When is revenue not revenue for SMEs? (and what it means for your tax return)

First published on 14 June 2024 by Alastair
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Question No. 1 Are you an SME?

Here’s the official definition.  A “Small” company has  50 or fewer employees and turnover of no more than £10.2M with a balance sheet of £5.1M or less. To qualify as “Small” your fire must meet at least two of these criteria.  A “Micro” company has 10 employees or fewer, turnover of £632,000 or less and a balance sheet £316,000 or less.

Fine, but what has this to do with when I can claim revenue in my tax return?

For accountants, knowing when to recognise clients’ revenue/turnover can be difficult: it’s always been an area where things can become unclear, often leading to large amount of time being taken to decide upon the right approach to ensuring you pay on the tax you are due to pay.

Essentially, this is about when (the date) you can claim income/revenue/turnover.  One of the easiest ways to illustrate it is to take the example of a recruitment agency (many of our clients have used rec-consultants to help fill vacancies).  The agency fills a position for you and normally charges a percentage of first year salary as their fee.  However, they can’t bill you until the new person has actually started work.  This, of course, may mean there is a gap between when they were contracted to do the work, when they did the actual work and when the person has been appointed and then, finally, when the person actually starts work.  It’s only at that last point that the income the recruiter receives can be considered as part of their annual accounts. This applies even if you have paid part of the fee up-front: for tax purposes the income is not recognised until the contract is finally fulfilled.

Another example would be a charity that has received grants that run over a number of years. The grant documentation may say you are due £1K for year one, paid in two six monthly instalments. A normal part of this process is that the charity has to provide a report, showing the work they have been able to do with the first part of the grant, in order to then get the second payment. But you can’t recognise (i.e. count) that income until the report is approved.

Bear in mind that accountants prepare clients’ accounts for the year that has just passed.  We have to be scrupulous in recording when income can be taken/counted (what we call ‘recognised’).  Now, the Financial Reporting Council (FRC) has approved amendments which will lead to what is hoped will be a simplification of the process.

The new, applicable framework which small and micro entities (SMEs) in the UK can follow works like this:

The change will come into place for accounting periods starting after 31 December 2025. A five-step approach will be adopted as set out below:

  1. Identify the contract with a customer (this means that, for example, a contract could be for two years, or it could even be when you receive an order confirmation following an online purchase).
  2. Identify the performance obligations in the contract - i.e. this is what you’ve said you’ll do, this is what you’ve done.  This works for both parties. (For an online purchase this is that one party will pay this and another will deliver an order)
  3. Determine the transaction price. e. what did you say you’ll get for your order?
  4. Match the transaction price to the appropriate performance obligations – i.e. has the order been delivered?
  5. Recognise relevant amounts based on satisfaction of performance obligation – i.e. when an online order has been delivered the contract has been fulfilled.

Clarity has also been added as to what a performance obligation actually is, namely:

‘A promise in contract with a customer to transfer to the customer either:

  • A distinct good or service (or bundle of goods or services); or
  • A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer’

Obviously, an online order above is a very clear example of this in practice, but does show all the steps very neatly. I hope this helps, but in the event that you are unsure, please feel free to contact me or any of my colleagues for advice. We appreciate that what makes sense to accountants can sometimes seem like gobbledegook to the rest of the business world!

Callum McKinnon, M&S Accountancy and Taxation


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