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Client never did a 2010/11 tax return

A client came to me after not paying any tax for 18+ months, a limited company contractor. He joined me after 31 Jan 12. His Ltd has a year end of June.

He took loads of money out since setting the company up (ignoring the CT bill and everything else). My plan was to date dividends to May 2011 so that they fell into the 11/12 tax year (money withdrawn being a DL up until that point). The problem then though is that there are effectively two years of dividends going through in 11/12 so a higher proportion of them fall into the 32.5%/25% threshold boosting his income tax bill.

What would happen if I was to phone up HMRC and say sorry client didn't realise he had to register as self employed, he was never asked to submit a 10/11 tax return but should have? Interest + late filing penalty + potentially not registering as self employed?

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Oh Dear........

<a class="username" href="http://www.accountingweb.co.uk/user/190629" title="View user profile.">Anonymousey</a>&nbsp; wrote:

My plan was to date dividends to May 2011 so that they fell into the 11/12 tax year ""   ""

I would think very carefully about that comment.

 

As far as 2010/11 goes, you would have 3 months from date of issue to submit the tax return so no late filing penalties.  However, your client would be liable for a penalty for 'failure to notify' and you should have a look at this to determine what penalty you think would be applicable.

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backdating dividends

Thanks for the reply.

Is the backdating dividends that bad (disclaimer: I've not done it before!)? As you'd expect the client didn't do any dividend documentation and I'm pretty sure I've read loads of times that there's nothing wrong with backdating dividends because they were always intended to be dividends and effectively it's just a case of getting the paperwork in order after the event. Which has a strong legal precedent. 

I'm happy to be told I'm wrong there.

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Yes - you should never backdate dividends

I would be interested in what you read that details the situation you have described above.

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Not right

You said:

What would happen if I was to phone up HMRC and say sorry client didn't realise he had to register as self employed, he was never asked to submit a 10/11 tax return but should have? Interest + late filing penalty + potentially not registering as self employed?

He's not self employed. He's an employee/director of the company.

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Neileg - Yes good point but does it make any difference?

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.

 

If you are covering for someone who is on holiday then wait until they are back.

The general answer is:

1. File missing return. Penalty mentioned above wont be levied in practice, HMRC are happy to take late returns, we do dozens of them every year.

2. Dividends are down to your judgement. If it was me I would probably just make it work in relation to profits at each point (probably quarterly)  balance the tax correctly and try and dig the guy out, having told him how he ought to be doing it with dire warnings to do it properly next time.

You know about OD DL's accounts and interest, right?

Others will tell you not to do (2) as its not right, which it isn't. But that's where the judgement comes in, if however you dont know what are doing, then of course its hard to make a judgement call about what's right in this circumstance.

 

Edited as was rather OTT.

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I agree with ireallyshouldkn...

Perhaps he's failed to notify HMRC that the company is active. That's a different matter.

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Thanks for the helpful comments. Less thanks for the condescension. 

With sole trader vs director. Yes I'm well aware there are huge differences but in this case? The fact is he was meant to do a tax return and he didn't. The nature of the income being declared is surely irrelevant.

I also realise this is a pretty standard issue that I'm not aware of, that's why I'm asking! I'm a very experienced ACA I'm just not at all experienced in the practicalities of dealing with HMRC as I was previously in a specialist non-tax area. I didn't realise people here aren't happy about anyone trying to do anything different to what they have been doing the last ten years. I shall try and only ask questions I know the answers to in the future.

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Clarity

Anonymousey wrote:
With sole trader vs director. Yes I'm well aware there are huge differences but in this case? The fact is he was meant to do a tax return and he didn't. The nature of the income being declared is surely irrelevant.
As an individual, you only need to do a tax return if HMRC ask you to do one. What seems to have happened here is that it is the company has failed to notify HMRC that it is trading. This would normally trigger a notice for a SA return for the director. HMRC consider that all directors need to file a SA return without a notice from HMRC but there is no statutory basis for this
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Helpful answer

neileg wrote:

Anonymousey wrote:
With sole trader vs director. Yes I'm well aware there are huge differences but in this case? The fact is he was meant to do a tax return and he didn't. The nature of the income being declared is surely irrelevant.
As an individual, you only need to do a tax return if HMRC ask you to do one. What seems to have happened here is that it is the company has failed to notify HMRC that it is trading. This would normally trigger a notice for a SA return for the director. HMRC consider that all directors need to file a SA return without a notice from HMRC but there is no statutory basis for this

Thanks Neil,

That's exactly the explanation I wanted. He told HMRC the company was trading after the SA year end but before the company year end. Unless he's hiding paperwork they never noticed there was this gap. His total income for 10/11 will only be dividends and sit in the basic rate threshold so no tax will even be due. I just don't like the idea of him not filing the return that he should have.

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Backdating dividends

You should never backdate dividends.

However, if you think the director went through the correct process of (i) ascertaining the levels of distributable profit/reserves and then (ii) drawing the money out, then one could argue that you are simply doing the paperwork relating to genuine dividend payments, albeit rather late. However, from the sounds of it you can't genuinely say that - your client is one of those "it's my company, therefore it's my money" types.

Best option in that case would be to accept the overdrawn DLA, take the hit of s455 tax for now, with the possibility of getting some of it back when the 'genuine' dividends are paid.

Perhaps also give him some lessons in basic dividend calculations - we have a simple template we give to some clients which guides them and then acts as a contemporaneous record of their 'deliberations'.

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.

@OP, apologies, you are right that was rather OTT and I have edited my post.

It appeared from your original posts you were making very fundamental errors to the extent of confusing the status of a sole trader and a limited company which suggests a complete lack of any theoretical understanding of the very basics of tax.

This typically happens with "the bookkeeper that decides tax is easy" the result being misery for both the client and everyone else invovled.

Clearly that isn't the case, I agree its quite a different matter to be new in practice and not have come across the practicalities of working with HMRC as opposed to the basics of what underpins the tax system.

What I would come back to however if you are a FCA is your basic ethics which state that you ought not take on anything that you are not fully competent to do, or in other words if you really are not sure about something get some proper third party help. I subbed quite a lot of work out in the early days (being non-tax myself and coming into it following audit and working in industry) and learnt by discussing the case with those who had been around a little longer than I.  Very valuable experience.

 

 

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While HMRC might think all directors should be in SA

there is nothing in legislation that says so, so that if there is no liability then there is no need to register for SA.

The issue then is; if he has not done the necessary paperwork in strictness surely what you have is a potential o/d loan account and beneficial loan benefit (which probably means that there was a need to notify for the benefit in the earlier year) that is then cleared with properly voted dividends in the later year, which also have the effect of throwing him into the higher rate in the later year.

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Thank you all. I'm comfortable about how to proceed now.

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Depending on what you decide

and how you ultimately proceed you might use HMRC's new Tax Return Initiative

 

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No SA Return

THe CT41g that is completed and submitted when compnay is set up advisesHMRC that there are company directors.  What we have done is to submit an SA01 (and a 64-8) and eventually receive a UTR.  If you are past this stage I suggest you do as already suggested which is to submit a previous year tax return electronically.

I was told by HMRC there no penalty is levied for late submission as there was no request to submit made.

With regard to dividends although no supporting paperwork is available I think that your client would tell you that these were diviidends.  They would only be unlawful if there were no reserves and using you accounting skills you will be able to tell when this was.  I suggest you initillaaly treat each withdrawal as dividend at the date of the bank entry.  But if a payment is supposed to cover both salary and div.  I think you are on much dangerous ground as there could be the contention that the whole was salary.

Sadly most accountants have come across a client that has acted as yors has.

 

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Hmm

Where I used to work we backdated dividends on all clients. Clients were advised to "draw out whatever you like, we'll sort it out when we do the accounts". When I queried it I was told "that's what's we do and we backdate all the paperwork as no-one ever checks".

Suffice to say I don't work there anymore and if anyone knows of an ICAEW firm in the Home Counties looking for staff please pm me.

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Some small points

Here are some small points which seem to have been overlooked or mis-stated.

It is the individual's obligation to notify HMRC when they become liable to submit a tax return, it is not down to HMRC to "pick up on it". It would appear from this thread that the point at which your client should have notified HMRC is the date he became a director. http://www.hmrc.gov.uk/sa/need-tax-return.htm

HMRC do consider that a late registration will incur a penalty. http://www.hmrc.gov.uk/about/new-penalties/failure-to-notify.pdf

In practice HMRC may not push for the penalty but it is incorrect to say there is none due.

Backdating dividends is illegal. It is an attempt to justify excess amounts taken from the company by saying they were always meant to be dividends. If you are happy to accept as stated above that the drawings from the company were dividneds and that the paperwork was not completed at that stage then go ahead and call them dividends and prepare the paperwork. I would ensure that there is sufficient evidence to support your decision in case an investigation is started.

Have a look at what the entry in the cash book is next to the drawings. This should give you a good idea of what your client was thinking the payments were at the time they were made.

If any such entry mentoins salary or wages why not make provision for director's remuneration at the level at which no tax or NI would be paid. That way you will not be wasting some of his personal allowances.

Consider what he was doing before the company was set up. Is there a need to prepare tax returns for the period before he was a director.

You must consider whether the faliure to submit tax returns and notify HMRC of the company commencing to trade was a deliberate attempt to avoid paying tax. If so you then may need to consider making a report to SOCA under the money laundering regulations. IF you are not sure then take advice.

There is a lot of advice given about what HMRC will and will not do. This can only be based on the experiance of the person giving the advice. It may or may not be what happens in practice but I would suggest that if you assume that HMRC will take the worst view every time then you will not go far wrong. In order to counter that you need to have your defences prepare din advance and that way you can protect your clients if the Inspector comes a'calling.

If you are not sure then ask, what you did with the original post was correct as you did not know. There are also tax helplines which you cna ask and also the ICAEW technical helpline.

 

 

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S7 TMA

Agree with Simon Lever.

Failure to notify chargeabilty is an offence.

If there is additional tax due as a result, expect HMRC to charge penalties under the new provisions of Sch 41.

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