Company money held by director

Company money held by director

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A client who is the sole director of a company had a large balance in a deposit account in his company's name.  The banking crisis happened and to protect his company's investments, he divided the fund into a number of new accounts.  These transactions were all put through the books, and he even minuted the fact that the transfers were being done to protect the company's funds.  The interest has always been declared as company income and never as his own.

It has now come to light at the year end, that the new accounts were all opened in his own name, not the company's.

I have advised him that HMRC will treat these balances as extractions, as will seek S455 tax (previously S419).  He is adamant that he has never extracted the funds, as they are still treated as Company assets in his accounts package.  Some accounts have already been used to pay company costs and none of them have been used personally.   I have stressed that as his name is on the accounts, HMRC will seek to treat the accounts as his money.  He has been able to provide all the written notes, made at the time of the initial transfers which support that the money is held on trust for the company.  But the banks were never notified that this was the case.

Due to the poor rates offered to companies, he does not want to move the accounts into the companies name.

Is there any way that we can defend that the accounts belong to the company and don't attract S455 tax, other than moving them now (within 9 months of the period end - which he has already said he will not do)?

He feels that his notes made at the time, qualify as a trust deed, but without bank notification, I doubt this will stand up.

Thanks in advance for any help.

Replies (10)

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By petersaxton
11th Apr 2011 21:57

You never know

I would not treat them as company funds but HMRC have accepted some very bizarre requests by clients so it's always worth a try. I do think it best to get HMRCs permission.

There was one such case when HMRC accepted a very bizarre statement and then with another client I asked HMRC for the same treatment and they thought I was mad - in exactly the same way I thought my previous clients request was mad!

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By gbuckell
12th Apr 2011 11:37

Can work

I had a case similar to this some years ago. Your client has clearly been more careful in his paperwork. In my case there was nothing beyond the cash being shown as a company asset on the balance sheet and interest being accounted for in the p & l account. To make matters worse, he had mixed the cash with his own funds. The reason for doing it was to get higher rates of interest. HMRC would not back down on the s419 point and so we took it to the General Commissioners and won. What I think impressed the Commissioners the most was when we were able to demonstrate use of some of the funds to pay a company liability (as in your case). I do not feel that failure to tell the banks is particularly critical. 

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By PennyC
12th Apr 2011 12:05

Don't give in

I had a case a few years ago, which didn't require much persuasion. All transfers to and from the account were clearly from and to the company. Inspector agreed that individual was holding funds on trust for company.

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By frustratedwithhmrc
12th Apr 2011 12:40

Not a problem.

I've seen worse in my time. Although these funds are being held in accounts in the name of the director provided there has been no cross-contimination with personal funds and preferably that they can be demonstrated as being used to pay company expenses, I shouldn't think that is a problem.

The bank might have a problem in that these funds aren't really his, although they are sat in a bank account with his name on it.

Provided that the correct accounting entries are made for all transactions, balances and interest, this shouldn't be an accounting problem.

Biggest problem he might have is an inspector querying why he has done this, however I think the minutes and the rationale of "protecting the company funds" is perfectly reasonable. In fact quite sensible really. The only reason I wouldn't do it is that I know how particular HMRC Inspector's can get about bank accounts.

I wouldn't want to trigger an investigation into my own personal affairs.

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By DMGbus
12th Apr 2011 13:21

Deduction of tax at source

It is normal (subject to bank errors from time to time) for interest paid by banks on Limited Company bank accounts to be paid gross.

For accounts held in individual names the reverse is true, ie. the funds held in an individual's name will have tax deducted off interest paid by the bank on the deposit.

So, in the circumstances here we seem to have:-

The bank report to HMRC tax deducted off interest "paid to an individual"The company's CT600 presumably claims credit for the tax deduction referred to above

This could result in HMRC action as follows:-

Enquire into the personal tax return - "interest received not declared"Enquire into Company return - claiming credit for tax returned by the bank under someone else's name

I wonder if anyone agrees that there should be a full disclosure of the arrangements put in place to stop HMRC enquiries after the event and at the same time get peace of mind that the arrangements are acceptable (I don't suppose anyone's tried it yet?).     HMRC should accept the arrangement - after all it's NOT a tax avoidance scheme, but rather a "side step unfair banking practices" arrangement.   It's just a matter of whether HMRC would, just to be awkward, try and extract an unfair s419 tax charge and further impose "benefical loan" provisions.

To sum up I think that, unless someone actually has made a disclosure of arrangements such as these to HMRC, it is most definitely "uncharted territory" with risks arising.

 

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By Katmandu
15th Apr 2011 11:21

HMRC seemed happy to leave my client alone

I have experienced this situation with a client.  We took the client on as a personal tax case shortly after he had sold his business where he remained as an employee.  About a year ago HMRC launched an enquiry into his personal tax return asking about a fairly substantial amount of undeclared interest.  After questionning the client it turned out that he had moved a substantial sum of money from the company bank account into a new account he had opened in his own name.  His reasoning was that at the time he was the sole director and shareholder and he regarded the money as 'his' and simply wanted to get a better rate of interest so he opened the account in his own name.  The account had been shown on the company's balance sheet  and the money had simply sat there earning what at the time was a fairly good rate of interest.  Two other firms had dealt with the business sale and acquisition and what I found worrying was that that the account was still in his own name post the sale of 75% of his shares and this obviously hadn't been picked up by either side in the due dilligence.

To cut a long story short, we explained the situation to HMRC, obtained copies of the relevant company tax computations from the company accountants and provided them to HMRC to show that the interest was included on the company's CT600.   HMRC accepted that our client was acting with good intentions and that the interest had been declared and were happy to leave it at that.

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By Tom 7000
15th Apr 2011 11:42

private funds

same story for me, I have had it both ways

 

I suggest you tell him to swop em to co name asap if you havent already

 

tomandco

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By Malcolm Veall
15th Apr 2011 11:54

Astonishing

Having HMRC agree that funds are company assets held on trust in the case of the OP's client & Katmandu's clients is one thing, they are both exeptional circumstances - including in statutory accounts as company assets bank funds that the banks would not repay to the company, (given that they know nothing about the trust arrangements), is quite another.

It may be that the banking practices are felt to be "unfair" but casually moving funds to increase their income-earning and ignoring s455 & the balance sheets that outside parties may rely on seems astonishing to me.

 

Perhaps I am just naive?

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By KH
15th Apr 2011 12:26

Not company assets

In my opinion there is no way you can count bank balances held in a personal name as company assets. It's rather akin to a husband and wife with 50% share each in an investment property, yet only the husband is putting the rental profits through his tax returns ... it is irrelevant whether any tax is being saved or not by this practice, in all such cases I've come across HMRC insist on amending the tax returns and showing the net rental profits shared equally.

If this were my client, I'd insist he put the money back into the LtdCo's name. As would the banks, if they knew! You see, someone's losing out by this ploy, in this case the banks (yes, I know, they deserve far worse punishment than this, but don't get me onto that rant!) ... I'd just amend the previous company accounts to show interest being paid to the company by the director (on his loan account), etc ... if the guy invested the money wisely, he won't be much out of pocket when comparing HMRC's standard interest rates for the year with what he could have earned by careful investment of the company's funds.

It would be a different scenario of proper trust documentation has been prepared by a solicitor, and the banks were also party to it.

And, I have to say, I have a lot of sympathy with the individual, but you can't just bend the rules to suit yourself, even if what you are doing is eminently wise and reasonable.-- KH

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By Katmandu
18th Apr 2011 18:00

I agree that the funds should be transferred back

I absolutely agree that the fund should be transferred back into the company's name.  In fact if the company concerned was my client then I would insist on it.  I was actually pretty much gobsmacked that having warned my client that HMRC were likely to regard these funds as an overdrawn director's loan or worst case net salary on which PAYE, NIC interest and penalties etc would be due that their attitude was pretty much 'don't worry about it, it was an honest mistake'.  Don't get me wrong, I'm not complaining as this obviously worked out very well for my client, (and the funds have now been transferred back) but this is just HMRC agreeing the tax treatment, the company is still a separate legal entity so from a company law perspective I believe that the funds have to be put back in the company's name.

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