Potential client illegal dividends in prior years accounts

Potential client illegal dividends in prior...

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Approached by new client, on reviewing their accounts I have noticed that their balance sheet is negative in the current year and the prior year, but they have still continued to record and pay dividends.  In my mind this means that they have been declaring illegal dividends, as I am pretty sure the client would not have known at the time of paying the dividends if there were sufficient reserves or not as they do not prepare management accounts.

My options as I see it are:

Agree to act on the basis that I would need to resubmit the prior year’s accounts to show a directors loan when it actually arose and therefore the client would be liable for S455 tax going back a couple of years plus interest, also advising the client that his chances of being selected for an investigation are increased! 

Agree to act this year but on the provision that I prepare the accounts and state a directors loan to correct the reserves in the current and then the client will have to pay what may be a hefty S455 tax charge unless they can repay the funds into the company and also state that should an investigation arise into the previous year’s accounts I would not be prepared to act in respect of the investigation.

Run for the hills!

My initial gut feeling is that as they seem to have drawn every last penny out of the company and are currently paying their corporation tax on instalments and amazingly have managed to just arrange a finance agreement for a new Van even though their accounts show such a dire position, is that they could be heading for trouble and do I want to be involved when that happens?  I am a new start up practice and maybe this is one that should be left for the big boys!

Would be interested to people’s views on this situation to work out if I am being over paranoid!

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By zarathustra
23rd May 2012 09:58

I would not seek to reverse the divis

First point is money up front / standing order for you

Second point is that the client is living well beyond their means. You need a discussion with them about this ASAP. It probably has not occured to them. They just take what money is available and extract as much credit as possible form HMRC/suppliers/etc. In their eyes the business generates sufficient funds to support them.

Obviously suggest that they not vote any more divis. Put a note in the next set of accounts that no more divis will be paid until the balance sheet is solvent.

The biggest problem will come if client cannot/will not curb spending.

 

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By adam.arca
24th May 2012 10:06

Agree with the above

You also need to consider when the PY accounts were signed off. If that was towards the end of the 9 month window, then arguably most of the divis paid in the current year were paid out with the directors being unaware they could be illegal.

You also don't know what advice if any the directors had from the previous accountants.

Whether or not they have carried on paying dividends since the BS date of the latest year would also be interesting to know.

I don't think you can re-write the past unless you are absolutely certain of the circumstances, but the directors do need to be warned of the possibility and consequences of IPs & / or HMRC seeking to do just that. Clearly, the directors should also stop paying divis straight away if they still are.

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