Mileage and business expenditure paid personally - no records

Mileage and business expenditure paid...

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Hi all

I am a bookkeeper and I am helping out a friend who has recently purchased a limited company. On reviewing the records it transpires that there a significant amount of expenses paid by cash or credit card by the ex owner which seem to be business related in there essence but there are no supporting iinvoices or, in the case of mileage, no log of journeys.

Our main question is - should there be a VAT or CT inspection would the expenses and mileage be 'rejected' and if so would the new owner be responsible?

Many thanks for any guidance.

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By User deleted
02nd Oct 2009 18:28

Was the company bought on a hand shake?
If not then you should be able to use the tax warranties and indemnities contained within the sale agreement to claim any future tax liability back from the vendor.

If they did not use a solicitor to buy the company via a properly drawn up sale agreement then they have a problem.

You have not indicated how much is involved nor how profitable the business is.

This would have a bearing on how you might deal with it.

There are various tax implications depending on how you want to deal with it.

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By lyonandco
03rd Oct 2009 17:07

Thanks - more info

Thanks for the comments so far.

The company has always traded profitably and the mileage claims were around the 10,000 miles/year mark. All claimed at 40p/mile. The other expenses totalled circa £1k/month.

I am sure that there was a sale agreementt, but it would be good to know how to proceed if not.

 

Any help gratefully received!

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By User deleted
04th Oct 2009 10:47

VAT & CT issues
The first thing that you need to do is find if there was a sale agreement as that should cover the issues involved. You don't want to run up costs and expect him to foot the bill without getting legal advice first.

VAT
First of all no VAT should have been reclaimed on the expenses without a proper VAT invoice, so any VAT claimed has been claimed in error. This should be corrected on the company's next VAT return.

CT
If the revenue were to query the expenses then if the company is unable to justify them they will be deemed by the revenue to have been taken by the former director personally.
This would mean that the company would not be able to deduct these expenses in computing the taxable profits, so the tax liability would increase by 21% x the amount of expenses added back. (Using the current small companies rate)

If the revenue were to investigate this they may decide to go back to prior years upto 6 or 20 in cases of fraud.

Additionally, this has further consequences re him taking the money.
Would the revenue seek PAYE and NI on the net amount that he has taken? Quite possibly. Again the revenue may go into previous years.

There are other issues that may arise if you consider adding back the expenses and debiting the former director's loan account.

Hopefully, this gives you some indication of the problems but you will need proper advice from a good accountant who has been fully informed of all the relevant facts. He should then be able to either advise you of possible options of how to proceed.

Ideally you need to speak to the accountant who advised your friend regarding the purchase of the business as soon as possible. If they did not get advice prior to making the purchase then they will need to find a good accountant as soon as possible.

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By User deleted
05th Oct 2009 11:04

Thank you very much for all of your input.

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