I hate these - client assumes a salary will be backdated

I hate these - client assumes a salary will be...

Didn't find your answer?

I have a new limited company client who needs accounts to be filed this month.

The company bank account is littered with random 'drawings'. He recognises that he has not recorded anything as salary. But, as he says, he never has. His old accountant used to tell him what figure he was putting in as salary when he prepared the accounts. No P35 was filed in 2013 or, it would appear, in recent years.

My instinct is to tell him that, unfortunately, his salary was a big fat zero. Am I being harsh? I suppose there is a compromise eg. a salary up to LEL or a figure that would not have required the filing of a P35. What would you do?

Replies (17)

Please login or register to join the discussion.

avatar
By andrew55
13th Feb 2014 11:51

I'd do the latter

Personally I'd put in the highest salary possible without a P35. Then I'd explain why their last accountant wasn't really doing them any favours with this approach and then sell them a payroll service for a lower fee than the additional saving - assuming they have no other untaxed income of course!

Thanks (1)
By stratty
13th Feb 2014 11:54

Lower Earnings Limit

Keep the salary below the LEL and you will be fine.

Thanks (1)
avatar
By refs8
13th Feb 2014 12:07

Yes you are

I personally think are being harsh, but understand the annoyance. I our believe job is to do the best for the client within the law. I think RTI will stop a lot of backdating !

 

Thanks (0)
avatar
By justsotax
13th Feb 2014 12:13

unfortunately what you describe

is the reality of a small business...drawings made when funds allow....a concept the 'employed' do not understand.....(as no matter how lacking in cash our country may be those of the public sector variety always get paid...on pay day each month)....

Thanks (0)
By ccassociates
13th Feb 2014 12:21

Careful

Are you now trying to change history. If you do, what history will client expect you to change next time.

Are there minutes that state that a salary is to be paid, what level are the random drawings? why should you decide the level of salary ? if the "random drawings" exceed the LEL level is it you who has to decide that the rest is dividend, loan, theft ??

I would be tempted to go down the big fat zero line and advise him what he should do to put things right. I suspect if HMRC looked at this without the relevant paperwork they would go down the big fat salary route and penalise the hell out of him, would you then be asked to create the paperwork??

Too many "directors" expect us to manage history for them, to avoid tax. If they cannot manage their own business in a proper fashion but don't want to pay for someone else to manage it contemporaneously, they should not be Limited

And experience shows that if HMRC become involved in any way, he just did what his accountant told him to do didn't he

Thanks (1)
By James Hellyer
13th Feb 2014 12:24

You can't change history

While you could put in a salary up to the LEL, the question is whether you should do so.

Is there anything to indicate that any of these payments are salary or dividend other than "my old accountant did this"?

If there isn't anything to indicate that the payments were intended to be salary or dividend when they were made, then they're director's loan account withdrawals.

 

 

 

Thanks (1)
By ShirleyM
13th Feb 2014 12:39

Is it changing history, though, or just a misunderstanding

The client wanted, and expected salary to be paid. He didn't do it himself because he didn't know how, or even how much was advisable, or he thought the accountant would do it for him.

I think in this instance, the previous accountant has failed to educate the client about proper administration of Directors remuneration, and it is simply an oversight, rather than a rewrite of history. I would put through pay under the LEL, and then educate them about proper payroll procedures going forward.

Thanks (2)
avatar
By justsotax
13th Feb 2014 12:51

I do

wonder sometimes who is paying the fee...the Revenue or the client....perhaps you should put through the whole of the drawings as salary....of course it will be declared late so client should be able to pick up some nice fines as well as interest charges for late payment of PAYE...hope he can afford to pay you your fees too for ensuring he doesn't annoy you again.... 

Thanks (0)
By ccassociates
13th Feb 2014 13:04

OK

@shirleym. in which case there will be minutes to support the argument so your view is fine

@justsotax are we professionals or mercenaries are you implying that if we are paid enough we just do anything we are asked to do, what about ethics?, what about covering your own [***]?

clearly Andy has an issue here or he would not have asked the question

Thanks (1)
Euan's picture
By Euan MacLennan
13th Feb 2014 13:24

Under the LEL

I agree with ShirleyM that the client thought he was drawing salary (although I think CC is placing an excessive reliance on Minutes), but you cannot be complicit in breaking the law, so you must limit the amount to just under the LEL as the company appears not to have a PAYE scheme (pay at or above the LEL requres a PAYE scheme and consequent filing of returns).

You can apply for a PAYE scheme now and put through whatever salary is required in the last two months of 2013/14.  As I assume that he is a director, both tax and NIC are on a cumulative YTD basis, so there is no problem there.

You could persuade him to declare the optimal salary of £641 a month, backdated to April 2013, and re-educate him to think of his drawings as dividends.  Persuade yourself that you will then be preparing his dividend paperwork after the event, but not quite re-writing history ... !

Thanks (1)
avatar
By andy.partridge
13th Feb 2014 16:13

Thanks

My decision-making isn't driven by my irritation with the client. I know whose side I'm on. I'm with the honest client who doesn't want to pay any more tax than they should. Then there is the 'stupid' client (ok, that is harsh) where my priority is to help keep them out of trouble. Sometimes it requires a less than sophisticated approach.

There can be a fine line between pragmatism and a compromise of personal ethics and those laid down by the institutes. Working mostly on my own, it's good for me to see where in the spectrum I fit in and compare with others occasionally.

Thanks all. You have been very helpful.

Thanks (0)
By tebthereb
13th Feb 2014 22:29

Isn't the advisor's responsibility to educate the client as to the difference between what a salary actually is and what a dividend actually is, inform them how these are each taxed, inform them on any reporting requirements and penalties - and then ask the client to confirm what it was they were taking when they drew from the company account?

If client just considers that they are extracting profit as they please, then that sounds more like a dividend to me or perhaps a loan/advance issue. Furthermore I don't really understand how advising the client to treat amounts within the LEL as salary can be correct unless client is saying that amount was salary.

Backdating (re-writing history) is not OK but I thought documenting a decision after an event was fine. So if the client confirms they took X as salary and Y as dividend but has not documented it, then the documentation could be dealt with now to avoid any doubt.

If the amount that was, as a matter of fact, salary exceeded the LEL then I would have thought the client must be assisted in correcting the failure in their reporting requirements etc.

The advisor should of course be recommending an efficient remuneration strategy going forward and explaining how to document this properly.

Incidentally I am not sure what the minuting requirements are for a one-man band (or if that applies here)? Technically, I would guess, the same as any other company.

Thanks (0)
By James Hellyer
14th Feb 2014 12:48

Tricky one

I think it is rewriting history because the client has no idea how much they were paying themselves in salary.

It sounds to me like the amounts paid were director's loan account withdrawals, with the former accountant topping up the loan account with salary and dividends when he prepared the accounts.

I would have problems recognising a liability in the accounts if the person to whom the money was due had no idea how much was due to them!

It's arguable that there's a constructive obligation here to pay salary, but even then the guideline for the amounts must be what was done in the past (e.g. round sum, up to the LEL, etc), as the client hasn't a clue!

 

 

 

 

Thanks (0)
avatar
By rworboys
14th Feb 2014 13:10

I would

Have a look at EIM 42280 and compare the manual and legislation to what had happened and go from there

Thanks (0)
By ShirleyM
14th Feb 2014 13:15

Each to our own

We often get 'uneducated' clients, and sometimes have to estimate costs and other items for the first year. It may be the clients fault for not listening to their previous accountant, or maybe the previous accountant didn't bother to explain (assuming they had a previous accountant).

I always make it clear that estimations are a 'one-off', for one year only, and will not be repeated in following years, as they now know what the proper procedure is, and if they don't follow proper procedures then they lose the tax relief.

Thanks (0)
avatar
By DMGbus
14th Feb 2014 13:19

Client understanding

In a situation like this I can see the pontential for client honestly believing that he had given instructions to his accountant as follows:

Record a tax/NIC-efficient salary for meWhat I have drawn over and above the tax/NIC-efficient salary is to be treated as dividends

In the circumstances the client is doing nothing wrong if he says "the above were my instructions, I know not what was a tax/NIC efficient salary - that's what I employ an accountant for - do what's best for me, that's your job".

Now if the above is "too naughty" to go along with then the client will be disadvantaged through no fault of his/her own making.   The only thing that I can think of to retrieve something out of the situation would be to accrue an undrawn salary (ie. accrual in the accounts, cost in the P&L) and obtain CT relief providing that said salary was "paid" (reported under RTI) within 9 months of the FYE.   

Clearly, as I think everyone agrees, the correct ongoing situation is to report under RTI a pre-decided ("no changing of history") salary for the future on a month by month basis with the client specifically advised how to designate any surplus money drawn as dividends.

Thanks (0)
avatar
By justsotax
14th Feb 2014 13:35

changing history...

I am assuming that for the clients who draw small salary correctly, but also have drawings that you ask them to prepare a dividend minute each time they draw money....or that you do this for them...that of course assumes they have sufficient reserves...presumably this is checked through doing monthly management accounts to ensure legal dividends are covered.  Of course if this is not done one presumes that you have simply added the drawings together when the accounts are prepared and shown as an overdrawn loan account, with a dividend to correct this position within 9 months of the year end....of course then I assume that either interest has been charged on this loan to avoid the requirement to disclose the loan via a p11d (assuming of course its above 5k).  All the while I assume you attended the directors meeting and witnessed the signing of the dividend minutes on the said day.  Of perhaps some only take on clients where the reserves are such that dividends can be voted as and when...saves all that analysis and nasty work that we don't like.....  

Thanks (0)