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Is accrued income taxed?

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    Is accrued income taxed?

    To cut it short, I have a client (start up) who are offering to pay $xxxx a day however this income would only materialise under certain conditions in a couple of years time. I am willing to take a gamble here. However I do not fully understand how this would look like in my company books. As this income may not materialise if the start up fails - do I still class this as revenue and hence pay tax on it? Yes I will ask my accountant but it's good to get a second opinion.

    #2
    Originally posted by cannon999 View Post
    To cut it short, I have a client (start up) who are offering to pay $xxxx a day however this income would only materialise under certain conditions in a couple of years time. I am willing to take a gamble here. However I do not fully understand how this would look like in my company books. As this income may not materialise if the start up fails - do I still class this as revenue and hence pay tax on it? Yes I will ask my accountant but it's good to get a second opinion.
    Be clear about this. You are willing to deliver work for nothing? That is not a contracting business. It is usually called naivety bordering on stupidity. HTH.
    Public Service Posting by the BBC - Bloggs Bulls**t Corp.
    Officially CUK certified - Thick as f**k.

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      #3
      Originally posted by Fred Bloggs View Post

      Be clear about this. You are willing to deliver work for nothing? That is not a contracting business. It is usually called naivety bordering on stupidity. HTH.
      It's not for nothing. It's for a lot of money which would materialise when the start up gets financing from VC. Yes I accept that this may not happen but given my relationship with the owners and the nature of the start up I am satisfied that I will almost certainly get paid.

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        #4
        Speak to your accountant. Under "normal" circumstances, the income would appear on your P&L in the period in which it was invoiced, and taxed as such, and then it would show on your balance sheet as a creditor until paid.

        Also, see https://www.investopedia.com/ask/ans...accounting.asp

        Good luck in getting anything from the client - i hope you've negotiated a significant increase in day rate to account for the very low chance of actually getting paid anything (based on how many startups actually make it).
        Last edited by Paralytic; 3 July 2021, 15:22.

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          #5
          A few things I would want to know before proceeding
          • Are the people behind the startup working full time on it? Or is it a part time thing?
          • How much money have they personally invested in the startup?
          • Have they offered any shares, or commission on future sales?
          • Have they taken a startup loan?
          • Have they had success with a startup in the past?

          The work for free now, and we'll pay you later sounds dodgy. Not even sure if it's legal from a tax perspective.

          Comment


            #6
            Originally posted by krytonsheep View Post
            A few things I would want to know before proceeding
            • Are the people behind the startup working full time on it? Or is it a part time thing?
            • How much money have they personally invested in the startup?
            • Have they offered any shares, or commission on future sales?
            • Have they taken a startup loan?
            • Have they had success with a startup in the past?

            The work for free now, and we'll pay you later sounds dodgy. Not even sure if it's legal from a tax perspective.
            Important to be cash accounting. The invoice will remain unpaid and I suspect will become irrecoverable debt in time.

            Just imagine having a new bathroom fitted and then telling the plumber you might pay for it in a few years time if you still like it. That's not how a contracting business works.
            Public Service Posting by the BBC - Bloggs Bulls**t Corp.
            Officially CUK certified - Thick as f**k.

            Comment


              #7
              It depends really on your accounting policy. If you account on a cash basis then yes you get taxed. However, if you use an accruals based accounting policy then it all depends on your contract as to how you recognise that income.
              Last edited by Abbot; 3 July 2021, 21:11.

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                #8
                If you’re an incorporated business (as your post suggests) then you can’t use cash accounting. If you’ve done work that has an agreed value then strictly speaking it should be accounted for as accrued income in the financial year the services are performed and yes, accrued income is taxed. If the money never materialises then it may be treated as a bad debt but I’d advise you speak to your accountant about this.
                Last edited by TheCyclingProgrammer; 4 July 2021, 00:16.

                Comment


                  #9
                  Originally posted by TheCyclingProgrammer View Post
                  If you’re an incorporated business (as your post suggests) then you can’t use cash accounting. If you’ve done work that has an agreed value then strictly speaking it should be accounted for as accrued income in the financial year the services are performed and yes, accrued income is taxed. If the money never materialises then it may be treated as a bad debt but I’d advise you speak to your accountant about this.
                  Have to disagree with you there on your point of revenue being accrued in the year the service is provided. That ignores the fact that revenue has to be recognised on fair value of consideration received or receivable. It isn’t as easy as saying it should be recognised as the OP needs to do an excercise to demonstrate why the revenue is or isn’t recognised and what information and assumptions are used to come to this conclusion that the conditions under which the revenue is recognised will or will not materialise in the future.

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                    #10
                    You should definitely take some advice from an accountant, as it is highly unusual. You want to ensure that tax is deferred. You run a severe risk of not only not getting paid but also a tax bill.
                    I'm alright Jack

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