Crown Court compensation received is it taxable?

Crown Court compensation received is it taxable?

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Hi

I have a client who has received compensation from the Crown Court in respect of a previous accountant who committed fraud and claimed the corporation tax had been paid, when in fact it hadn't. Client is currently paying the corporation tax off again!

What have I to do with this compensation on the accounts and would Corporation Tax be charged on this?

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By johngroganjga
18th Jun 2014 11:51

More facts please ...

Facts are not clear yet.  On the one hand you say that CT had not been paid.  Then you say client is paying CT "again"!

Who did the accountant "claim" had paid the company's corporation tax?

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By Jonesy_123
18th Jun 2014 11:59

The client originally paid the corporation tax to an 'HMRC bank account', account details were given to him by the accountant, which turns out the bank account was the accountants personal account and HMRC never received this money and spent it on luxurious items.

HMRC have cancelled all interest and penalties but informed my client that he still needs to pay the orignal corporation tax that was due, which he is doing at the moment.

 

 

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By johngroganjga
18th Jun 2014 12:17

Thanks

How has the original payment into the wrong bank account been treated in your client's books?

And who has paid the amount you are now asking about?  You say "Crown Court", which is presumably where the fraudster was convicted, but was the recovery not perhaps the result of a civil action against the accountant?

And finally, how is the amount now received calculated? 

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David Winch
By David Winch
18th Jun 2014 12:32

Crown Court

The Crown Court may have ordered payment of compensation to the client (as a victim of the fraud of which the accountant was convicted).

"Compensation orders are governed by sections 130 - 133 Powers of Criminal Courts (Sentencing) Act 2000 (PCC(S)A), while section 40 (1) Magistrates' Courts Act (MCA) lays down the maximum amount a magistrates' court can order, currently £5,000 per charge (see section 133 PCC(S)A for the position on TICs). The Crown Court has unlimited powers, but should have regard to the means of the offender. While the court's powers are very widely drawn, the High Court has stated that compensation orders should only be made in simple straightforward cases.
 
From 3 December 2012, section 63 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 inserts section 130(2A) into the PCC(S)A 2000 providing: "A court must consider making a compensation order in any case where this section empowers it to do so". This new requirement is in addition to the long-standing requirement in section 130(3) to "give reasons...if it does not make a compensation order...".

Victims may have suffered considerable distress, personal injury or financial loss and they are entitled to have these facts and requests for compensation put to the court. Courts attach considerable importance to the making of compensation orders and must give reasons where they do not make an order.

Compensation shall be for such amount as the court considers appropriate, taking into account any evidence and representations by the prosecution and defence.  In order to strengthen a compensation application, prosecutors (via the police) should seek evidence in support, for example an estimate or receipt for the repair where damage has been caused or proof of financial loss in the case of fraud. "Loss" may include a sum by way of interest (Schofield [1978] 1 WLR 979).

 

Turning to the OP's question, presumably the original payment was treated as payment of tax.  It is now apparent that it was in fact a loss due to fraud.  However perhaps there would be no harm in treating the 'second' payment of this tax as a loss due to fraud and the compensation received as a credit against that loss.

David

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By Jonesy_123
18th Jun 2014 12:38

The original payment was treated as tax paid, then once all this kicked off it was treated as bad debt in the accounts and has since been reversed as the amount has to be paid.

The amount that was paid was part of the recovery process from the police and was distributed to affected clients.

I am not sure how the amount received has been calculated, seems to be a lump sum that was paid out, as the accountant wouldn't have been able to pay off all the client's if the full amount was compensated. The CT was £26k and my client received compensation of £6k.

I have asked my client for documentation and all he has sent me is emails stating that he will receive the certain amount of compensation.

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David Winch
By David Winch
18th Jun 2014 12:40

I suggest that you now have a loss due to fraud of £20k (= £26k paid to accountant re 'tax' less £6k recovered).

I will leave others to advise whether that £20k loss is allowable against profits for tax purposes.

David

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By johngroganjga
18th Jun 2014 12:48

Not sure why you haver reversed your bad debt write off.  Carrying it in the books as a recoverable debt, rightly or wrongly, is not going to help one jot with the payment of the tax.

So to date your client has a net loss due to the fraud of £20k (i.e. net of the £6k compensation).  Has your client taken advice on civil action to recover that loss from the accountant?

Assuming no further recovery your question I think is whether the company is entitled to CT relief on the £20k?  Is that right?

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By Jonesy_123
18th Jun 2014 13:07

My client hasn't taken advice on civil action to recover the loss from the accountant.

Yes that's right, is there CT relief on the £20K?

 

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By johngroganjga
18th Jun 2014 13:23

Well perhaps, to cover yourself, you should advise him to do so - because that is the conspicuous gap in the sequence of events you describe.

Like David I will leave others to opine on whether or not you need to add the loss back in the CT computation.

Presumably you are clear on the accounting entries now.  Did the company claim tax relief on the original bad debt write off, and is it paying tax on the reversal?

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David Winch
By David Winch
18th Jun 2014 13:15

Civil action against the accountant

I suggest civil action against the accountant will be sensible if, but only if, there is an insurer who will pay out the claim (which there may well be).

If there is an insurer who is liable then the evidence of the accountant's conviction should make proving (the accountant's) liability straightforward.

It sounds like the accountant himself will have been cleaned out by the compensation order.

The issue then is whether there is any insurance cover (whether held by the client or by the accountant) and whether it covers losses of this nature.

Best advise the client to talk to a lawyer IMHO.

David

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By bernard michael
18th Jun 2014 14:47

Just bankrupt him

Just issue a Statutory Demand and bankrupt him ASAP

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By Jonesy_123
18th Jun 2014 15:19

Yes thank you John and David.

The company did claim tax relief on the original bad debt. I am reversing the bad debt in the current years accounts and was going to have corporation tax paid on this.

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By johngroganjga
18th Jun 2014 15:38

Again not sure why you are reversing the bad debt - or do you perhaps mean only £6,000 of it, which alone would make sense?

So the company has already had tax relief on the amount you are asking whether it can claim relief on?

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By Jonesy_123
18th Jun 2014 15:45

Apparently HMRC are wanting to see the corporation tax showed in the accounts as owing. So I would need to credit the corporation tax account, what should I debit if I am not reversing the bad debt.

where would I put the £6k to if the company has already claimed relief?

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Replying to rogerpearson65:
By johngroganjga
19th Jun 2014 12:16

HMRC

Jonesy_123 wrote:

Apparently HMRC are wanting to see the corporation tax showed in the accounts as owing. So I would need to credit the corporation tax account, what should I debit if I am not reversing the bad debt.

where would I put the £6k to if the company has already claimed relief?

What the company puts in its accounts is none of HMRC's business.  Of course the accounts should show the CT as owing - because it is.  That would be the case whether HMRC provided their view on that point or not.

I am not sure why it is not already shown as owing if you have debited the fraudulently obtained payment of £26,000 to bad debts.  David's explanation of the required entries is spot on.  But at no point is it possible simultaneously have a bad debt of £26,000 in the P& L account and a CT creditor of £Nil unless there has been some other major accounting error you have not told us about.

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David Winch
By David Winch
18th Jun 2014 16:36

Accounting entries

Presumably when the money was first paid the accounting entries made were -

Dr Corpn Tax (in Balance Sheet); Cr Bank with £26k

Then later when the fraud was discovered a further entry was made -

Dr Bad debts (in P & L A/c); Cr Corpn Tax (in Balance Sheet) with £26k

At that point you will have therefore have had an outstanding Corporation Tax balance in Creditors in the Balance Sheet and a P & L charge for bad debts (on which you in effect have obtained tax relief as a deduction from profits).

Now you need to -

Dr Bank; Cr Bad debts (in P & L A/c) with £6k

re the compensation received.

Yes?

The tax issue is whether you should have received tax relief on the 'bad debt' of £26k.  If you should (and did) then the £6k receipt is taxable now.

If you should NOT (but did) then that relief on the £26k obtained back then should be reversed.  That may involve interest & penalties.

David

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By Jonesy_123
18th Jun 2014 16:48

Thank David, that has helped alot and thanks again John for all your help.

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