How do I account for a Self Assessment Tax Refund from HMRC

Accounting
1

I have had a SA tax refund from HMRC that has been paid in to my bank account I use if QF. Does anyone know how I account for this and how I tie everything up correctly. I have looked at what I can tag it as and when I select to tag it as a tax refund from HMRC, all I see in the drop down menu is VAT or PAYE Liability, which this is neither. Any help will be appreciated, thanks.

2

SA income tax doesn’t go into your business books at all - the amount you owe/you are owed is calculated from, among other things, the net profit or loss of your business, but the payment transaction is between you as an individual and HMRC. So if you use your business bank account to pay (or receive a refund for) your personal tax bill then it is treated as a transfer to (respectively from) drawings.

When you receive an SA refund into your business account you’re effectively putting some of your personal money into the business, the fact that you received the money from HMRC is irrelevant from your business accounts point of view.

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3

So for the way I have this set up, if I just tag the money refunded by HMRC as a transfer from my proprietors drawings account, that will deal with it?

4

That is my understanding, yes.

5

Thanks for the replies. I have done this, but it then on the profit and loss screen it has taken the money from the suspense account and now the net profit has been reduced by that amount also, is that normal?

6

That sounds correct, it should never have featured on your P&L to start with. Although untagged bank entries get booked to suspense (9998) until tagged. Tagging to Proprietor Drawings takes it off the P&L which is what you want if it’s a personal tax refund.

7

I think I understand, so it shown the untagged payment as profit, until I tag it to proprietors drawings, which tells it that it is not profit and takes it off of my profit figure.

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8

Yes that is correct!

Suspense is a Profit & Loss code and is just a kind of place where unexplained transactions reside until they are tagged. It’s best to keep the suspense at zero or as close as to ensure your accounts are accurate.

9

Hi Marcus,
Nominal 1202 (Prop’s Drawings account) appears in the current assets section on the balance sheet, whereas 3100 (Prop or partner drawings) is a capital account and sits in capital and reserves. Sole trader NI contributions are not allowable and so must be deducted from net profit. The same applies to drawings out (for own use) and taxation payments. I prefer to use 3100 wherever possible. In the case of your tax refund, the double entry requirements are to Dr current account (in increase) and Cr 3100 (an increase). Conversely, if you pay NI’s or tax OUT, it’s credit bank, debit 3100.
Hope that helps

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10

Whereas I would use 1202 as a normal bank account during the year, and just deal with 3100 at year end.

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11

Thank you for all of your replies, I think I understand it better now.