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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 5147
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I have just changed over from a sole trader to a ltd company

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I have just changed over from a sole trader to a ltd company and are filing my tax return for end of sole trader business we still have defects liability on work we did as a sole trader of 35000 can this be offset against tax
Hello and welcome to the site. Thank you for your question.

If you have specific provision for rectification work to be done (payment for supply of goods and/or subcontract work other than your own time) then you can make a provision for this expense in your accounts to reduce your profit, when filing your tax return.

Specific provisions are tax allowable.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond. and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
How far back can I go as our liability is for 3 yers
Merv, thank you for your reply.

Normally, one would make a provision every year and adjust it for over/under provision as and when rectification takes place. If you have not made a provion in the past then basically you are taking a hit now.

Make sure you have supporting documents to justify this provision. You can go back three years.

I hope this is helpful.
Customer: replied 3 years ago.
But I if this provision is made and the liability becomes negated I presume I will be liable for the tax in future as the liability goes or the amount is spent on defects
Merv, thanks for your reply.

You are correct in your understanding..... any underspend against this income would be added back as income and liable to tax as you would have got allowance against it as an allowable expense.

It is important you make adequate provision bearing in mind some liability may be negated.

I hope this is helpful.
Customer: replied 3 years ago.
Would I need to hold a capital amount in a separate accounts cover any defect work done or would the ability to fund it be sufficient we usually hold 5% just in case to cover defect work for 3 years for each job until defect period up but have not put them into accounts as this before
Merv, you don't need to maintain a separate capital account to cover defect work. It would normally be funded out of working capital.

I hope this is helpful..
Customer: replied 3 years ago.
Thank you very helpful
My pleasure...

Best wishes