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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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.
"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.
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.