Limited company using personal account

Limited company using personal account

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We have a client who despite being advised by us to do so when setup limited company, has not setup limited company bank but continued to use sole trader. The balance has increased by £20k in year. Surely this must create a s419 liability. Dividends for year applied and a directors loan account circa £1k

Replies (42)

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By johngroganjga
13th Oct 2013 09:17

Yes the company transactions in the personal account are entered in the company's books through the DLA. Everything else follows.

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Euan's picture
By Euan MacLennan
13th Oct 2013 11:00

No - there is no liability under s.419

I agree with John, but the 25% refundable tax liability is under s.455 CTA 2010, which replaced s.419 ICTA 1988, assuming of course that the client is not just the director, but also a shareholder (participator) in the close company.

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By Steve Kesby
13th Oct 2013 11:24

Not sure I entirely agree

If the individual's receiving no benefit, but the company's receipts and expenditure (and only the company's receipts and expenditure) are passing through an account that happens to still be in the individual's name, I don't think that constitutes a loan or advance.

Prima facie, the individual holds the company's money as bare trustee. Ideally, it would be documented as such.

If that is the case, then substance over form dictates that the account should be shown in the company's balance sheet.

My view would differ though if the account were part of a mortgage offset arrangement for the individual.

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By johngroganjga
13th Oct 2013 12:26

Disagree strongly with Steve unless there is a formal declaration of trust sufficient to allow a liquidator of the company to collect the funds in the account for the benefit of the company's creditors. For this purpose an accountant should regard an alleged undocumented trust as not being a trust at all.

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By Steve Kesby
13th Oct 2013 12:41

Yes, but...

... the company isn't being liquidated. The question is about whether the client should pay S. 455.

Are we looking to represent a client, or HMRC? Document it now and argue that it's always been so.

On the face of what the OP says, it seems a business has been incorporated, but continued to operate through the same bank account. If that is documented to be the case now, there's a strong argument. Banks don't make it the easiest thing in the world for newly formed companies to open bank accounts.

On the facts given I see a basis for it not having to be the accountant that makes the client pay S. 455.

The alternative surely is just to be another atomaton following "HMRC's rules"?

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By johngroganjga
13th Oct 2013 12:58

The first question is how to prepare the accounts. The liquidator example is the acid test of whether assets should be included on company balance sheets where there is any doubt as to whether the company has good title. If the company's title to the funds in the account is not good enough for a liquidator to access the funds is is not good enough to include the asset on the balance sheet as if it belonged to the company. Of course executing a trust now would deal with it. Treating it as having retrospective effect is probably slightly irregular but in practice would be not be in reasonable in my opinion. That part of Steve's last but one post that I objected to was that it was only ideal, rather then essential, for the trust to be documented. Of course accountants should help their clients not HMRC but not at the expense of putting their name to incorrect accounts.

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By Steve Kesby
13th Oct 2013 13:50

I disagree on the accounting though John

Accounts shouldn't be prepared with a liquidator in mind. They should be prepared on a going concern basis.

If the substance of the bank account is that it is a company asset, then it should be shown as such. Showing at as such isn't incorrect if that is the true nature of the position and comes to be documented after the balance sheet date. I'm sure we agree though that any documentation should not be backdated.

When I said the trust should ideally be documented, I didn't mean to imply that the undocumented position should be allowed to continue. Merely that I suspected that it hadn't been hitherto, but that needn't mean that a trust hadn't existed in the intervening time if all other facts pointed to it. I should have said that it would ideally have been documented from the outset.

I suspect though that the OP knows now what to do.

Incidentally, Basil makes some good points too. Although I only did a speed read.

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By johngroganjga
13th Oct 2013 14:54

Nobody is saying that the accounts should not be prepared on a going concern basis. If you do not follow my example involving a liquidator there are several others. What happens for example if the holder of the personal bank account dies suddenly and his executor seeks to collect the balance in the account to distribute it to the beneficiaries of his estate. Company pipes up and says "hang on - that's our money". Executor says "that's news to me (and, as it happens, the bank). Prove it". Company says "we have always included it in our accounts as if it were our money". Executor says "that's of no interest to me - that just tells me that your accounts are wrong and your accountants were too incompetent to spot it".

Again I say that if the company's title isn't good enough to enforce its rights over the money against such objections, it is not good enough to justify including it as an asset in the company's balance sheet.

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By Steve Kesby
13th Oct 2013 15:36

You should tell the Supreme Court...

... in Prest then John, which of did the same thing as setting aside your executor analogy, only in reverse.

And there's also the FTT decision in Bingham, where the father, being the source of all the money, was held to be the beneficial owner of all the money in a join bank account.

Facts speak for themselves sometimes. If the business was incorporated and continued to use the bank account just as it did before. If the only money going into the account came from the business and the only application of the funds in the account was to meet the expenses of the business. And if the business includes the account in its accounts year on year I think the courts would infer that the money in the bank account belonged to the company, despite their being an absence of paper.

That seems to be their way historically.

In Prest the paper all pointed towards the houses belonging to the companies, yet the Supreme Court concluded that they were trustees for Mr Prest and Mrs Prest was entitled to a share on their divorce.

EDIT:

Notwithstanding any of that, I maintain my view that the accounts should reflect the economic substance of transactions and balances rather than their strict legal form.

Until such time as someone external actually does come along and seeks to dispute the position or the proprietor falls out with his own company, the economic reality is that the funds in the bank account are an asset of the company as defined in FRS5 and it would be incorrect not to include them in the company's accounts.

In the intervening period, it would be prudent to document the position so that it's clear to all. Not least HMRC who are the immediate "problem".

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By johngroganjga
13th Oct 2013 15:30

I am trying to be practical here. I am well aware of the decision in Prest etc. But accountants up and down the land can't be expected to reach judgments on a case by case basis that tax even the capacity of the Supreme Court. My simple mantra is no trust deed no trust. If all accountants followed that policy they would keep themselves and their clients out of trouble.

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By Steve Kesby
13th Oct 2013 15:39

I've edited...

... but I do agree that it's what they should do from the outset. It often doesn't happen though.

But in the face of a position with HMRC, it should be included in the accounts (if the economic reality is that it's the company's money) and appropriate documentation put in place as soon as possible, but without backdating.

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Chris M
By mr. mischief
13th Oct 2013 15:48

My approach

Here is my approach for what it's worth in these situations.  It is only applied in situations where there is a very clear going concern.

1.  Remind the client of the advice given when he or she incorporated that a limited company bank account was necessary to operate properly.

2.  Ask him or her to set up.

3.  Draft a one pager with the balance held in the personal account which is being shown on the company year-end balance sheet.  Wording along the lines of "I accept that this money belong to X limited irrevocably and is being held in a personal bank account due purely to short term administrative problems.  X of this will be applied to corporation tax, Y to VAT, Z to PAYE to settle the company's tax liabilities.

4.  I then keep a certified copy of this on file.  No section 455 entries on the CT return, as above we're not there to do HMRC's job for them.

 

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Replying to lionofludesch:
By johngroganjga
13th Oct 2013 16:36

Agree

mr. mischief wrote:

Here is my approach for what it's worth in these situations.  It is only applied in situations where there is a very clear going concern.

1.  Remind the client of the advice given when he or she incorporated that a limited company bank account was necessary to operate properly.

2.  Ask him or her to set up.

3.  Draft a one pager with the balance held in the personal account which is being shown on the company year-end balance sheet.  Wording along the lines of "I accept that this money belong to X limited irrevocably and is being held in a personal bank account due purely to short term administrative problems.  X of this will be applied to corporation tax, Y to VAT, Z to PAYE to settle the company's tax liabilities.

4.  I then keep a certified copy of this on file.  No section 455 entries on the CT return, as above we're not there to do HMRC's job for them.

 

That's exactly what I would do, but in my case the document would be a trust deed under seal drafted by a solicitor.

All gets a bit more complicated when the bank account goes overdrawn I think!

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By Steve Kesby
14th Oct 2013 10:29

@Basil

If the bank account isn't on the balance sheet there is a S. 455 problem. The two things go hand in hand. The S. 455 issue is simply the first effect of the problem and is the motivator for the client to get all their ducks in a row, if the requisite facts are present.

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Replying to Ruddles:
Red Leader
By Red Leader
14th Oct 2013 12:25

floodgates - open

Whilst respecting the well informed comments above, I can't help feeling that this approach would lead to constant near-abuse by clients.

A typical scenario is the client wanting to take funds out of the ltd co and deposit in a savings a/c in his own name in order to gain the better interest rate.

They'll all be doing it and then we'd probably be looking at a HMRC crackdown.

It just doesn't seem sensible, somehow. A very un-technical post I'm afraid, but there you go.

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Replying to andy.partridge:
By johngroganjga
14th Oct 2013 12:43

Sort of agree

Red Leader wrote:

Whilst respecting the well informed comments above, I can't help feeling that this approach would lead to constant near-abuse by clients.

A typical scenario is the client wanting to take funds out of the ltd co and deposit in a savings a/c in his own name in order to gain the better interest rate.

They'll all be doing it and then we'd probably be looking at a HMRC crackdown.

It just doesn't seem sensible, somehow. A very un-technical post I'm afraid, but there you go.

But provided the trust arrangements are documented properly and robustly there is nothing for HMRC to complain about.

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By Roland195
14th Oct 2013 14:30

You don't have to be crazy to work here..

In the case on one man Limited Companies, I feel the legal fiction of incorporation is being stretched a bit thin. To anyone other than an accountant or lawyer, the idea that an entity owned, controlled, operated and managed by one person is actually legally distinct from that person and not responsible for each other's actions (too an extent) would be ludicrous. How many people are planning on having a meeting with themselves at some point (and taking minutes of it) to satisfy their accountants?

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By zebaa
14th Oct 2013 20:33

@ Roland195

One man Limited Companies have been around a long time - my understanding is Salomon v Salomon in 1897 provided case law, 106 years, older than even me.

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Chris M
By mr. mischief
15th Oct 2013 06:30

The most common reasons for this are two-fold:

1.  The client incorporates and tells his or her customers, puts the new bank details on the invoices.  But lo and behold some of them ignore this and several requests to make the changes.  I find NHS trusts for doctor clients are the most likely offenders.

2.  The client applies for a company bank account on the day of incorporation, but the bank screws around on some piddling detail of pedantry.  The worst one was a restaurant client where the client keyed in 16 April instead of 15 April as DoB on the company details form.  This client had banked with this bank for over 25 years and ran the same highly profitable, never in the red, business for 20 years.

SEVEN MONTHS later we had the bank account.  By now it is 20 November, the restaurant is mad crazy busy so the client does not want the hassle right then of sorting out all the suppliers who are still being paid by direct debit and electronic payment from the old account, and getting all the autopay receipts over into the new account.  Come year-end there were still various items of company money not in the company account.

This is by no means the opening of any set of floodgates.

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By pauljohnston
16th Oct 2013 14:07

This subject has been in a previous post

As I see there is inference that the money in the personal account is not the Company's.  Who would be prepared based on the info above to stand up in Court and say this.  There is no legal requirement to hold funds in a Company Bank account.

Assuming that this personal account is the transctional account for the Company I can see no reason for us to assume that it is not the Company funds.  I stand with Steve in saying that I would treat it as any other Company bank account.

In real life many Ltd Companies can not get a bank accoun because of past banking history, or because of the credit history of the Company or the DIrector(s).  Thus a personal account is used. 

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Replying to North East Accountant:
By johngroganjga
16th Oct 2013 14:31

No control

pauljohnston wrote:

As I see there is inference that the money in the personal account is not the Company's.  Who would be prepared based on the info above to stand up in Court and say this.  There is no legal requirement to hold funds in a Company Bank account.

Assuming that this personal account is the transctional account for the Company I can see no reason for us to assume that it is not the Company funds.  I stand with Steve in saying that I would treat it as any other Company bank account.

In real life many Ltd Companies can not get a bank accoun because of past banking history, or because of the credit history of the Company or the DIrector(s).  Thus a personal account is used. 

The reason why it would be wrong to prepare a company's accounts as if money in a personal account belonged to it is because, in the absence of an actual or implied trust, it doesn't.

Most of the debate above is about whether a suspicion of an implied trust is sufficient to justify inclusion of an account on a company balance sheet, or whether an actual written trust is required.

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By TOC
16th Oct 2013 14:08

Bank Accounts

Recently we've had several instances where banks have refused to set up bank accounts for limited companies and the directors have had to use to use personal accounts.

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Replying to jcace:
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By John Wheeley
16th Oct 2013 14:22

Bank Accounts

Do you know why the banks have refused to open accounts for limited companies ? Usually the banks are very keen to open new accounts along with selling their (expensive) services.

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By matchmade
16th Oct 2013 14:27

From the client's point of view there is also the major issue that Company bank accounts are a complete rip-off as regards charges, whereas personal bank accounts are free. Why pay £1 to issue or pay in a cheque, or pay monthly subscription charges for a service that is frequently poorer than that endured with personal bank accounts?

 

Also, commercial online banking systems are still frequently not tied in with the personal ones, so they are a pain to administer for small companies with director loans to the company and a regular shuttling of funds between company and personal bank accounts.

 

I feel that as long as the account's existence is declared and the client is not using the company bank account as a personal piggy-bank and can properly account for each transaction, what's the problem? I agree however that a deed of trust might be useful for documentary backup, just as it would be for a property purchased with a personal mortgage “on behalf of” a company. It is virtually impossible for any small trader or landlord or property developer to obtain a commercial mortgage, especially in the first three years of a company's existence, so one can understand why people turn to personal mortgages instead.

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By Ninian
16th Oct 2013 15:01

Directors and their bank accounts

Is it not the case that directors have a duty to preserve the assets of the company and to account to it for any taken into their hands or for any profit arising from the use thereof? In which case anything not taken as dividend, salary or documented loan still belongs to the company.  

Going back to the executor earlier in the debate; if he is doing his job properly should he not be checking for liabilities before handing out the loot?

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Replying to Red Leader:
By johngroganjga
16th Oct 2013 15:07

What if they don't?

Ninian wrote:

Is it not the case that directors have a duty to preserve the assets of the company and to account to it for any taken into their hands or for any profit arising from the use thereof? In which case anything not taken as dividend, salary or documented loan still belongs to the company.  

Directors may have a duty to account to the company etc. but what if they do a runner and take the money with them? Is it still the company's money then?

 

 

 

 

 

 

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By Steve Kesby
16th Oct 2013 15:13

No John

It's no longer under the company's control, meaning that it's quite clearly been stolen from the company.

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By Ninian
16th Oct 2013 15:20

What if they don't

If they do that then they have taken the money and are subject to s455 or taxation in some manner (assuming HMRC catch up with them) but that would be just the same if they took it from a ltd co a/c and did a runner. 

As the example which opened this debate was of money sitting in the account then clearly they have not done a runner with it.

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Replying to Justin Bryant:
By johngroganjga
16th Oct 2013 15:29

Test

Ninian wrote:

As the example which opened this debate was of money sitting in the account then clearly they have not done a runner with it.

Of course the director in this case has not cleared out the bank account and run away.  That's not the point.  But what would happen if he did is the test of whether the arrangement stands up.

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By johngroganjga
16th Oct 2013 15:24

Only if the director was trustee and the balance n the bank account was trust property!!!!!  That's the point.  If it was his own money not subject any trust he has not stolen anything.  It's his money to do with as he pleases. Notwithstanding that he has absconded he retains an obligation to make good to the company what he has withdrawn from it and that will be represented by the balance on his loan account in the company's books, unless of course the company's books have been written up incorrectly to show the money in the director's personal account as if it still belonged to the company.  QED.

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By Ninian
16th Oct 2013 15:31

Only if...

But it isn't his money. He is holding it for the company.

If you allowed me to put some of your money in my account it doesn't become mine for that reason.

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Replying to Wanderer:
By johngroganjga
16th Oct 2013 16:04

Yes it does

Ninian wrote:

But it isn't his money. He is holding it for the company.

If you allowed me to put some of your money in my account it doesn't become mine for that reason.

Yes it does become yours.  But you have a liability to repay it to me.  But out of which account you make the repayment is up to you and I have no control over.

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By Steve Kesby
16th Oct 2013 15:34

No it isn't

There's no need to carry out an examination of all the could happens. If a simple examination of the facts show that the company is operating the bank account as its own, then it's the company's money. Bingham. Prest.

If the director does a runner he steals the money at the point of the runner being done.

Facts, not fancies.

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By Ninian
16th Oct 2013 15:36

Test

When he takes it for another purpose he then ceases to be holding it for the company; a changed set of circumstances and thus the consequences would flow. Until then he is holding it for the company. This would be just the same, as previously mentioned, if he took it from a company account.

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By Ninian
16th Oct 2013 16:18

Yes it does

Because I am holding something doesn't make it mine in any legal sense and if I happened to accrue some interest on it HMRC would look to your Tax Return not mine.

 

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Replying to jbaccsol:
Stepurhan
By stepurhan
17th Oct 2013 08:21

Substance over form?

Ninian wrote:
Because I am holding something doesn't make it mine in any legal sense and if I happened to accrue some interest on it HMRC would look to your Tax Return not mine.
An account in my name attracts interest and HMRC look to someone else's tax return for that interest? That strikes me as extremely unlikely. HMRC will ask me why I haven't declared interest on an account in my name. In the absence of a legal document supporting the assertion I can't see "the account is in my name but the money in it isn't really mine" as an argument that will work.

This seems to be a question of substance (personal account operated as if it did belong to the company) over form (the personal account is legally the property of the individual). The fact that we are talking about one-man companies, where it has already been shown the distinction blurs, is making it appear more complicated. Let's take an alternative scenario. Two director company, 50/50 shareholders and otherwise all equal. For some reason they cannot open a company bank account so a personal account of each of the directors is used, company transactions being split 50/50 between the two accounts as far as possible. Can each director access the money in the other's personal accounts? Hardly likely, as I wouldn't make a business partner signatory to my own account if I could avoid it. They therefore both have control of some of the company's money, but neither of the company officers can access all of the funds. It therefore follows that the company does not have control of the money in either of those accounts, as the equal officers of the company cannot freely access those funds. The only treatment can therefore be loans to directors until the account matter gets resolved.  

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Replying to andy.partridge:
Red Leader
By Red Leader
17th Oct 2013 11:47

@Huw

I think maybe it is no longer as easy to use the 9 months rule to get out of a s.455 liability.

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Replying to richardterhorst:
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By Huw Williams
18th Oct 2013 11:50

s455

How so Red Leader?  The HMRCs toolkit on directors loans asks whether the repayment is genuine or whether it is just book entries.  If the account is being used as the main bank account then I would expect any repayments to be genuine.  Have I missed a point?

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By Tomazaan
16th Oct 2013 16:30

Business/ company bank accounts

The last time I set up a personal bank account, I had to sign something to say that I was the legal and BENEFICIAL owner of the money held within the account.

Clients may be tempted to use a personal bank account for business or not bother to set up a bank account for a company because of the charges but in my view the former is suspect and the latter dangerous.  I don't see how anyone can argue that money in a personal bank account really belongs to a company if they have previously signed something to say that they are the beneficial owner.

I do understand that sometimes one has to take a pragmatic approach regarding a short term problem (such as when the bank delayed opening the company's account).

Paying bank charges is a cost of doing business and I tell my clients that it is good value compared with extra work needed to separate private and business expenditure or, in this case, worrying about loans to director(s) and/ or participator(s).

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By Huw Williams
16th Oct 2013 16:56

Is s455 an issue?

Just a thought about section 455.  There is a tax liability if a participator has borrowed money from his company.  But the liability is extinguished if the money has been paid back within 9 months of the accounting reference date.

I am guessing that if the personal account is being run as a business account then the chances are that the "loan" has been repaid (and possibly reborrowed) after the year end  so that there is no liability.

The question is then one of disclosure on a tax return.  To be on the safe side the "loan" could be disclosed on the tax return making it clear there is no tax to pay.

I realise most people have been worried about whether the bank balance should be shown as a company asset or not and I am not adding to the debate about this - just looking at the tax question and whether there is a major issue in this situation or not.

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By Ian McTernan CTA
17th Oct 2013 13:10

Red Herring

Unless the personal account is used SOLELY for the companies business and the individual maintains another account from which day to day living expenses are drawn, and payments made from the 'company personal' to the 'personal' then the argument that this is the companies account and you are somehow holding it on trust doesn't stand up, as clearly the facts of the case don't match up with the reality.

The reality here is the director is treating all the money as his to do whatever he likes with.

The accountant has been placed in an awkward position and is trying to be inventive to avoid tax charges that may arise due to his client playing fast and loose with the company's funds.

For a deed to be effective, it would have to date from the date of the first transaction.

The client needs to be told in no uncertain terms to get a company bank account opened- even it if means changing banks.

If the Revenue come along and do an enquiry the costs of dealing with it and sorting everything out will far outweigh any bank charges.

The restaurant is a fine example of how things can get out of hand, but where there is a sound commercial evidenced reason for using the personal account UP UNTIL the company account is established, at which time reasonable steps should be taken to transfer everything as soon as possible- and it really isn't that hard to transfer payments, standing orders, etc.

 

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By pauljohnston
17th Oct 2013 14:27

Not So

"For a deed to be effective, it would have to date from the date of the first transaction".  The deed will say when it is to be effective and indeed an implied trust would not have a deed.

I have re-read the question here is the relevant part

"We have a client who despite being advised by us to do so when setup limited company, has not setup limited company bank but continued to use sole trader. The balance has increased by £20k in year."

I still believe this can be a Company Asset.  Even if the ditrector has used it as a piggy bank as many who have Ltd Co bank accounts do.  Lay the facts out to company director(s) ask them/him to confirm how he views this account and act accordingly. 

Looks like an increase in fee to me.

 

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