tax come under completely different regulations/rules.

PS Forum Moderator dbran is deadly on this stuff!!

Cheers

Peter

Alan Shore

Accounts should be prepared on an accruals basis. Your sales for the year are the total of your sales for the year. Whether paid or not by year end.

The unpaid invoices are know as debtors. A provision for doubtful debts can be made if are concerned about the invoices not being paid.

Depending on the amounts involved with the debt and your ongoing relationship will dictate your approach.

nacho66

Thanks for the replies lads

I can see you too differ in your opinions. So do two accountants I talked to and revenue themselves. I'm quite confused now and the biggest problem is, hiring an accountant to do my taxes may not be enough if there are so fundamental differences in approach to taxing. Not really sure what to do. I'm assuming I'll get paid eventually before 31st October this year, so question is if my income tax is

1) income 'into' my account between 1st Jan - 31 Dec 2012
2) non-vat invoices raised between 1st Jan - 31 Dec 2012 (so including delayed payment made in 2013)

Alan Shore

Ok, If you were not registered for VAT when you issued the invoice as you were under the threshold then forget VAT.

What is your year end for tax returns is it 31 Dec 12? If so your sales for 2012 is the total of the sales for the 12 months ended 31 Dec 12.

Do you have the name of the person you spoke to in Revenue, what level were they at. Do you know the specific question that you asked them, why did they mention VAT. There are 2 methods of accounting for VAT based on the date of the invoice or the date of the payment is that where the confusion.

nacho66

Sorry, there's a bit of confusion regarding VAT.

What revenue told me was regarding income tax. I wasn't registered for VAT in 2012. They said that, for income tax, it's the date of money transfer to my account that matters, not invoice date. So my income tax for 2012 would be for the amount I received into my account until 31 Dec 2012. Any delayed payments that come in 2013, even tho they cover invoices raised in 2012, will be included in 2013 income tax. That's what I was told at the desk in Revenue office.

Now, regarding VAT. VAT I mentioned in the thread is my own concern. Perhaps it's needlessly bringing confusion into the thread. Let's focus on income tax and sort out what exactly am I supposed to pay before 31 Oct 2013

Peterdalkey

From your last post, it appears that Revenue have already answered the questions, VAT is a 2012 issue and the income is classified as 2013.You could contact them again and ask for the clarification in writing, to assuage any remaining doubt you may have.

Cheers

Peter

Alan Shore

nacho66 wrote:

They said that, for income tax, it's the date of money transfer to my account that matters, not invoice date.

They are wrong, if you raise an invoice and it's outstanding at the year it's included in sales for that year and therefore in the profit for that year.

JCYSHOW

Alan Shore wrote: »

They are wrong, if you raise an invoice and it's outstanding at the year it's included in sales for that year and therefore in the profit for that year.

I have to agree with Alan Shore on this one.
The term Profits are not defined in the Direct tax acts but Revenue issued a Statement of Practice on this, SP IT/2/92

This statement of practice mentions that the earnings or accruals basis is the way to calculate profit generally but in certain circumstances another method may be used namely the cash basis (also called the conventional basis in the SP). The accruals basis must however be used in the first 3 years of trading. Take a look at the statement of practice for the exact details, I'm not 100% sure of the requirements as all of my clients prepare the tax accounts on the earnings/accruals basis.

In addition the statement of practice quotes the Finance Act for a definition of profits in accounts, copied below.

“...the profits or gains of a trade or profession in any period shall be treated as computed by reference to earnings where all credits and liabilities accruing during that period as a consequence of the carrying on of the trade or profession are brought into account in computing those profits or gains for tax purposes, and not otherwise, and “earnings basis” shall be construed accordingly;...”