Limited Company - Bank account not in Ltd Co name??

Limited Company - Bank account not in Ltd Co...

Didn't find your answer?

Hi

I have just taken over a client which is a Limited company and i have noticed that the bank account is in the Directors personal name (sole trader company) he set up the Ltd co back in 2002 and has never changed the account details. His previous accountant always showed this account on the balance sheet in the Ltd co accounts, is this okay to do?

If not how do i go about removing it from the accounts, it was overdrawn by £ 4,500 as at the end of the previous year would i transfer this over to DLA, and in this current year post all bank receipts and payments to DLA?

Thanks in advance

Tim

Replies (21)

Please login or register to join the discussion.

avatar
By honesty
19th Jun 2011 18:02

DLA sounds about right. I would have thought it best to get the bank account name changed. Has the past interest been shown as bank interest? The situation needs to be corrected now.

 

I had the oposite problem few years ago. Individual using the bank account of a struck off company.

 

I'll leave the more experienced contributors to give advice.

 

 

 

 

 

 

Thanks (0)
Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
20th Jun 2011 10:03

DLA

Strictly speaking, the bank account belongs to the individual, not the company. As such, it is a Directors Loan Account. All monies paid in and out of the bank account are DLA entries.

There is nothing in law to stop this set-up; there is no obligation for a company to have a bank account - but the implications for tax purposes are potentially high. If there is money in the bank account, then this is a Dr to the DLA - meaning potential s455 and beneficial loan tax issues dependent on the timings and amounts involved. An overdrawn bank is less of of an issue, but it really still does need addressing.

Some accountants declare substance over form, i.e. that it is the business's bank account, and it's just the owners name that is recorded wrongly at the bank (i.e. never changed when the business incorporated), but the intent is for the account to be the business account of the company, and thus showing it in the balance sheet as a bank account, not a DLA. Whether you would be happy arguing that with a HMRC inspector should the opportunity arise is up to you.

It really is best for the client to get a Ltd bank account ASAP - saves any future hassle.

Thanks (0)
avatar
By MBK
20th Jun 2011 12:13

Whilst I agree...

.. that the position should be sorted out by opening a company bank account ASAP, I don't agree with the previous two posters that this is a DLA issue.

It is perfectly possible that the director holds the monies in the personal account as nominee for the company. In such circumstances the ONLY correct accounting treatment is to show the bank balance as part of the company's balance sheet. It is very long established in both accounts and tax (usually) that it is beneficial ownership that counts, not legal title.

I would suggest that the fact that the bank account has been treated as belonging to the company for the past 9 years or so is the strongest possible evidence that the director does, in fact, hold the funds as nominee. That being the case you would need need some quite strong evidence to overturn that assumption and treat the whol thing as a DLA issue.

 

 

Thanks (0)
avatar
By MarionMorrison
20th Jun 2011 12:41

Trading As?

 I have this upcoming as I wend through the delights of Incorporation.  My existing business bank account (which is a business account not in my personal name) is the recipient of very many clients paying by standing order as well as other existing banking arrangements.

In a perfect world I would simply change the name on the account to that of the new limited company and keep the account number.  But the bank tell me that this is impossible - I have to open a fresh account for the Ltd Co and transfer all payments over to there.  Knowing my clients this will take years.

Is there not some election/minute I can make that would enable me to continue to operate the same account as nominee?  The old account is in the ongoing trading name of the business.  So from 1 July (say) I cease to be McDonalds and become McDonalds Accountants Ltd t/as McDonalds.  Is it not possible for me to just float on without interminable account bureaucracy?

Thanks (0)
Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
20th Jun 2011 15:20

Nominee

Thank you MBK, that was the terminology I was looking for, but couldn't remember!

In practice, I'd decide either on a case by case basis. In the case of an established genuine business bank account that is clearly the main trading account, I would include it as a company bank account and not a DLA. I'd be comfortable with this; I know other practitioners wouldn't be, rightly or wrongly. If the arrangements were a bit more woolly, a DLA treatment might be more appropriate.

When I incorporated my business a few years ago it took a good few months to open the bank account and so I continued using the sole trader one for the time being. I did view it as a DLA but as I kept an eye on the balance and it eventually closed to Nil, it didn't make any impact on the accounts or tax. Thankfully I didn't have a hefty weight of standing orders to change at that point...

Marion, I'm sure a minute would suffice, although a letter to/from the bank might add further weight. I think it may be the attitude of the bank that causes more trouble than the potential tax issues - though given they would ask for a Personal Guarantee from you on behelf of the company anyway, I can't see it being too much of an issue. Never can tell with banks though... I did actually change my business bank in January - changing the standing orders was a pain, but not too bad, so if it needs doing, if you schedule it for a quieter month it might not be too bad?!

Thanks (0)
avatar
By Phil Rees
20th Jun 2011 15:40

One line in Monsoon's 1003 post sums this issue up for me

"Whether you would be happy arguing that with a HMRC inspector should the opportunity arise is up to you."

 

Thanks (0)
avatar
By User deleted
20th Jun 2011 21:11

Another pitfall could be ...

... personal bankruptcy of the director, and the effect on the creditors of the company if the company funds are seized (if it were to go back in funds? The converse would be the dilution of available assets for personal creditors if the bank is also a creditor for the overdraft (I think a bank unlikely to seek a personal guarantee on a £5000 overdraft of an established company assuming the trading is not in decline)

I know nothing in depth on this, just a thought that occured!

Thanks (0)
avatar
By Malcolm Veall
22nd Jun 2011 13:01

When the **** hits

The crisis this could cause is not a tax argument.

How confident would you be that the other creditors of the company could successfully argue with the bank that they could legally treat this as a company asset available for distribution on a winding up?  Not very is my guess.

So when they say they relied on the accounts you prepared showing large bank balances that turn out to not belong to the company at all - who will they sue?

Thanks (0)
Euan's picture
By Euan MacLennan
22nd Jun 2011 13:52

The telling point?

In MarionMorrison's response, she says:

"In a perfect world I would simply change the name on the account to that of the new limited company and keep the account number.  But the bank tell me that this is impossible - I have to open a fresh account for the Ltd Co"

So, the bank does not accept that a limited company can have a "pre-owned" bank account originally set up for an individual.  The bank would refute any claim that the funds in the account belong to the company or indeed, anyone other than the individual whose name is on the account.  How can the company possibly disclose the individual's bank account as an asset in the company's accounts?

I reject the beneficial owner/nominee argument.  The company has no legally enforceable title to the bank account.  It can feature in the company's accounts only as a DLA with the attendant s.455 tax liabilities.

Thanks (0)
avatar
By jonbryce
22nd Jun 2011 14:11

Going concern

We prepare accounts on a going concern basis, so issues about what might happen if the company were to go bust are not applicable, unless it is likely that they will.

Thanks (0)
avatar
By The Black Knight
22nd Jun 2011 14:55

Has the company even traded ?

Has not the sole trader just continued as a sole trader ? I bet nothing else happened either ! What other evidence is there that the company traded if there are no transactions through a company bank account, may be it is just a case of false accounting and tax evasion for the past 9 years ?

What does the related party transaction note say ?

Deliberately concealed ?

MLR ? suspicion ?

 

Thanks (0)
avatar
By Malcolm Veall
22nd Jun 2011 15:04

Really a limited company?

Kalden,

You may actually be right - I have come across people who thought "being a limited company" just meant paying £40 to add some nice looking letters to their business name.

Although presumably not MLR as that would need understanding that what was done was wrong.

Thanks (0)
avatar
By Malcolm Veall
22nd Jun 2011 15:06

Going Concern

to jonbryce:

That may be true, but I would not want to be defending that against company creditors in a court.

Thanks (0)
avatar
By pauljohnston
22nd Jun 2011 16:01

Nominee and Marion

The concept of a nominee is very well established in trust law.  Thus as long as dealings in the account were shown to be relating to the Ltd Co I feel that would end any argument in court.  Judges look at the real reason thus a Ltd company account having only personal entries may well be construed as a personal account.

Marion yours is a regular dilemma.  To make life simple I suggest that your old non Ltd account be used only to receive the standing orders and that the only entries you make are transfers to the Ltd Co account.

Thanks (0)
avatar
By JohnBanfield
22nd Jun 2011 18:13

Accounting Standards Rule OK

Coming in from the Accounting Standards angle, I think its perfectly ok to show it in the Accounts of the Limited Company, as it meets the criteria for an Asset (or Liability) - future economic benefits etc, and can also be shown as a Cash equivalent as its readily convertible into cash, so I don't see any reason to change the way the Stats have been prepared. I'll leave it to my learned tax colleagues to fight over the DLA implications etc.

John

Thanks (0)
avatar
By MBK
23rd Jun 2011 07:55

There is no doubt ....

... that a bank account held by the bank in a personal name is correctly shown in a company's accounts if there is a nominee deed in place. That is fully efective for tax too. There are no DLA implications.

The only issue here is that it doesn't appear that there is such a deed in place. But a deed is not necessary  - it is simply evidence that puts the position beyond doubt. Without a deed one looks to the other evidence available. In this case 9 years or so of the bank account being treated the way it has seems to me to be plenty of evidence.

The issues that various posters raise about "when things go wrong" are not relevant to the accounting / tax debate. They simply point up some legal risks associated with this sort of structure which mean it isn't a great idea to do it this way if it can be avoided.

If the company goes bust there is no doubt at all that the liquidator wil be able to force the individual to hand over the funds.

If the individual goes bankrupt then, because the legal title of the bank account rests with the individual, the trustee in bankruptcy will be able to take the funds from the bank account. The company will then be a creditor in the bankruptcy - which clearly gives rise to various issues as to how to account for with the funds that are no longer at the disposal of the company. But that doesn't change the current accounting and tax treatment until (if) it happens.

 

Thanks (0)
avatar
By pauljohnston
23rd Jun 2011 09:05

following MBK's advice

I suggest that a short bare trust/nominee deed be drawn up stating the facts.

Thanks (0)
avatar
By Gethin4tax
23rd Jun 2011 10:26

Names on cheques

I wonder why the bank has accepted cheques made out to a limited company into the personal bank account. Are cheques also made out to the individual? If so, is other documentation deficient - for example are invoices clearly in the name of the company? This abscence of a bank account for the company may indicate more serious problems.

Thanks (0)
avatar
By The Black Knight
23rd Jun 2011 11:02

P I Cover

has the previous accountant got PI cover, or a house ?

If the client was non the wiser ?? how do you not know I wonder ? the accountant must have known ?

I would be very careful before setting up paperwork to pretend something (with the benefit of hindsight) was different.

I am not disagreeing with the nominee account arguement, but it does sound that this did not happen.

Thanks (0)
avatar
By Malcolm Veall
23rd Jun 2011 13:50

Simple Nominee or mixed use

I think that Kalden has the risk issue here: if it is a demonstrably purely buisness account, (as for example Marion's would be), then, just perhaps, I would feel almost comfortable with this.  However, it is highly likely, (especially if the client has never even twigged that this could be an issue), that there will be mixed company/personal use of the account, (as would have been acceptable if it were a sole trade) - then how clear is the nominee question?

MBK - you are very confident - does this come from actual experience of sucessfully arguing this point in court?

As a sole practitioner accoutnant I would hesitate to be willing to defend a negligence action on this point against the legal department of a bank or plc company creditor.

Thanks (0)
avatar
By saudaagar
22nd Oct 2014 16:32

does a limited company necessarily need a bank account

I agree with MBK - beneficial ownership angle.

How does the Director return the money within 9 months of taking it - the company has no bank account, so does he/she pay it in cash? And who has custody of this cash? Back to square one. As long as th company's liabilities are discharged fully and in timely fashion, irrespective of who pays them out, there should be little concern unless there is an audit involved.

Thanks (0)