Paying Contractors Upfront Before Tax Year Ends

[Mr Olsen]

I run a limited company that has a lump sum of money generated in this current tax year, I would like to pay some contractors (who I trust) that work for me upfront so whatever is left of this lump sum isn't with me when the new tax year starts and I would have to pay corporation tax on it, and these contractors would be with me until the end of the project. There would be contracts in place and the work is all recorded.

Does anyone have experience using this method and how HMRC react to it?

 

[peterwalkley]

Artificially reducing your profit for the year by incurring future costs early can be a minefield, so you should consult your accountants as they will be the ones signing off on the audit at financial year end. Its their reputation on the line and you're paying for expertise, so use it.

 

[Rids]

It works against basic accounting principles

Even if you pay them upfront, if the payment is for work that is yet to be completed it should be treated as a prepayment and the proportion of the sum relating to work that hasn't been completed would then go back into your P&L and be subject to tax.

Have a chat with your accountant, there may be some levers they can pull but this one doesn't feel like the solution to me. If HMRC ever go through your books this will be easily flagged.

 

[Jokester]

My gut feeling on this is that it's fine as you wouldn't be cheating the tax man out of tax ultimately, as Rids says this would get reflected in you're P&L account that your subcontractors owe you work of a value that's been paid for but not completed, and it's really just a question of cash flow.

Your accountant would keep you right though.