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15
2012

Confusion between self employment and limited company income

Client set up a limited company on 6th January 2012.  He has presented me with his invoices, bank statements etc for the year to date so that I can prepare some management accounts for him.  Two points have arisen:

1) I note that his first two invoices, dated 16th January and 1st February 2012, related to work performed by himself in November 2011 and December 2011 for a client, i.e. before the company was incorporated.

Is it allowable to treat this income as company income, given that the invoice was dated post-incorporation?  Would expenses be allowable for that period?

2) The company bank account was not set up (due to various delays) until the end of May 2012.  In the meantime, all invoices were paid to the client's personal bank account and later transferred to the business account by the client.

I do not think there is a problem with this course of action (the client needs to receive payments from his clients!), but my query is whether I can treat the payment date as the date the client paid the money into the company bank account?  Or should there be a directors loan implication as the client did hold onto the money in his personal account for quite some time before making the transfer?

Thanks for any advice.

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It was his self employment

1) I note that his first two invoices, dated 16th January and 1st February 2012, related to work performed by himself in November 2011 and December 2011 for a client, i.e. before the company was incorporated.

Is it allowable to treat this income as company income, given that the invoice was dated post-incorporation?  Would expenses be allowable for that period? -

Comment - I do not view it as acceptable as this was his self employed earnings and should be reflected in his own self assessment 

 

2) The company bank account was not set up (due to various delays) until the end of May 2012.  In the meantime, all invoices were paid to the client's personal bank account and later transferred to the business account by the client. 

Comment - I assume that you know that the company was in fact incorporated by your client and not bought off the shelf having been incorporated by somebody else as it seems unusual for monies to be paid into the director's personal account if it is money due to a company. Surely the cheques - assuming that it was cheques or direct payments from the payer and not cash - must have been made out in the personal name of the the director and I think that I would look a bit closer at the explanation for the monies going into his personal account. I would think it unlikely that a payer is going to pay monies to a third party namely the director if they are due to the company. If the explanation is correct then clearly he did take a directors loan unless remuneration etc was voted and paid.

 

regards and hope  this helps

Bill

www.wamstaxltd.com

 

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Thank you Bill for commenting.  With regard to the monies paid into his personal account, the invoice clearly states the company name at the top, "Client Name Consulting Limited" and the bank details at the bottom "Account name: Client Name".  So the client did indeed happily pay the invoice amount to the client's personal account, and I imagine that the client explained that he had only just set up the company, and that the company bank account was not yet operational.

Do others agree with Bill's comments?

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Broadly agree with Bill

The company could not have done the work if it was undertaken before it existed and so should not form part of the company's trading activity.

Money that did belong to the company but was paid into the director's personal account should be debited to the director's current account and subject to P11D BIK rules.

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P11D if no PAYE scheme?

We can get around the BIK issue by ensuring that interest is shown in the accounts and paid to the company (accounts not yet produced).  However is this necessary, given that the company does not have a PAYE scheme and therefore the company does not have a payroll reference under which to submit a  P11D?

The trading issue is what I expected, although I am sure I saw a thread on this forum stating that the company could include pre-incorporation trading activity, as long as it was not invoiced, and no funds received, until after the date of incorporation...  

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Commercial judgement

needs to be applied.

All those who have commented need to remember who they're providing a service to :)

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?

Kent accountant wrote:

needs to be applied.

All those who have commented need to remember who they're providing a service to :)

 

I'm not quite sure I understand your comment? Apologies if I have missed something obvious.

Thank you to everyone who has replied - I appreciate the responses.

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Remember the law

Kent accountant wrote:

needs to be applied.

All those who have commented need to remember who they're providing a service to :)

My services are only provided on a legal basis. I will not commit any criminal offences.

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Agreed, but still confused...

petersaxton wrote:

Kent accountant wrote:

needs to be applied.

All those who have commented need to remember who they're providing a service to :)

My services are only provided on a legal basis. I will not commit any criminal offences.

 

I quite agree and would not dream of providing illegal services... but am still rather confused as to the meaning of KentAccountant's post.  

For the avoidance of any doubt, I intend to explain to the client that his self assessment tax return will need to be amended to include the self-employment income relating to work performed pre-incorporation.  I will also be explaining that the funds he received into his personal bank account are a directors' loan, and to avoid any BIK implication, he needs to pay interest to the company at an appropriate rate.

I do not think there are any illegalities in the above course of action, but would appreciate being told if anyone thinks otherwise!

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P11D

If a P11D is needed then you have to set up a payroll scheme.

"The trading issue is what I expected, although I am sure I saw a thread on this forum stating that the company could include pre-incorporation trading activity, as long as it was not invoiced, and no funds received, until after the date of incorporation...  "

That information would be wrong.

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Seems right

That's the best way to do it.

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@sparkler

Sorry, wasn't very clear bit blase too.

Why on earth would anyone want to do a P11d when there is an alternative, as you you suggest an interest charge which is far easier, avoids (what I consider in these circumstances) unnecessary form filling (P11d), the difference in tax paid is minimal.

Regarding timing - who did your client's client contract with - the individual or the company? Wouldn't be the first time an invoice was raised incorrectly.

Clearly its open to interpretation, my view based on the facts above:

1. Client did work prior to company incorporation.

2. Therefore should have invoiced from sole trader not limited company.

3. Send revised invoices to end client in name of sole trader advising that these were incorrect due to transition from sole trader to limited company.

Nothing illegal just applying common sense, avoiding unnecessary work and acting in a clients best interests.

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Invoicing & P11D

"Regarding timing - who did your client's client contract with - the individual or the company?"

If the company didn't exist I would say the contract was with the individual.

Depending on the amounts involved there may not even be a benefit but given the dates I would expect there would be.

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Bingo

petersaxton wrote:

"Regarding timing - who did your client's client contract with - the individual or the company?"

If the company didn't exist I would say the contract was with the individual.

So its self employed income.

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Re P11D

Just to throw this in as a question. If there was no obligation to pay interest at the time the loan was made can you make such an accounting adjustment to avoid BIK?

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Hence the comment at 14.52 04/12/12.

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