Director refuses to accept my opinion ?

Director refuses to accept my opinion ?

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There are some personal legal expenses that need to be booked to DLA but the director is refusing to accept my view.

The director (100% shareholder) is saying these expenses should be allowed a legtimate deduction for tax purposes.  Basically one of the directors is taking action against an old shareholder.  Though in my opinion it is a personal expense.

The amount is material as it will put the company from a loss making position to profit

How should I deal with this client as I am due to finalise the accounts in the next week or so.

Replies (16)

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By Wiganer Elaine
07th Aug 2013 16:16

What exactly has happened?

Is the director personally taking action against a former shareholder on a personal matter, or, is the director acting on behalf of the company, taking action against the former shareholder?

I think the actual facts of the legal action need to be determined before you can say if the fees are allowable for the company or not.

Alternatively, if they are of a personal nature and the company pays them on behalf of the director then you could consider them to be a P11D item. Then they are allowable as a company expense but taxable on the director as a benefit in kind.

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Replying to GlobalTax:
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By Jim100
07th Aug 2013 18:50

late P11d

Wiganer Elaine wrote:

Is the director personally taking action against a former shareholder on a personal matter, or, is the director acting on behalf of the company, taking action against the former shareholder?

I think the actual facts of the legal action need to be determined before you can say if the fees are allowable for the company or not.

Alternatively, if they are of a personal nature and the company pays them on behalf of the director then you could consider them to be a P11D item. Then they are allowable as a company expense but taxable on the director as a benefit in kind.

If he does agree to the P11d option  (late P11d) would HMRC definitely allow the expense for a CT deduction ?

The facts I have just been told is that the director is pursuing the old director legally on the bias valuation of the company.  He had brought the shares of the director based on the valuation. 

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Replying to DJKL:
By johngroganjga
08th Aug 2013 11:15

Personal expense

Jim100 wrote:

The facts I have just been told is that the director is pursuing the old director legally on the bias valuation of the company.  He had brought the shares of the director based on the valuation. 

Then the costs are clearly nothing to do with the company as the company has no interest in the outcome of the dispute.  The dispute is between the vendor and purchaser in the recent share transfer, possibly including any professionals who advised the purchaser on the value of the company.

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By Jim100
07th Aug 2013 16:50

Agreed Elaine

Its more akin the director taking action against the shareholder on some personal matter

What happens if the director does not agreed the expenses to be taken as a P11d item but insists on the expense to be allowable ?

 

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By Steve Kesby
07th Aug 2013 16:53

Agree with the above...

... you might also like to take a look at the case of XI Software, which has these sort of circumstances and where it was decided that a proper apportionment of the costs should be made between providing the director with a benefit and the business purposes of the company.

That being said, I do find that people are sometimes too quick to bandy the word director about in relation to a shareholder-director. That person has two capacities.

If the action is wholly a dispute between the current shareholder (in his or her capacity as shareholder), then it has nothing to do with the company's business; it will not be an allowable deduction against the business profits and will be taxed as a distribution if it doesn't get charged to the loan account.

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Replying to lionofludesch:
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By Jim100
08th Aug 2013 12:16

Correct Basil

fawltybasil2575 wrote:

@ OP.   (1) Clarify please. From your post at 16.50 today, I have the impression that you have not yet raised with the director the question of whether he would agree to the legal fees being taxed on him as a P11D item ( an alternative thereto is of course that he refund the money to the company, perhaps via his DLA) - have you raised the point with him and, if so, can you confirm that he thinks he should not have to pay tax on it in any way.                                                          If his judgment is indeed that he should not pay tax on the legal costs in any way, what are his specific grounds for that judgment call ? - obviously, he must explain his reasoning -  you say the dispute was a personal matter, but does he think ( rightly or wrongly) that there is some "business" connection ?                                                                                                                    (2) VAT. Has the company reclaimed the VAT ( only relevant of course if the company is VAT-registered, and not operating the VAT FRS) ?  Unless the company can establish that the services were supplied to it, and not to the director, then of course an Input Tax claim would be incorrect ( the VAT will be irrecoverable, regardless of whether the company can claim tax relief on the legal costs, if the services were not supplied to the company) - if the services were supplied to the director personally, and not to the company, no VAT recovery applies even if one can validly state that the company derived benefit from those costs.                                               (3) In round figures of course,  what were (i) the legal costs, (ii) the loss ( after those legal costs) ; and (iii) the closing DLA balance ?      Regards, Basil                                                                                                                                                 EDIT. Posted before I read your last post.                         

Correct Basil

I have not broached the subject with the director on P11d.  The problem I have is the director expects me to waive a magic wand and get rid of any taxes he has to pay when I am only applying the law. 

Information has been forthcoming in drips and drabs so apologies for the continuous update.

Just found out there were two legal cases and one I have mentioned previously but the other one the company was taking an employee to court for some alleged misappropriation. The company lost the case and had to pay the other side costs.  I always wondered if these costs were allowable if you lose the case ? 

They have claimed VAT

 

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Replying to ashmehta:
By johngroganjga
08th Aug 2013 12:28

Company expense

Jim100 wrote:

... the company was taking an employee to court for some alleged misappropriation. The company lost the case and had to pay the other side costs.  I always wondered if these costs were allowable if you lose the case ? 

The expenses in relation to this are company expenses and I can't see any reason why they would not be allowable for tax. 

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By Richard Willis
08th Aug 2013 11:08

This of course comes under the heading

'It's my company and I'll do what I like.'!

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By Wiganer Elaine
08th Aug 2013 11:15

Director's Emoluments

@Jim100

If the items are shown on the P11D (including vat) then these costs form part of the director's emoluments and are allowable for CT purposes.

 

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By Jim100
08th Aug 2013 16:43

Post balance sheet event ?

Would the settlement need to go in the stats as a post balance sheet event or exceptional item. They lost the case and had to pay around the other side legal fees of 15K.

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By johngroganjga
08th Aug 2013 16:54

Do you mean the the court hearing was after the date of the balance sheet?

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Replying to lionofludesch:
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By Jim100
08th Aug 2013 21:14

court hearing

johngroganjga wrote:

Do you mean the the court hearing was after the date of the balance sheet?

yes after the balance sheet date

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By pembo
08th Aug 2013 16:56

who is the client ?

Is the solicitors client the director or the company ? If the former then a DLA item as presumably invoiced to him. If the latter then OK to claim for CT and VAT but then potential BIK for the director. Can though see an argument for no tax impact if he makes a 100% business claim against the potential benefit. HMRC may disagree however depending on the facts.

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By johngroganjga
09th Aug 2013 11:49

Then I think that you can only recognise the liability to pay the other side's costs as of the date when the court so ordered.  Client's own costs can be accrued up to the balance sheet date. 

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By David Gordon FCCA
09th Aug 2013 14:20

Directors' legal costs

 In these cases you are not going to win so do not get into an argument. If you are correct the client will blame you for not warning him in the first place. If you are incorrect the client will blame you, anyway.

 I assume that either the director did not win his case, or did not win entirely. (In which events he would have claimed and had costs reimbursed ?)

 Take the safe sensible option. Tell your client that you are a general practitioner, and that therefore you should take expert specialist advice. Tax counsel may be approached without the need to go through a solicitor. Clearly a significant sum involved.

 I am able to recommend a tax chambers that gave my client excellent advice.

 Based on my experience over the last two years:-

 In a limited company if your tax expert/counsel is able to show that the expenses were necessary to protect the company's trade and or assets, then if you win your argument, all costs are allowable. If you do not win your case, the costs are not allowable.

 So, it is reasonable to claim the costs if your client is able to produce a sensible opinion that the costs were necessary to protect the company's trade and or assets.

 You are not expert in what is a professional minefield. Sometimes as I saw, God may smile on you, and the counsel wins a most outrageous case. Sometimes the opposite.

 If the client is not prepared to go with this suggestion, you should not let your name be attached to the accounts, if he insists on claiming the expense.

You will probably lose the client.

 HINDSIGHT

If ever a client lets fall a hint that they may be involved in litigation, (rightly, or wrongly, unavoidable or not) take them to the nearest sewage farm and ask the client to go for a swim. it will most likely be more fun. It is your professional duty to warn them in advance, of the possible financial and or tax consequences, win or lose.

 

 

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By David Gordon FCCA
09th Aug 2013 14:36

sorry- clarification

 

Employer v employee disputes are generally speaking allowable costs.

The exception may be if the employer has been judged to have committed a criminal offence.

 Under the general principle that one is not allowed to profit from the proceeds of crime.

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