Share this content
0
1879

Are any of these options bordering on tax evasion?

Reclassing dividends as something else is troubling...

Didn't find your answer?

Search AccountingWEB

Hi Everyone,

I have a question for you guys, hopefully you can help me. Here is the backstory:

Husband and Wife own 2 companies, Company A is 2 years old and sole director is wife, husband is employee of company A; company B just incorporated 6 months ago, a startup, sole director husband, wife is employee of company B.

In last 6 months, husband has used company A as cash cow to fund company B start up costs etc (with wife's permission of course).

I saw those as drawings, every single transaction (cash, card purchases, purchase invoices etc, the lot). As long as the expenses didnt relate to Company A, it was dividends to wife in my eyes.

Total dividends £100k

Husband and wife now understand the tax implications of the dividends and they have asked me to consider the following:

  1. Reclassify as a loan to company B
  2. Reclassify as an investment in company B
  3. Raise a sales invoice for £100k + 20% mgt fee + vat to Company B for reimbursement of expenses and for work done for company B; reclassify dividends as cost of sales

Accounts need to be filed in 7 days!

Am in right in standing my ground? What would you do and why?

Thanking you in advance.

Replies

Please login or register to join the discussion.

avatar
27th Jul 2018 22:13

There doesn’t appear to be evidence that what you have can be defined by any of the three options laid out by the client.

To complicate matters there is no evidence of dividends either. The default position might just be that you report what you found - an overdrawn director’s account.

Thanks (0)
avatar
to andy.partridge
27th Jul 2018 22:27

But if the expenses /payments were genuinely for company B costs, then surely it’s an intercompany loan and nothing else?

Either I’ve seriously misunderstood what happened, or it’s pretty clear cut.

Thanks (1)
avatar
to atleastisoundknowledgable...
27th Jul 2018 22:56

Some of the amounts are straight up cash withdrawals for thousands of pounds via a hole in the wall. Will that also be classed as a intercompany loan?

Thanks (0)
avatar
By wamstax
to tljenkin007
28th Jul 2018 11:34

Whose to say that the cash was spent on Company B expenditure¿ Fanciful maybe but maybe Company B expenses were financed by off record sales given question says only bank statements analysed by directors.....

Thanks (0)
avatar
to andy.partridge
27th Jul 2018 22:54

That is exactly where everything is packed but will be classed as dividend payments to director in the final accounts. Is that incorrect?

Thanks (0)
avatar
to tljenkin007
28th Jul 2018 11:03

It seems to me that you are, unilaterally, determining the reality of the transactions without evidence. I wouldn't assume that.

Thanks (1)
avatar
to andy.partridge
28th Jul 2018 11:18

andy.partridge wrote:

It seems to me that you are, unilaterally, determining the reality of the transactions without evidence. I wouldn't assume that.

Thanks Andy, in other comments below, everything will now stay in dca as I have no evidence to support. I intend to hand over those accounts for approval and if they are rejected, well even if they are not, I am disengaging. Client is too much trouble!

Thanks (0)
avatar
By wamstax
to tljenkin007
28th Jul 2018 11:46

Could vote a dividend on finalisation of the accounts (assuming the company has sufficient undistributed reserves to vote such a dividend ) but would also need to consider shareholdings for this

Thanks (0)
avatar
to wamstax
28th Jul 2018 12:32

There is enough for a distribution but as everyone has said, these are not dividends. I know that because I havent seen any paper work. It was suggested by the director that the vote etc would be done and paperwork in place to pay this out of the profit (well it has already been paid in piecemeal amounts as explained above)

Thanks (0)
avatar
By wamstax
to tljenkin007
28th Jul 2018 14:45

tljenkin007 wrote:

There is enough for a distribution but as everyone has said, these are not dividends. I know that because I havent seen any paper work. It was suggested by the director that the vote etc would be done and paperwork in place to pay this out of the profit (well it has already been paid in piecemeal amounts as explained above)

But what I meant was that a dividend could be voted in finalising the accounts for the year so that all things being equal the overdrawn current account will have been repaid within 9 months of the accounting date. Would still have potential for cheap loan benefit on director but S455 should be nullifiecd

Thanks (1)
avatar
By frankfx
27th Jul 2018 22:55

Accounts for company A need to be filed 'now'.

but transactions causing concern have arisen in past 6 months.... namely AFTER the accounting year end of Company A

Have the 2017 18 personal tax returns been submitted? showing part of the £100,000 dividends .......... say 2 months (to 5th April 2018) of 6 months in the tax year 2017 18. given your query probably not.

You may be able to untangle the transactions .... legally.... ensure that the relevant journals are ' minuted and explained '' .

Be prepared to fully document and place on record the action taken...... the real acid test when one has doubts .

After the event I would not be surprised that clients seek professional advice elsewhere..... perhaps leaving you on the hook should HMRC become involved.... new advisor may submit SAR if he senses that transactions have been recast !

solution 3 .... seems unreal.

contracts in place.. arms length

VAT tax point?

will drawings become work in Progress

will original entries in accounting records be erased?

A large VAT repayment in company B may arise............ VAT office may raise query.

Tangled webs often weave an unpleasant outcome.

ICAEW and ACCA and CIOT ethics codes are worth reading.... concentrate the mind .

Thanks (1)
avatar
By wamstax
27th Jul 2018 23:01

Cannot be interim dividends during the accounting period without the contemporaneous company dividend voting meeting and dividend certificate.
Why are you even contemplating anything other than an overdrawn Director/shareholders account with S455 liability on the company and cheap loan benefit on the director
If you compromise yourself in this what won’t you do to cover up their drawings from the cash Cow. If it blows up in their face Whois going to get the finger pointed at? Could you then be seen by HMRC as a dishonest accountant?

Your suggestion as regards the spouses being employees in each other’s company does suggest that whatever the description they’re possibly both directors in both Companies.
Answer is of course that they should have sought and you should have advised them before he/ they started to milk the company

Thanks (1)
avatar
to wamstax
28th Jul 2018 00:09

You are absolutely right. My stance is not to bend to any of their options. I have already been threatened with disengagement. That is fine. The reporting should be what it is. Should I consider filing a SAR?

Thanks (0)
avatar
By Maslins
to tljenkin007
28th Jul 2018 12:22

tljenkin007 wrote:

I have already been threatened with disengagement. That is fine.


Sounds like your perfect solution to be honest. Just say something like "I'm sorry you feel that way, and I appreciate you'll be looking elsewhere for assistance with these. I'll get my formal disengagement letter over to you shortly."

Whether you file an SAR is up to you. From what you've said I don't think I would. It seems to me it's a case of very bad record keeping, but at this stage no deliberate wrong doing? Or do you see it another way?

Thanks (0)
avatar
to Maslins
28th Jul 2018 12:29

Maslins wrote:

tljenkin007 wrote:

I have already been threatened with disengagement. That is fine.

Sounds like your perfect solution to be honest. Just say something like "I'm sorry you feel that way, and I appreciate you'll be looking elsewhere for assistance with these. I'll get my formal disengagement letter over to you shortly."

Whether you file an SAR is up to you. From what you've said I don't think I would. It seems to me it's a case of very bad record keeping, but at this stage no deliberate wrong doing? Or do you see it another way?

I dont think they intend to pay any tax on the £100k, thats what has been said. Whether they do go ahead with this remains to be seen. I am disengaging. I do hope the next accountant does his homework. In that regard, should the incoming accountant ask if there was an reason why he shouldnt work with the new clients, it is my duty to let him know my thoughts. No?

Thanks (0)
to tljenkin007
28th Jul 2018 16:44

tljenkin007 wrote:

You are absolutely right. My stance is not to bend to any of their options. I have already been threatened with disengagement. That is fine. The reporting should be what it is. Should I consider filing a SAR?

What ??????

Company owned by husband and wife borrows money from a company owned by the same people ?

What offence has been committed here ?

Or even might have been committed ?

Thanks (1)
avatar
By wamstax
to lionofludesch
28th Jul 2018 17:11

Lion.......
you are forgetting that directors and shareholders are supposed to keep the company’s funds custodians and keep the company’s funds safe and not let them be dissipated for some purpose other than furthering the purposes of the company. They can only use a company’s funds as they want if they have either made the surplus funds available to themselves by voting dividends or remuneration and paying the tax due by them on them. If they don’t do that then they can only be taking monies from the company on current/loan account with consequential tax consequences for cheap loans and BIK

Thanks (0)
to wamstax
28th Jul 2018 17:27

So no company can lend money to another company ?

Bad news for bankers.

I think you take your point too far. Taking your words literally, every company would need to keep its cash under the metaphorical mattress. It wouldn't be allowed to bank it.

Thanks (0)
avatar
By wamstax
to lionofludesch
28th Jul 2018 17:11

Lion.......
you are forgetting that directors and shareholders are supposed to keep the company’s funds custodians and keep the company’s funds safe and not let them be dissipated for some purpose other than furthering the purposes of the company. They can only use a company’s funds as they want if they have either made the surplus funds available to themselves by voting dividends or remuneration and paying the tax due by them on them. If they don’t do that then they can only be taking monies from the company on current/loan account with consequential tax consequences for cheap loans and BIK

Thanks (0)
avatar
By wamstax
27th Jul 2018 23:02

Cannot be interim dividends during the accounting period without the contemporaneous company dividend voting meeting and dividend certificate.
Why are you even contemplating anything other than an overdrawn Director/shareholders account with S455 liability on the company and cheap loan benefit on the director
If you compromise yourself in this what won’t you do to cover up their drawings from the cash Cow. If it blows up in their face Whois going to get the finger pointed at? Could you then be seen by HMRC as a dishonest accountant?

Your suggestion as regards the spouses being employees in each other’s company does suggest that whatever the description they’re possibly both directors in both Companies.
Answer is of course that they should have sought and you should have advised them before he/ they started to milk the company

Thanks (0)
avatar
28th Jul 2018 08:31

It's not a matter of reclassifying the payments from something they were not (dividends); it's a matter of knowing what the payments were in the first place.

Your couple need to learn to document what they are doing as they do it (e.g. you said "with wife's permission of course" - which means they had a meeting, which means they could have recorded minutes. It'd also be nice - but just as fanciful - if one of the things they agreed was to consult their accountant!)

In the absence of documentation, other respondents see loans. If that's right, why (Andy, wamstax) aren't those loans to the entity that received the money - Co B?

tljenkin007 wrote:

Some of the amounts are straight up cash withdrawals for thousands of pounds via a hole in the wall. Will that also be classed as a intercompany loan?

Why not, if the purpose of the withdrawals was that the money was to be spent by (or on behalf of) Co B?

As frankfx says (I think!), you have a responsibility to yourself to ascertain the parties' intentions at the time. How was the position presented in the books you received? How do you know the money (or what it bought) ended up in Co B?

Thanks (1)
avatar
to Tax Dragon
28th Jul 2018 08:47

Thanks Tax Dragon. Perhaps I should have added the following to the original post:

1) I only engaged with this client in March this year, so was not in a position to advise at the time transactions happened. Prior accountant could not be found (went bust and could not be contacted) and all paperwork came from Director.
2) year end is end of Feb 17
3) client wants accountant filed next week ahead of normal deadline
4) client provided a spreadsheet analysing bank statement for the year in question
5) no other paperwork has been seen to date
6) my classifications are purely based off that spreadsheet and email clarifications

Thanks (0)
avatar
to Tax Dragon
28th Jul 2018 08:54

One more point, I know it is company B in parts as some of the transactions are startup costs for websites, app. development, investor pack etc for company B. For the cash withdrawals, I can’t trace that or prove it was for company B, I go on the directors say so, they have no receipts or invoices to show for the transactions underlying those huge withdrawals.

Thanks (0)
avatar
to Tax Dragon
28th Jul 2018 10:10

Tax Dragon wrote:

In the absence of documentation, other respondents see loans. If that's right, why (Andy, wamstax) aren't those loans to the entity that received the money - Co B?

In the absence of seeing the detail I see two distinct transactions. If I borrow money from A and subsequently lend to B it doesn't hold that A has lent to B.

Thanks (1)
avatar
By wamstax
to Tax Dragon
28th Jul 2018 11:31

Company B did not receive the funds direct from company A - the “Directors” withdrew the money and spent it in the manner of their choosing. Fanciful is clearly the name of the game ......

Thanks (1)
to wamstax
28th Jul 2018 16:57

wamstax wrote:

Company B did not receive the funds direct from company A - the “Directors” withdrew the money and spent it in the manner of their choosing. Fanciful is clearly the name of the game ......

Is that true ?

The OP is vague as to whether the payments called in at the directors on their route.

The OP simply mentions cash, card payments, invoices. Too vague for me to form an opinion on whether there's a loan to Company B or the directors, who then passed it on to Company B.

If an invoice addressed to Co B is paid by Co A, I'd be thinking loan from Co A to Co B. If the director takes cash and lodges it in the Co B account, it could still be argued that he acts on behalf of Co A and this is another loan to Co B.

On the other hand, if the director buys something for Co B, using his personal card, and Co A settles the liability, I'd say that was a loan from Co A to the director.

The options are endless and the boundaries are likely to be blurred.

Thanks (1)
avatar
to lionofludesch
28th Jul 2018 18:04

Your last option didnt happen. This is simply a case of expenses being racked up on company a bank card and cash withdrawals which wholly relate to company b setup and operations

Thanks (0)
to tljenkin007
29th Jul 2018 10:04

tljenkin007 wrote:

Your last option didnt happen. This is simply a case of expenses being racked up on company a bank card and cash withdrawals which wholly relate to company b setup and operations

Originally, you said they were dividends in your eyes.

Thanks (0)
avatar
to lionofludesch
29th Jul 2018 10:14

Agreed I did. The director had been harping on about backdating a declaration of dividends to the tune of amounts in the DCA, and offsetting DCA . But I get your point.

Thanks (0)
to tljenkin007
29th Jul 2018 10:26

For that reason, I've found it difficult to get at the facts of the matter.

Plus several respondents have been presenting their own opinions as settled fact.

Thanks (0)
avatar
to lionofludesch
29th Jul 2018 10:35

My question to you would be this, if with all the info presented to you, you have drawn up a set of accounts and parked transactions that client hasn’t told you doesn’t relate to the company and parked other transactions that cannot be substantiated in the DCA, would you think that is adequate professional work alongside specific management representations?

Thanks (0)
to tljenkin007
29th Jul 2018 10:46

You might want to revisit "parked transactions that client hasn't told you doesn't relate to the company" as I'm not sure what that even means.

This is the nub of the problem. Who says what these transactions are ? The excessive use of negatives backs up the implication that assumptions have been made.

You need to be looking at what the transactions are rather than what they aren't.

Thanks (0)
avatar
to lionofludesch
29th Jul 2018 10:59

I will give you some examples:

1) cash withdrawal from bank £5k
2) payment to Netflix
3) Director birthday party bash £3k
4) holiday package £6k
5) shopping in harrods £7k

These are all parked in the DCA alongside what the director flagged as monies going to company b start up costs.

What else would you/ should you be looking for please?

Thanks (1)
to tljenkin007
30th Jul 2018 12:26

Clearly none of those are loans to the boogie-woogie bugle boys of Company B.

Now, if you had something like plant and machinery for whatever Co B does or a batch of letterheads in Co B's name or money sent to Co B's bank that might be different.

Thanks (1)
avatar
By wamstax
to Tax Dragon
28th Jul 2018 11:31

Company B did not receive the funds direct from company A - the “Directors” withdrew the money and spent it in the manner of their choosing. Fanciful is clearly the name of the game ......

Thanks (0)
avatar
By wamstax
to Tax Dragon
28th Jul 2018 11:42

Tax D - what evidence is there for any of the fanciful projected solutions of both clients and gloss on their “inadequacies “. Raising a sales invoice in B to cover directors extractions in A (and convert them to allowable tax deductions) is to say the least suspect if not clearly fraudulent.
Why would a tax adviser even contemplate such solutions - or fanciful further explanations - to cover up something that was just wrong?

Thanks (0)
avatar
By wamstax
to Tax Dragon
28th Jul 2018 11:42

Tax D - what evidence is there for any of the fanciful projected solutions of both clients and gloss on their “inadequacies “. Raising a sales invoice in B to cover directors extractions in A (and convert them to allowable tax deductions) is to say the least suspect if not clearly fraudulent.
Why would a tax adviser even contemplate such solutions - or fanciful further explanations - to cover up something that was just wrong?

Thanks (1)
avatar
to wamstax
28th Jul 2018 16:57

The Aweb jury is very quick to pass sentence. Guilty unless proved innocent in this space, innit?

The couple on trial have said they robbed Peter to pay Paul. We don't know whether Paul received the money, although no reason has been suggested why we should assume otherwise. Nevertheless, they are essentially charged with (and found guilty of) fraudulently lining their own pockets.

Cheshire was on the money for me. The OP should stand up for him/herself and obtain the documents to do the job properly.

Thanks (1)
avatar
to Tax Dragon
28th Jul 2018 21:03

Tax Dragon wrote:

Cheshire was on the money for me. The OP should stand up for him/herself and obtain the documents to do the job properly.


Cheshire and Lion, whose comments I have just caught up with, slightly belatedly.
Thanks (0)
avatar
to Tax Dragon
28th Jul 2018 21:19

Missed my response earlier. Asked for, non forthcoming

Thanks (0)
avatar
28th Jul 2018 08:52

What exactly did you tell them you needed to complete the Accounts, back in March? (via your engagement letter/other means?)

Thanks (0)
avatar
to Cheshire
28th Jul 2018 09:01

Cheshire wrote:

What exactly did you tell them you needed to complete the Accounts, back in March? (via your engagement letter/other means?)

The standard. Needed permission to engage with prior accountant. That door got shut quickly.

So this is the first accounts of company A. They got incorporated in Feb 17, been trading 1.5 years.

In the absence of the prior accountant, I asked for the bank statements and any paper work they had. All I got was downloaded statements which got analysed on spreadsheet.

Thanks (0)
avatar
to tljenkin007
28th Jul 2018 11:50

tljenkin007 wrote:

All I got was downloaded statements which got analysed on spreadsheet.

Make sure that you obtain a detailed representation letter before handing over the accounts.

Thanks (1)
avatar
to Accountant A
28th Jul 2018 12:34

Accountant A wrote:

tljenkin007 wrote:

All I got was downloaded statements which got analysed on spreadsheet.

Make sure that you obtain a detailed representation letter before handing over the accounts.

Excellent advice, I plan to.

Thanks (0)
avatar
28th Jul 2018 09:14

So they don't give you the tools you need to do your job, they consider options to seemingly re-write history, they push you into completely unrealistic timescales (and it appears for no apparent reason) plus they threaten to disengage......why are you continuing?

The latter alone would prevent me working with such fools.

If you really wish to stand your ground, demand the paperwork which proves what they are suggesting is their version of the truth. Time for them to put up or shut up. Plus I do hope you have been paid in full before you do so.

Thanks (1)
avatar
to Cheshire
28th Jul 2018 09:34

Cheshire wrote:

So they don't give you the tools you need to do your job, they consider options to seemingly re-write history, they push you into completely unrealistic timescales (and it appears for no apparent reason) plus they threaten to disengage......why are you continuing?

The latter alone would prevent me working with such fools.

If you really wish to stand your ground, demand the paperwork which proves what they are suggesting is their version of the truth. Time for them to put up or shut up. Plus I do hope you have been paid in full before you do so.

I have already been paid in full and the accounts are drawn up. Anything that cannot be substantiated will be in the Directors current account and I will have some notes to go with the accounts. I intend to disengage this weekend and handover next to someone else next week. All I see here is trouble and an SAR on the horizon. Thank you Cheshire

Thanks (0)
avatar
By frankfx
28th Jul 2018 09:53

So client is in a rush to file first accounts early?

save yourself from their self- inflicted folly

Have you explained that a change of accounting date to 31 July 2018 ( August is just as good ) would potentially provide important tax advantages in their situation.

30 June 2018 , by contrast, would be a disaster .

by explaining the tax benefit of a July year end you may go up in their esteem.

Thanks (1)
28th Jul 2018 16:40

Buying stuff for a sister company is not dividends in my book. My initial reaction is inter-company loan - but, then, my information is incomplete and I might be swayed by further clarification.

It's the OP's error to make the assumption without asking the questions.

Thanks (1)
avatar
to lionofludesch
28th Jul 2018 18:08

lionofludesch wrote:

Buying stuff for a sister company is not dividends in my book. My initial reaction is inter-company loan - but, then, my information is incomplete and I might be swayed by further clarification.

It's the OP's error to make the assumption without asking the questions.

I should have clarified, all the transactions are packed in the DCA. And they wont be reclassed as dividends unless I see the paperwork. I have no paperwork to suggest a loan. What the director did was give a series of creative accounting options to consider or be fired. That tells me there is no paperwork at present but there will be in the future if I agree to play along.

Thanks (0)
to tljenkin007
28th Jul 2018 18:19

tljenkin007 wrote:

I should have clarified, all the transactions are packed in the DCA. And they wont be reclassed as dividends unless I see the paperwork. I have no paperwork to suggest a loan. What the director did was give a series of creative accounting options to consider or be fired. That tells me there is no paperwork at present but there will be in the future if I agree to play along.

This is new information. "Packed in the DCA" by whom ? I was assuming you - but your latest post implies the company.

You're asking a lot here. You want paperwork to treat these payments as dividends (I wouldn't do this even if there was paperwork - a payment to a third party isn't a dividend imho) and paperwork to treat them as loans.

Careful you don't back yourself into a corner. There's probably no paperwork so you won't be able to treat them as anything if you follow that line of thought to its logical end.

Incidentally, you mention the directors but I can find any note of the shareholdings in these companies.

Thanks (1)

Pages

Share this content