Reply to: Is accrued income taxed?

[Craig@Clarity]

If only it was so easy to measure.
I had this argument with my accountant last year. As the fixed price was based on an estimated amount of effort I could do that.
But what if it isn't?
What if I'm charging customer A a fixed price for a product I've already developed for customer B. Where there is no/minimal effort or time to deliver and the only reason I haven't invoiced is that I'm waiting for client sign off. Do I bill some, all or none?

It comes down to income recognition. I assume the product hasn't been delivered to customer A and since there is no sign off yet, I would gather there is no income recognition at that point. I'm thinking along the lines of the product being a piece of software like office 365.

I guess the same goes for a physical unit. If I ship a car on 31st Jan (year end date), and the client receives it on 1st Feb I would normally invoice on 1st Feb. But the car has left my depot in the previous year so have I accrued the income last year or this year.

In this scenario, you'd take the car out of stock and into cost of sales. The car being dispatched on 31 Jan, you'd recognise the turnover on 31 January despite not invoicing until 1 Feb. Again, it's income recognition. It's to stop people delaying turnover into the next financial year and avoiding paying tax on that income.

[Lance]

Apply the percentage of the work completed to the fixed price and provide for it as work in progress (Credit Sales, Debit Work in Progress).

If only it was so easy to measure.
I had this argument with my accountant last year. As the fixed price was based on an estimated amount of effort I could do that.
But what if it isn't?
What if I'm charging customer A a fixed price for a product I've already developed for customer B. Where there is no/minimal effort or time to deliver and the only reason I haven't invoiced is that I'm waiting for client sign off. Do I bill some, all or none?

I guess the same goes for a physical unit. If I ship a car on 31st Jan (year end date), and the client receives it on 1st Feb I would normally invoice on 1st Feb. But the car has left my depot in the previous year so have I accrued the income last year or this year.

[BlasterBates]

If you pay tax on your deferred income but it subsequently doesn't get paid you can book it as a bad debt in a subsequent year and it will be deducted from future profits. So you should get the tax back.

[Craig@Clarity]

When the work is for a fixed price, and incomplete at year end, how is accrued income calculated?

Apply the percentage of the work completed to the fixed price and provide for it as work in progress (Credit Sales, Debit Work in Progress).

[Lance]

If you've delivered the work but have not received payment or invoiced yet then it would go in as accrued income or work in progress. If you've invoiced, then it goes in as sales and you pay CT on it. Either way, where there is billable work completed, you need to recognise that value and include it as sales/turnover and apply CT to it. Cashflow is a separate issue where you haven't received the money for the work completed but you still have to pay the tax on it. That's where you as the company owner need to balance to negotiation.

When the work is for a fixed price, and incomplete at year end, how is accrued income calculated?

[Craig@Clarity]

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.

If you've delivered the work but have not received payment or invoiced yet then it would go in as accrued income or work in progress. If you've invoiced, then it goes in as sales and you pay CT on it. Either way, where there is billable work completed, you need to recognise that value and include it as sales/turnover and apply CT to it. Cashflow is a separate issue where you haven't received the money for the work completed but you still have to pay the tax on it. That's where you as the company owner need to balance to negotiation.

[eek]

They want full time commitment from all shareholders which I cannot give.

Point them at vestd https://www.vestd.com/free-consultat...caAhtgEALw_wcB

[cannon999]

High likelihood that you could still get nothing and you'd have to take them and their army of venture capital lawyers to court to get some money.

Could you instead work for stock? The guy who painted the walls of Facebook's early office cashed out when the beans they threw him became a few hundred million, IIRC

They want full time commitment from all shareholders which I cannot give.

[PerfectStorm]

High likelihood that you could still get nothing and you'd have to take them and their army of venture capital lawyers to court to get some money.

Could you instead work for stock? The guy who painted the walls of Facebook's early office cashed out when the beans they threw him became a few hundred million, IIRC

[NotAllThere]

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.

I've worked for nothing but a percentage off gross sales. It's a risk, that is all.

Do it the way I did it and there's no accrued income, so no tax if it goes pear shaped. You treat any arising income the same way as royalties from e.g. book sales.

[BlasterBates]

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.

[Abbot]

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.

[TheCyclingProgrammer]

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.

[Abbot]

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.

[Fred Bloggs]

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.