I have taken on a new client who is a family friend. A one-man-band limited co that makes around £75k a year before owner/director take of salary/dividends. All profits are usually taken out each year.
In last financial year Co borrowed £100k from a P2P lender. Director withdrew around £80k of this for personal use having also drawn out all distributable profits for the year. This extra £80k couldn't be covered by distributable profits so previous accountant cleared the overdrawn DLA at year-end as follows:
- £30K taken as dividends in excess of available reserves.
- Before declaring these dividends, the previous accountant noted in writing that these were in excess of available profits.
- Director “assumed liability” for £50k of the P2P borrowings.
- This was done solely via a Management Rep Letter point to this effect.
- No formal assignment of this £50k of debt from P2P to Director was undertaken (although Director has given personal guarantee).
- Entry in accounts was therefore to debit P2P borrowings £50k and credit DLA £50k.
Director was entirely unaware of the problems this has caused but is willing to repay the £80k above by personally borrowing the money from family.
My questions are:
- To me the adjustment at 2. above is clearly wrong. £50k of the Company liability to the P2P lender can’t be derecognised by the Director simply “assuming it”. Anyone disagree?
- Whilst drawing dividends in excess of distributable reserves does not automatically make them “illegal dividends”, I think these are probably illegal as the accounts drawn up to justify them showed them to be in excess of reserves. Does anyone disagree?
- Although I usually try and avoid making Prior Year Adjustments to correct a previous accountants’ mistakes, I don’t think I can avoid doing this here as the £50k is clearly material (total liabilities are £124k at present). Anyone not agree?
- Can I also "undeclare" £30k of dividends via a PYA?
Obviously, correcting all of this will require a refiled CT return (to recognise the S455 issue) and personal tax return (to remove £30k of dividends), plus interest on unpaid CT until the DLA/S455 is cleared, BIK tax/NIC issues on overdrawn DLA plus god know what.
Am I overthinking all this or am I correct to just bite the bullet, make PYAs and refile everything? My problem really stems from Q1) above, in that I am not willing to prepare accounts for the current year that, in my opinion, understate the Company liabilities by £50k.
Any help or suggestions would be much appreciated.