Is this legitimate or should I be worried

Is this legitimate or should I be worried

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My client has a limited company customer who has gone into liquidation owing my client's company approx £30,000 gross.

The director of this customer, who is independently of substantial means and is a close friend of my client, has said that he does not wish my client to be out of pocket due to the liquidation of the company. He has offered my client a gift equivalent to roughly the net amount of the debt (approx £25,000) .

He has also suggested that the gift may then be loaned by my client to his company as a director's loan in order that my client's company does not have a cashflow problem. My client's company would be able to claim back the VAT on the debt using bad debt relief once the debt has been approved by the liquidator.

Further the director of the liquidated company has suggested that instead of drawing a salary my client can draw out his "normal" salary for the next few months but that this could be considered as a repayment of the loan and therefore not subject to PAYE or NI thus saving the company even more money.

The initial loan comes from, as far as I am aware, legitimate sources and is a gift between friends to reflect the fact that my client is the innocent and unwitting victim of a business failure over which he had no control.

My problem is that this does not feel right. Am I right to feel worried or should I just accept the facts as given and be thankful that my client is not going to have cashflow problems and will continue to be a client into the future?

Any advice gratefully received.

Simon Lever

Replies (4)

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By billgilcom
25th Apr 2007 14:50

Hardly a Bad Debt
Given what is said it can hardly be that your client's company has a full bad debt relief - clearly the only thing that generated the "gift" was to replace the company's hole in it's profits. If this is the sort of tactics that the "other well off director" employs then perhaps your assertion that the gift comes from legitimate sources is you convincing yourself that you do not need to make a SOCA report - on BOTH directors

Presumably the other director is experienced in such matters and smacks of preference in a liquidation- not that I am an expert in those matters.
regards
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By billgilcom
25th Apr 2007 14:52

A Gift Offered?
Another thought strikes me that as our client is being "offered" something it looks to be in consideration of something other than friendship otherwise the gift would just have been given. presumably offered suggests that your client has to keep quiet about it?

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By billgilcom
25th Apr 2007 14:54

Risk review
Oh yes forgot to mention that if HMRC were to risk review the company director's loan account against your client's normal income - reduced by the gratuitous loan - then I suspect your client/ his company might come under scrutiny for a wee tax enquiry

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By Euan MacLennan
25th Apr 2007 15:41

Seems OK to me
The debt is owed by one limited company to another. They are both legal entities which are separate from each other and their respective director/shareholders. Your client's company is entitled to whatever VAT relief it can obtain on the bad debt due from the other company.

If Rich Boy wants to make a gift, that is up to him. It is up to your client whether he wants to put the funds into his company by way of a loan, but if he does, the company can certainly repay the loan in due course without any tax implications. Whether or not your client continues to draw a salary at the same time is also entirely up to him, but he would be well advised to draw £5,220 a year to maintain his NIC record.

You should make some enquiries to establish that Rich Boy is indeed sufficiently well off to fund the £25,000 and that it did not derive from money fraudulently extracted from his company, otherwise you might well need to report it to SOCA.

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