I agreed to complete 2011/12 accounts for a family member as a favour to help save some accountant fees. He is a Director for his limited company SME (just him, one director, no-one else involved). All was plain sailing until we reconciled the Trade Debtors account.
The trade debtors account was showing a £20k balance and it turns out that this was amounts paid from the company for personal items such as rent, personal phone, general living expenses, etc. A salary had been paid as well, but only up to the personal tax free limit. For the year we have been preparing the accounts, further payments were made so the 'trade debtors' now stands at £35k.
I feel that the previous accountant has treated this incorrectly in showing it as a trade debtor rather than a loan. Before I submit the accounts and offer him advice, I would really appreciate it if someone could reassure me that I am correct.
This is how I think it should be treated:
(1) the loan should always have been treated as a benefit in kind, therefore interest should have been charged.
(2) none of the loan has ever been repaid, and it is now over the 9 month period, so we have the following options available:
(a) the company must pay 25% corp tax on the loan balance
(b) we release the loan to show it as salary/dividends and he is then liable to pay the respective NI on the loan amount.
(c) the loan is written off and he will still owe the NI
Or am I missing something and have got it totally wrong, and the original accountant was correct in that we can treat it a a trade debtor forever with no tax to be paid?
Would really appreciate any comment here! Thanks very much in advance.