first time tax return - a couple of Qs

[Innat]

Hi I started a business in January and am trying to get my head round my first tax return. It should be straightforward as I only had two pieces of work between Jan-Apr.

My biggest question is - I was paid for one piece of work up front (before 5 April) and carried out the work between April and July. This means my expenses (mileage etc) were incurred in the following tax year. Does that mean I can't claim them as expenses on this year's tax return? Which will mean paying more tax presumably :(

Thanks for any advice

Surely if the client paid upfront you can just defer the income as being "a deposit", ie owed back to them until the work was complete and let it fall within the next tax year's income instead.

I think omgomgomg is right - in the bigger picture HMRC don't really care which tax year you attribute your earnings to as long as you account for it properly. Makes more sense to allocate the income for that job to post-April if that's when you carried out the work and accrued expenses.

Ah that's very helpful thank you - i didn't know that was an option. There's a lot to learn being self-employed!

It's not just an option, and it's not because HMRC don't care (they very much do) - it is the only correct way to do it.

Business accounts for tax purposes must follow Generally Accepted Accounting Principals (GAAP), which include the Matching Principle. If you record income when you receive it rather than when you do the work this is called accounting on a Cash Basis which is not allowed for income tax on a self-employed business (although it is allowed for VAT, but that is another story...).

So yes, leave both the income and the expenses out of your 2010/11 accounts (but remember to include them in 2011/12).

If your income has increased significantly this year it will be worth talking to an accountant as there may be an opportunity to save tax.

Thanks for setting us all straight mranchovy.

utterly agree with anchovy (funny that)
but would also suggest that OP has a look at this ....
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