Late Foreign Payment: Which Tax Year Does It Count In?

You finished the project in March. You sent the invoice on the 20th. Your client in London paid on June 10th, nearly three months late.

Sri Lanka's tax year closes on March 31. So which tax year does that foreign income belong to? The one where you did the work, or the one where the money finally showed up?

For most freelancers the answer is the earlier year. But a late payment raises questions beyond that one, and they're the ones this article is about. What happens when the exchange rate moved while you waited? What if the client pays in parts? And what if they never pay at all?

Why does the tax year of a late payment matter?

It's tempting to treat this as bookkeeping. It isn't.

The year decides which return the income goes on. And each year has its own tax calculation and its own instalment schedule. Put a Rs. 900,000 invoice in the wrong year and you understate one year's income while overstating the next.

That has knock-on effects. Your instalments for the earlier year were worked out on a lower income than you actually had, so they may have been short. If you'd like to understand how instalments track your income across the year, our guide to estimating quarterly tax on irregular income covers it.

Do freelancers count income when they invoice or when they're paid?

When they become entitled to it. For most freelancers, that's when the work is done and billed.

Section 21(3) of the Inland Revenue Act says an individual conducting a business must account on the accrual basis. A freelancer selling services is running a business, whether the clients are in Colombo or California.

Under the accrual basis, Section 23(1) says you derive an amount when it is receivable. And Section 23(2) defines that moment. An amount is receivable "when the person becomes entitled to receive it, even if the time for discharge of the entitlement is postponed."

That last phrase does the heavy lifting. A client paying late is exactly a postponed discharge. It doesn't move your income.

This rule also sets the exchange rate you use. Section 26(6) says a foreign-currency amount is converted at the Central Bank of Sri Lanka rate on the date it is taken into account. For a freelancer, that's the entitlement date. We cover the rate in detail in our article on which exchange rate to use for foreign income.

What about remote employees paid late by a foreign company?

Different rule, different answer.

If you're employed by a foreign company, your salary is employment income. Section 21(2) says an individual accounts for employment income on the cash basis. Under Section 22(1), you derive it when payment is received by you or made available to you.

So March salary that lands in June counts in the year that includes June. For a payment on June 10, 2026, that's the 2026/2027 year of assessment. You convert it at the Central Bank rate for the day you received it.

One narrow exception softens this for some employees. Section 96A, added by the Inland Revenue (Amendment) Act, No. 11 of 2026, gives a tax credit on arrears of salary, meaning pay for an earlier year from the same job that arrives late because of reinstatement, a backdated promotion or increment, or similar reasons the Commissioner-General specifies. The arrears still count in the year you receive them. The credit is worked out by comparing the tax the arrears add this year with the tax for the earlier year they relate to. An employer who simply paid March salary late isn't one of the named cases.

Here's the thing that trips people up. The same late payment, on the same date, lands in different years depending on whether you're a freelancer or an employee. If you're not sure which you are, our guide to foreign employment income tax explains the difference.

How does a March invoice paid in June actually work?

Let's follow one payment through both years. Nadeesha is a freelance designer. The exchange rates below are illustrative, not actual Central Bank figures.

Step 1: the income goes into 2025/2026. Nadeesha was entitled to the fee on March 20. So USD 3,000 × Rs. 300 = Rs. 900,000 goes into her 2025/2026 business income. It stays at the March rate. She doesn't swap in the June rate just because she's filing after the money arrived.

Step 2: the rupee difference gets adjusted. When the money arrives, it's worth USD 3,000 × Rs. 295 = Rs. 885,000. That's Rs. 15,000 less than she declared.

The Act has a name for this. Section 23(6) says an inaccuracy occurs when an entitlement is settled by a payment of a different amount, "including by reason of a change in currency valuations." Section 23(5)(a) says the adjustment to remedy it is made at the time the payment is received. So the Rs. 15,000 shortfall is adjusted in 2026/2027, the year the payment came in.

If the rupee had moved the other way, and she received more rupees than she declared, the same rule would adjust the difference upward in 2026/2027.

There's a second limb worth knowing. Section 23(5)(b) lets the Commissioner-General require the adjustment in the year the inaccuracy originally occurred instead, even outside the normal time limits for amending assessments. So don't treat the earlier year as permanently closed.

Step 3: file on time. The return is due eight months after the year ends (Section 93(1)). For 2025/2026, that's 30 November 2026. A June payment almost always arrives before you file, which makes it easy to confuse "I got paid before filing" with "it's this year's income." It isn't. The March invoice is still 2025/2026 income.

What if the client pays part now and part later?

The answer turns on when you became entitled to the money.

Section 23(2) is explicit on this. An amount is receivable when you become entitled to it, "even if ... the entitlement is payable by instalments." So if you finished the job in March and agreed that the client could pay the fee over three months, the whole fee belongs to 2025/2026. The payment plan changes when the cash arrives, not which year the income belongs to.

A contract with milestones is a different case. If your agreement says you're only entitled to each part of the fee as you deliver each stage, then each part becomes receivable when you deliver that stage. A stage delivered in May belongs to 2026/2027, even if the project started in February. So read your contract. The Act ties the year to entitlement, and your contract is what sets when you're entitled.

You might come across the Act's special rule for long-term contracts in Section 25. It doesn't apply to most freelance work. It covers only contracts for manufacture, installation or construction (or services related to those) that aren't completed within twelve months. A year-long design or development retainer isn't one of those.

What if the client never pays at all?

It happens. A client goes quiet, the invoice sits unpaid for months, and eventually you accept the money isn't coming.

You don't reopen the earlier year. Under the accrual basis, the invoice was correctly included in income when you became entitled to it. The Act deals with the loss later instead.

Section 24(4) and 24(5) let you deduct the amount in the year you write it off as a bad debt. So an invoice from 2025/2026 that you write off in 2026/2027 is deducted in 2026/2027.

There's a condition, and it matters. Section 24(6) says you can't write off a debt as bad unless you've taken reasonable steps in pursuing payment and you reasonably believe it won't be paid. You can't write off an invoice just because it's late. You need to have chased it.

How do I keep late payments in the right year?

A few habits handle almost every case.

1. Record the right date for your income type. Record the date you became entitled to the fee if you freelance, or the date you were paid if you're employed.
2. Record the Central Bank rate for that same date. One date sets both the year and the conversion rate.
3. Log the payment when it arrives. If the rupee amount differs from what you declared, that difference is the Section 23(5) adjustment, and it belongs to the year you were paid.
4. Keep contracts and payment terms. They show when you became entitled, especially for staged work.
5. Chase unpaid invoices in writing. If you ever need to write one off, that record is what supports the deduction.

Remember, too, that the amount you record is the gross fee. Platform charges are handled separately, as our article on whether foreign income is taxed gross or net explains.

So which tax year does a late foreign payment belong to?

If you freelance, the year you became entitled to it, usually when you finished and billed the work. A late client doesn't move it. If you're a remote employee, the year the salary actually reached you.

The lateness does have tax effects, though. Any exchange-rate difference is adjusted in the year you're paid. A payment plan doesn't split the income across years. And an invoice that's never paid is deducted in the year you write it off, as long as you genuinely chased it. Get the date right when you record each payment, and the right year follows from it.