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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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.
Personal expense
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.
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.
Company expense
... 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.
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.
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.
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.
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.
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.