accounting for the following

accounting for the following

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Client's year end is 31 March.  The accounts for the year to 31/3/14 show a pre tax profit of c£400k on a t/o of £2m.  The client company is being sued through the courts on the basis that the profits belonged to someone else.  What has happened is that the director of the client company used his knowledge of another business to take work away from that other business.  There is a bit more to it than this but I don't wish to go too far into the detail.  It is clear that for the period to 31/3/14 substantially all of the profits will need to be repaid.  A court date is set for June 15 which will confirm this position and how much of the 31/3/15 profits will also belong to the pursuer.  What will the accounting and tax position be for the client company for the y/e 31/3/14?

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paddle steamer
By DJKL
08th Nov 2014 13:52

Is the liability the company's

Is the potential liability the company's or is it a potential liability of the director i.e. are you sure it is the company that is being sued and not its director?

If it is the company the obvious thing is to get some written input from your client's legal team to confirm the possible outcome and its probability and then make an appropriate provision in the accounts with a suitably worded note.

Given the quantum you have to expect HMRC to query any relief sought. The directors also ought to be considering whether their company will be solvent  in the event of an adverse decision and planning accordingly.

The key here is what certainty there is re the outcome of the case and that surely has to come from the legal team acting for your client.

 

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By Steve Kesby
08th Nov 2014 14:12

"Client's year end is 31 March"

Does it have to be?

At the moment you only seem to have a contingent liability.

If the accounts were prepared, say, to 31 December 2014, then something that happens in June 2015 would be an adjusting post-balance sheet event. The claimant will also not then have notice of what the defendant's thinking is.

You also wouldn't then need to file anything with HMRC until 31 December 2015, but you could pay tax on 1 January 2015  and 1 October 2015 using your best guestimate of what the actual tax position will eventually be.

Just a suggestion.

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By blok
08th Nov 2014 15:21

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The defenders of the case are the director and the company (they are both being sued), so the director can't walk away from this.  I do struggle to get beyond the fact that this has arisen because of the actions of the director not the company.  Having said that it is the company that has earned the profits.  I have thought about extending the year end  - although that will bring its own complications because the courts have asked for March 2014 figures and are likely to ask for March 2015 accounts when the time comes.  The pursuers accountants and the judge is unlikely to take a change of accounting date very well.  I think I definitely need a provision in the accounts at 31/3/14 and it will probably be for a payment equal to the more than the accounting profit shown as certain legal costs and director's remuneration will not be allowed as a deductible expense by the pursuers defence team.  So, there will be a loss in the year to 31/3/14.  As to going concern - the director has deep pockets.  I am wondering how to treat the provision for tax purposes.  There is certainly an element of benefit in the payment by company from the directors POV, because he is being jointly sued and if company can't/won't pay, then he will need to.

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By blok
08th Nov 2014 15:24

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The lawyers for the client have confirmed that substantially all profits in year to 31/3/14 will be paid over.  That is for certain.  What is unknown is what portion of the 31/3/15 profits will be paid over (if any) because the longer time goes on the less likely that these profits have been directly earned from the directors historic actions.

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By User deleted
08th Nov 2014 15:27

Alternatively you could ask the director to indemnify the company for the potential liability and get away with just a disclosure rather than a provision?? And take a call when you're certain about the liability next year.

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