Hi All,
I have a client who has a limited company and despite many requests to do so, she has yet to set up a company bank account and continues to use her personal one. Within the financial statements, I am treating this as the personal account is the "custodian" of company funds which I believe is acceptable. My question is, the actual closing balance on the personal account is, say, £1000.00 (including personal transactions) but excluding all personal transactions i.e company transactions only, the bank balance would be £10k - I assume the 10k is the figure to use within the company financial statements? Any assistance much appreciated! Thanks JMB
Replies (94)
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The company has no bank account
Therefore it has no funds in the bank.The director has borrowed it all for personal use.
Why do her customers pay someone other than the company? Do her customers and suppliers know they are dealing with a company, and not a self-employed person?
My client
I have a new client who is doing the same thing. I have explained that he has a large s455 payment to make if he doesn't set up a company bank account and transfer the funds into the company bank account soon.
In the accounts I have prepared there is no company bank account and a large director's current account which is overdrawn.
Tax
That might cause a big personal tax bill.
If the money is in a personal bank account it is much better to transfer it to a company bank account.
In my case I used dividends as much as there was no adverse tax effect.
If company fnds are clear...
I have accepted this where the account is clearly for company funds but as has been said above I would not accept for a mix of the two.
There shouldn't be a s.455 charge in genuine cases:
1. There exists some sort of paperwork to justify the use of the personal account.
2. The balance in the bank account is at least equal to the balance that appears on the company's balance sheet.
3. Withdrawals from the account are supported by adequate paperwork with regard to payslips, dividend certificate etc. In other words business funds shouldn't have been withdrawn without paperwork.
But the money doesn't belong to the company, so it would be plainly wrong for an accountant to include it on a company's balance sheet as if it did. If the account holder had executed a declaration of trust in favour of the company it might be different.
The money surely does belong to the company..
and is just being held in the personal account?
We have opened a number of new cpmpanies of late for Freelancers who have had real problems opening accounts with the bank we have always worked with. The number of online declines has gone up - on visiting the branch, they are given an account eventually. The issue is that once the money is flowing through their own account, try getting them to open a business account!! Surely I would be better to suggest a separate personal account from the outset? Unless anyone knows a better bank?
The simple test to find out who the money belongs to is to ask the bank. Who would they say it belonged to then? Are they not the final authority on whose money they are holding?
No
As you suggest above, a judge in a court is the final authority for that based on case law etc. as a DoT can be made over a bank account (without the bank's knowledge) and I expect that a judge would consider that was then not the legal owner's money (even if the bank may have thought it was). A DoT over a bank account need not be in writing.
Well! That's all fine and dandy, but ...
As you suggest above, a judge in a court is the final authority for that based on case law etc. as a DoT can be made over a bank account (without the bank's knowledge) and I expect that a judge would consider that was then not the legal owner's money (even if the bank may have thought it was).
... how do you make a Declaration of Trust over a changing part of a personal bank account? I might just accept a separate bank account with a properly documented DoT as being the company's asset, but there is no way that a personal bank account used for both business and private purposes can be anything other than a Director's Loan Account (potentially subject to s.455 tax as the director is a shareholder) in the company's accounts.
As I say above
The DoT can be verbal (and confirmed in writing later) and any decent lawyer would be able to tell you how to achieve this. The only issues I think are under FSMA 2000.
Red herring
https://www.accountingweb.co.uk/anyanswers/limited-company-bank-account-...
Also, if you use the phrase, 'any decent accountant would . . ' or 'any decent lawyer would . . ', while it shows your strength of feeling it actually dilutes your argument.
And, no, I don't know why my comments have appeared in your quote box!
Andy
On the contrary, your comment above shows your strength of feeling! There are plenty of rubbish accountants and lawyers. That's just a fact of life! If you disagree with that, then let's agree to disagree.
Stating the obvious
On the contrary, your comment above shows your strength of feeling! There are plenty of rubbish accountants and lawyers. That's just a fact of life! If you disagree with that, then let's agree to disagree.
The point is that it doesn't add to your case as something similar could be added to every sentence you ever utter. It is something so obvious it should be assumed by everybody.
But
It is not obvious at all and I certainly would not assume that anyone commenting on this website is a decent accountant for example. So let's agree to disagree.
Any decent X
Saying "any decent" rarely adds anything in any discussion. When used to disagree with someone then, intentionally or not, it adopts an insulting tone. If something is so commonplace that "any decent" professional could deal with it, there is the clear implication that anyone thinking otherwise is a fool.
But I am not convinced any decent lawyer would rewrite history for you. If the account had solely been used for company matters, then there is evidence of an intention that a declaration of trust would just be formalising. With the extensive private use, especially with its effect on the final balance, then the facts indicate the director has taken the funds with the intention of using them personally. I'm not convinced a lawyer that would retrospectively write a declaration of trust stating otherwise in these circumstances could be described as decent.
As Euan has already pointed out, identifying an ever-changing portion of a bank account (as opposed to the whole account) is likely to be legally impossible anyway.
Lack of understanding
My point was that you saying that your “any decent” comment is obvious not that anybody commenting on this website is a decent accountant.
You seem to display a lack of basic understanding. Let’s agree on that then.
Let's all join in
....if I warm my hands on these flames, it's cold out.
MtF
Any decent flame will warm your hands.
I think you must mean
Any decent flame will warm your hands.
Candescent, as opposed to incandescent.
OK Now thats behind us
1 There is no legal requirement for a company to have a Ltd Co bank account.
2 The problem appears to be the mixing of personal and business income. The op appears to have seperated this out so how can there be a S455 charge - except in the case of excess drawings.
Not a great place to be but can the op suggest to client that he/she use a seperate account for Company items. This is becoming more the norm. Banks wont open Ltd Co accounts if there is a bad credit history or because the client can not meet the money laundering requirements EG recently a non-resident
No, they don't
A floating charge simply means that borrowing is secured over whatever assets the creditor owns. This is to allow the lender to maintain their security without having to update it every time the actual assets held change. The assets held still have to be separately identifiable as owned by the creditor. You can't clearly identify a portion of a balance that is quite clearly being treated as personal by the director as owned by the company. Don't floating charges work that way?
Bank accounts
I very much doubt that a bank would allow a separate personal bank account if they wont allow a company bank account. It's unlikely that the client would have a separate bank account available. Do banks allow personal bank accounts to be used as business bank accounts?
I agree
That IF custodian is acceptable, then it would have to be a separate account. Also, no one has pointed out that the account balance was only £1K, whilst the calculated company balance was £10K. So in this case you cannot even argue it is acceptable. I do not agree with custodian argument.
Every time we have come across this, the funds have been treated as drawn personally. This has always caused a S455 problem. It does persuade the client to sort it out. It may be an account has been refused KungFuKipper, but I note you only deal with one bank. Usually someone will take them on, especially around the first year end.
Answers
Agreed, but obviously good practice for a company to keep control of its own cash funds if it can.I disagree given that there is no DofT either over the whole account or over that part of the closing balance that the OP has calculated would not have been present had company receipts not been deposited and company payments not been extracted. If a lawyer could perform the mental gymnastics to draft a trust deed that unambiguously covered the ever-changing balance from moment to moment that would naturally change things, and it would of course then only be right to include the balance at the company's year end as a bank balance of the company. But not without a DofT because that would be a plain lie.
Yes of course best advice to the client if opening a company account is not possible is to keep a dedicated account for company purposes if a DofT is executed, but not otherwise - makes no difference without a DofT!
John
"Yes of course best advice to the client if opening a company account is not possible is to keep a dedicated account for company purposes if a DofT is executed, but not otherwise - makes no difference without a DofT!"
I quote from your post - just because a DofT is not completed it does not mean that the trust does not exist. It just makes proving it to a third party much more difficult.
Johngroganjga
I agree with John, but pauljohnston, you comment that a DoT can still exist even though not written. We are talking about convincing a bank and I see no practical way of doing that without the written Deed.
An oral Declaration of Trust is valid.
If it is in relation to Land, it needs to be evidenced in writing.
Yes I agree in theory. But
Yes I agree in theory. But the difficulty of proving it, and bearing in mind that the client's protestations might be self serving, and of course deniable if and when a liquidator comes after the money, means that as an accountant I for one would never dream of including a personal balance in company accounts without a formal declaration of trust.
RTI to consider too
Nobody has mentioned yet the latest explosive ingredient to this Witches Brew. It could be seen as earnings under the RTI rules and trigger penalties, when they eventually come in for small employers that is (which won't be until HMRC has got its act together and stopped sending out erroneous notices en-masse).
Without properly documented dividends or a Loan Agreement, this is very likely to be the case as Rebecca Benneyworth pointed out last year when she discussed how RTI could well affect overdrawn loan accounts.
Whilst accepting that a personal bank account used exclusively for company business could be treated as a company asset, I wouldn't put it in the Balance Sheet under Cash at Bank. It would have to go under Other Debtors I think, with an appropriate disclosure in the note for Transactions with Directors.
As for banks, Barclays have arrangements with some online formation agencies whereby you can apply for an account when you create a new company, and these seem to go through more or less on the nod, although you still need to wait for them to phone you and go through the normal application process.
my pennys worth
Personally, in my humble opinion if the director is using their own bank account to accept funds on behalf of the company and to pay expenses on behalf of the company than the appropriate treatment would be to include all of these transactions through the directors loan account.
I think it would be appropriate to do a full transactions with director/ (RPT) note, stating amounts advanced (being sales receipts banked) repayments (being amounts paid on behalf of the company), net repayable to the company and maximum o/s in the year. Assuming no p11d has been prepared, the company should charge interest as per official HMRC rate to director on their overdrawn loan account. Ensure full disclosure is made in the full and abbreviated financial statements) and apply S455 CT accordingly. Also include sufficient detail in your letter of rep.
Like a client account
Director receives money which is not his it's the company's. He therefore holds it on trust for company. Legal owner = director as account in his name. Beneficial owner = company.
Just like a client account. It's not our money and neither is it the director's.
Of course he should get a company account and pay all funds in there.
Client account?
Do you know of any client accounts that permit the trustee to dip into the funds whenever they like? (to the tune of an excess £9,000 in this case) Me neither. Director receives money which is not his it's the company's. He therefore holds it on trust for company. Legal owner = director as account in his name. Beneficial owner = company. Just like a client account. It's not our money and neither is it the director's. Of course he should get a company account and pay all funds in there.
The way client accounts are required to operate means the balance is made up of specific amounts held in trust for particular clients. When the total balance in the account is less than the balance allegedly held on trust, that cannot possibly be the case.
Does money laundering need consideration?
If a Company did some work for me and a Director gave me a bill from the Company but asked me to make the cheque out to him personally, should I not be smelling a money-laundering rat (even if it's actually a hamster)?
Yes, that is of course right
Also, a specialist, expert, (non-rubbish i.e. decent) lawyer could draft the DoT so that any cash in the personal bank account that is converted to other assets (with the company's blessing of course) are also held as nominee (for the company). There is no problem with mixed funds (as there would not be also in a constructive trustee situation if company funds had been misapplied etc.). You would need to check potential FSMA 2000 issues as mentioned above.
Minority view?
Also, a specialist, expert, (non-rubbish i.e. decent) lawyer could draft the DoT so that any cash in the personal bank account that is converted to other assets (with the company's blessing of course) are also held as nominee (for the company). There is no problem with mixed funds (as there would not be also in a constructive trustee situation if company funds had been misapplied etc.). You would need to check potential FSMA 2000 issues as mentioned above.
Justin
Either your comment has been made in jest or you adhere to what is very much a minority view on this topic.
David
Split of accountants
It would be good to see which accountants think it's sensible to keep things simple and those that are willing to complicate matters to within an inch of their life. I could understand the complication if there is a valid reason such as a big tax saving or no other way to operate.
Client account
Also of course a client bank account needs to have the word "client" in the account name & the bank need to be aware that the monies are held on behalf of client(s).
David
What a lot of effort ....
... all the palaver getting around the use of a personal account, just to avoid getting a proper ltd co bank account. It's just creating complications!
Personally, I like things to be straightforward, and I like to know that the clients customers & suppliers know they are dealing with a company, and not a self-employed individual. If any of my clients want to 'ski off-piste' I charge them a lot extra, if I can be bothered with them at all. I won't tolerate clients that ignore our advice or make simple things complicated.