Potential client illegal dividends in prior years accounts
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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