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Backdating a salary and claiming back tax and NI

Is it possible to reclaim tax and NI ?

I am a bookkeeper and have a client with two directors (husband and wife). For 17/18 they had been on the directors optimum salary and took dividends later in the year. From April 18 they needed more instant cash and after getting no reply from their accountant for tax advice, the owner asked me to pay them £1000 each per week, even though he knew it would be subject to tax and NI. Now we have met a new accountant who says he should write to HMRC and get it all refunded (for a hefty fee) by saying the old accountant had not given any advice about salary and dividends. The 17/18 accounts have not been submitted to HMRC yet so nothing needs backdating in that respect.

How likely is HMRC to agree to a full refund of all this tax and NI? I'm thinking of composing the letter myself seeing as I'm the one potentially backdating it, not the new accountant and thus saving the hefty fee. However I'm sure one of the many experienced accountants on here must have had the same scenario and I really would appreciate some good advice. The directors are very happy thinking of the large refund coming their way but I want to see how realistic it is!

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20th Feb 2019 20:19

nessy4646 wrote:

I am a bookkeeper and have a client with two directors (husband and wife). For 17/18 they had been on the directors optimum salary and took dividends later in the year. From April 18 they needed more instant cash and after getting no reply from their accountant for tax advice, the owner asked me to pay them £1000 each per week, even though he knew it would be subject to tax and NI. Now we have met a new accountant who says he should write to HMRC and get it all refunded (for a hefty fee) by saying the old accountant had not given any advice about salary and dividends. The 17/18 accounts have not been submitted to HMRC yet so nothing needs backdating in that respect.

How likely is HMRC to agree to a full refund of all this tax and NI? I'm thinking of composing the letter myself seeing as I'm the one potentially backdating it, not the new accountant and thus saving the hefty fee. However I'm sure one of the many experienced accountants on here must have had the same scenario and I really would appreciate some good advice. The directors are very happy thinking of the large refund coming their way but I want to see how realistic it is!

So, if I'm reading it correctly, it appears:-
1. The directors have paid themselves £1,000 per week.
2. You have put this through payroll, on the instructions of the directors.
3. Some new accountant wants to write to HMRC to rewrite history on the basis of "the old accountant had not given any advice about salary and dividends".
4. You are thinking of 'backdating it' and rewriting history yourself?

Have I got that right?

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to Wanderer
20th Feb 2019 20:37

1 to 3 - true
4 - false - I would only do this if it's allowable. Personally I think it's impossible, but this is the advice they've given my client and hence my post

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to nessy4646
20th Feb 2019 20:47

If the accountants want the backdating to be done, tell them you'd prefer them to do that, and keep well out of it.

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to nessy4646
20th Feb 2019 20:55

As Moonbeam says. And in addition tell your clients that you won't be 'correcting' any entries and won't be acting for them any more.

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20th Feb 2019 21:02

They've not asked me to do anything. I'm just looking out for them as I really don't agree with this advice of backdating salaries so I've come on the forum for advice. They are a very good client of mine and I'm afraid this accountant has now put this idea in their head that it's do-able and I really don't want to be involved unless HMRC say yes, go ahead..

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to nessy4646
20th Feb 2019 22:21

Have no part of this.

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20th Feb 2019 21:38

Start your letter, ‘once upon a time’ and end with, ‘and they all lived happily ever after.’ Always works.

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20th Feb 2019 22:27

The letter won’t do anything.

The way to change HMRC’s payroll figures is by filing an EYU.

However, expect to fail the HMRC visit when they ask why £1k/wk was ‘actually’ £150ish salary and £850ish dividend / DLA, especially as tax & NI was paid on it as a full salary, until a new accountant was engaged. It’s ridiculously transparent. The new accountant really is after a short-term client not a long term relationship. Penalties, interest, tax repaid and fines.

Does it pass the sniff test in your mind? I’m always the first to do ‘grey line’ thibgs for the client, but this is way too far over the line, even for me.

If they insist on it, don’t you dare do anything, get the accountant to do everything to do with it. Stay as far away from it as you can. Try not to have any correspondence with the accountants over this matter, send any reports etc to the client for them to forward on.

Whether you go the full hog and disengage with them is up to you - this is one if the reasons why working with family/friends is tricky. Are you part of a qualified organisation (ICB, AAT etc)?

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to atleastisoundknowledgable...
21st Feb 2019 09:04

atleastisoundknowledgable... wrote:

I’m always the first to do ‘grey line’ thibgs for the client, but this is way too far over the line, even for me.

Or to quote Joey Tribiani, it's so far over the line, the line is just a dot to you.

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to atleastisoundknowledgable...
21st Feb 2019 09:55

Hi, I'm halfway through AAT level 4 and have been bookkeeping all my working life. As I've said earlier this just doesn't sound right to me and I am very wary of this potential new accountant.

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21st Feb 2019 01:42

As ALISK says, the letter will do jack pitt other than potentially drawing attention to an attempt at rewriting history.

When you say the new accountants have quoted a hefty fee for this letter, that adds to the smell in my opinion. How hefty, if you don't mind me asking? It almost sounds as if they are wanting to take a 'cut' out of the supposed refund.

HMRC couldn't give a monkeys that the client 'didn't get dividend / salary advice'.

How reputable is this new firm of accountants?

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to Manchester_man
21st Feb 2019 09:53

£1500!

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21st Feb 2019 09:10

I honestly cannot believe the [***] that 'accountants' come up with sometimes.

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21st Feb 2019 10:01

Thanks to everyone who contributed to my post; all your comments confirm my initial thoughts.

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to nessy4646
21st Feb 2019 10:37

I'd be tempted if I was you to show this thread to your client/friend. They may change their mind about the new accountant then. To preempt a defence, how can we be biased and want the work - we don't know who your client is, he doesn't know who we are (other than, I can assure you, experienced accountants working in the real world who mostly own their own practices)

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21st Feb 2019 12:17

Backdating a rewriting history is a big no-no.

Now the controversial bit.

There is nothing to stop the director's having a meeting and reducing their annual salary to a more reasonable value (There must be a valid reason to do this reduction). This would be processed through the payroll and would generate a tax refund, not sure about NI (and cannot be bothered to try it out).

This would produce a negative amount for the pay month and the directors would owe the money back to the company. The amount owed must be repaid.

EIM0800 and EIM00805 are sort of related to this plus

https://www.rickardluckin.co.uk/negative-earnings-can-arise/

Please also consider that if the high payslips were used to obtain loans etc the directors should advise the loan provider of the change and the reason for the change.

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21st Feb 2019 15:33

@ nessy4646 (OP).

Peter’s post at 12.17 very probably provides the key, by its referring to the “negative earnings” concept.

I surmise that the £1,500 accountancy fee is NOT simply for preparing a letter, but is for the required paperwork for a “plan” under which “negative earnings” figure are introduced into 2018/19 [whether (i)brought into the 2018/19 payroll (either in February 2019 or, more likely, March , 2019) or (ii) by way of later correspondence with HMRC].

This is another link which may give some insight into the “negative earnings“ plan.

https://uk.practicallaw.thomsonreuters.com/8-582-9825?transitionType=Def...(sc.Default)&firstPage=true&comp=pluk&bhcp=1

Purely by way of example, if directors’ service contracts were to be drawn up, under which the directors were to receive remuneration of (say) £17,000 per annum for 5 years, those contracts requiring that the directors however immediately refund £35,000 each (out of their previously paid directors’ salaries) to the company, this “plan” (if watertight) could be successful: if so, it would enable substantial Income Tax (and National Insurance hopefully) refunds to be received. Such a plan, again if prepared properly, would be seen to be in the interests of the company and not fall foul of any legislation. Minutes would also be required.

I can certainly conceive that a fee of £1,500 could be justified in those circumstances.

I am not of course assuming for certain that this “negative earnings plan” is at the root of the request made to you, but I would be 80% sure thereof.

Whether what you are to be requested to do sits comfortably with you, you can cover yourself by ensuring that you receive a written assurance, from your client, that the “plan” is bona fide: and you should also seek independent advice, from your own governing body and from ACAS.

Under no circumstances whatever must you be a party to backdating correspondence, whether in your own name or in the name of the client company.

Basil.

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21st Feb 2019 17:02

To add to my earlier post, this is a link to a relatively recent case, for the interest of those seeking light reading :) -

https://assets.publishing.service.gov.uk/media/57664367e5274a0da30000b3/...

Basil

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