Bank of the Expert Witness - Part II
If you are contemplating offering lawyers end-of-case terms, what should you consider?
Following on from our piece last time, we heard from Grahame Goodyer, an investments expert in the Register. He reminded us that the expert who agrees long deferment terms may also be liable for income tax on the invoices, even though no payment has yet been made.
With VAT, you can usually defer paying anything to HMRC until payment of your invoice is made, if you have agreed with the VAT authorities that you will use cash accounting. The cash accounting scheme allows you to account for VAT on your sales on the basis of payments you receive rather than on tax invoices you issue. This is different from the normal rules that require you to account for VAT on your sales as they take place or as soon as you issue a VAT invoice, even if your customer has not paid you.
There is a similar scheme for income tax (though it has much more restrictive eligibility criteria) that some may be able to use. However, if your business is not eligible to join that scheme you are liable to pay income tax in the tax year in which it is earnt, not the year it is paid. Therefore, offering a deferment period of 18 months may mean that possibly half (or more) of the chargeable amount could be liable to an income tax payment by you before any money is received, putting you in even further debt.
You can offset the invoices as a bad debt, but only if you are certain that the invoices will not be paid within a reasonable time frame.
All in all, another reason not to accept payment at the end of a claim! If you do, make sure you set a time limit of, say, 12 months to avoid paying out income tax on an unpaid invoice.