Accounting question re tax refund

[Tarlika Elisabeth Schmitz]

On Mon, 19 May 2008 13:26:34 +0100
Bob Williams <linux at barrowhillfarm.org.uk> wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent
> me a cheque. Would you advise me to record this as a negative value
> in Expenses:Income Tax or income in Income:Other Income?
> 
> The money isn't actually income, I just accidentally "lent" it to the 
> taxman ;). Likewise, it's not tax either, as I should never have sent
> to said taxman in the first place.


Hello Bob,
There was a similar discussion about how to record tax liabilities here:
http://www.nabble.com/report:-aggregate-interest-per-account-td16881069.html


You seem to record the tax paid on account as expense. However, it is
not an expense at that point, just a reduction of a potential liability
towards HMRC. I say potential because it might be an overpayment. Only
the tax due, based on your Self Assessment, is an expense, which
needs to be recorded in the period that it relates to so it shows on
that period's P&L. 

You need to record your ongoing payments into a liability account
(Liabilities:Tax). Everytime you make a payment you reduce
your liability towards HMRC. Therefore, tax on savings deducted at
source should also be put against this liability account. 

The outcome of your Self Assessment tax return then determines the
tax DUE. This is the expense that needs to be entered against the
liability account. The date of this expense needs to fall within the
year it relates to. (I record it on the last date of the tax
year 05/04/XXXX).

Any payment to you by HMRC goes against the liability account
(Liabilities:Tax <-> Assets:Bank:Account) thus increasing your
liability.

The tax liability would go to zero when you are fully up-to-date and
have paid all the tax you have incurred to that point in time. In
practice, that will never happen as you continue to pay on account for
the current year.

--


Best Regards,

Tarlika Elisabeth Schmitz


A: Because it breaks the logical sequence of discussion
Q: Why is top posting bad?