Share this content
63

Director mortgage - has put everything through Ltd

Contractor director earns well now wants first mortgage but has spent 5 years paying himself nothing

Didn't find your answer?

I've just been approached by a company director for help. They are a friend of a current client so am trying to help but this is out of my experience. 

He has been a contractor for 6 years but also makes money from non-contract work and puts it all through his Ltd. He has paid himself nothing, not even submitted a self assessment as he said he isn't earning enough. He is in media and advertising so his expenses are very very broad but to be fair to him, farely legit.

The bookkeeping is very good in general, he uses Xero, keeps receipts, is vat registered, pays on time etc but has managed to make no profit every year. He spends it. If there is anything at year end, he will invest it in the business, buy inventory, fixed assets, an advertising campaign etc to spend the revenue.

Now he wants a mortgage as he got married. But doesn't know where to start. His wife is unable to work. 

To me it sounds like he's at ground zero at best. No profit, no salary, no drawings. The business revenue is roughly £120k.

Anyone have any suggestions? 

Replies (63)

Please login or register to join the discussion.

avatar
By RajD
06th Jun 2020 00:53

I should add, his year end was September and accounts due at the end of June. He is happy to change how he reports and leave money in the business and pay the tax, take it out and declare it as salary, pay his wife a salary. Resubmit a self assessment or go on payroll. If he submits last year now, then this year in October then he has two years worth of accounts making profit.
But again, what is a good way of doing this without paying tax for the sake of it.
He has hired a few people during covid that were let go by some of his clients. So as dodgy as he sounds, he's a decent chap.

Thanks (0)
Hallerud at Easter
By DJKL
06th Jun 2020 01:04

If he buys inventory (that is not resold) and fixed assets then ceteris paribus the business must be reporting profits, as where else would it get the funds to buy these, so at least that is something.

What reserves has the company generated?

Thanks (1)
By Tim Vane
06th Jun 2020 01:44

Pull the other one. What has he been living off for the last 6 years? How has he paid his rent, fed himself, clothed himself? And how the heck has he managed to afford a wedding, not to mention a wife? In my experience the latter two alone are a horrendous expense.

The stench of rodent is thick upon the grass.

Thanks (4)
Replying to Tim Vane:
Flag of the Soviet Union
By thevaliant
06th Jun 2020 01:53

I agree. Load of bollo cks.

He's basically been putting personal expenditure through the business and claiming it all as business expenses.

Thanks (0)
Replying to Tim Vane:
My photo
By Matrix
06th Jun 2020 07:26

Please can you change your post since it is sexist. It is not the 50s.

Thanks (2)
Replying to Matrix:
avatar
By Jfg
06th Jun 2020 12:08

Bloody right it is sexist. I don’t go round mentioning that my husband is a luxury I can’t afford, well not very often anyway!! LOL

Thanks (2)
avatar
By SXGuy
06th Jun 2020 06:49

What a load of tosh. How does he live each year with no money?

If there was Retained profits a bank would lend. No need to draw a salary. But I'm guessing there isn't any since he's fudged it all.

Thanks (0)
By mrme89
06th Jun 2020 07:17

Perhaps the wife has a good job and they can afford to live on one wage whilst the business grows?

Thanks (0)
Replying to mrme89:
.
By Cheshire
06th Jun 2020 07:50

It says his wife is unable to work.

Thanks (0)
Replying to Cheshire:
By mrme89
06th Jun 2020 08:08

So it does. That’ll teach me to look at AWeb at ungodly hours with a raging hangover.

Thanks (0)
My photo
By Matrix
06th Jun 2020 07:28

It doesn’t make sense to me, he either is making money in the company and paying tax and then investing it or taking the money out. It can’t be neither. Please.clarify.

Also I would check your PI, why haven’t you recommended he takes a salary to use up his personal allowance and get a credit towards the state pension.

Thanks (0)
Replying to Matrix:
RLI
By lionofludesch
06th Jun 2020 07:34

Matrix wrote:

Also I would check your PI, why haven’t you recommended he takes a salary to use up his personal allowance and get a credit towards the state pension.

This is a new client. Or, at least, that's how I read it.

Thanks (0)
Replying to lionofludesch:
My photo
By Matrix
06th Jun 2020 07:44

OK sorry.

Raj - was he DIYing his accounts too then or did he have an accountant?

I don’t understand your comment about paying tax if he takes a salary, make sure you understand if you are advising him and don’t change anything historically. You say in your first sentence that it is outside your experience so refer him to another accountant if necessary.

Thanks (0)
avatar
By bernard michael
06th Jun 2020 09:22

How does he pay his living expenses ?????

Thanks (0)
avatar
By bernard michael
06th Jun 2020 09:25

How has his accountant shown his personal expenses/drawings in the the company accounts for the last 6 years ??
Don't tell me he does the accounts himself

Thanks (0)
avatar
By RajD
06th Jun 2020 10:04

Thanks all for replies. Certainly didn't expect so many over night!

Yes, let me clarify. I'm looking at the now and future. I haven't taken him on a client as I may hand him over to someone who knows more. I did say he should have at least maxed out his personal allowance for him and his wife. Even just a basic salary will do to start and to pay NIC etc. Don't know if he can amend historic returns.

Some people are right but its a bit more complicated going backwards. Well very complicated. He has put more through expenses than he should, definitely. But he seems to have not done anything that wasn't business related for the years I have access to. He works solid. His holiday last year was to Ireland to help a conservation charity.

His wife - was wealthy in her own right as an editor but also from a well to do family. The wife left work after something happened at work which left her with mental health problems. They lived with her family until recently. Her father re-married (mother died years ago) and the step mother wants them out to "start fresh".

The wife doesn't work in the normal sense but writes and does get paid sometimes. She is planning on going into online writing. She works as the company secretary and web manager too. So they have/had money.

Food - either dealt with by client meetings, the wife's family, subsistance or wrongly put through the business.

Wedding - cost very little due to business contacts and was small.

He also has money and savings from previous permanent work. They both do so can afford to live but not to buy a house alright.

I just called him to discuss and he says he knows he has been naive and skirting around it. And thought it was too easy. He was told this was a good way to do it by a mentor and when he met with a Xero sales person, they made out he didn't really need an accountant (doesn't surprise me from Xero) so has just been doing what he thought was OK.

My client is in the same work and got a mortgage last year. That's how they got onto the conversation and my client sent him to me.

Hopefully that adds more context.

Thanks (0)
Replying to RajD:
My photo
By Matrix
06th Jun 2020 10:11

You will have to redo all Xero and book anything personal to the Director loan account and refile accounts, CT600 etc. Will be messy. Up to you if you want the job but don’t change history. Any PAYE scheme would be prospective and it will cost him in fees, tax and loss of mortgage.

Thanks (0)
Replying to Matrix:
avatar
By bernard michael
06th Jun 2020 10:22

Matrix wrote:

You will have to redo all Xero and book anything personal to the Director loan account and refile accounts, CT600 etc. Will be messy. Up to you if you want the job but don’t change history. Any PAYE scheme would be prospective and it will cost him in fees, tax and loss of mortgage.

Surely if you try do redo all the previous work you're inviting HMRC to have a field day and open an immediate investigation

Thanks (0)
Replying to bernard michael:
.
By Cheshire
06th Jun 2020 10:37

Surely by not doing anything you are complicit in tax evasion.

Thanks (1)
Replying to bernard michael:
My photo
By Matrix
06th Jun 2020 10:37

TBH Bernard, I would probably not take this on but I would advise Raj to mention what should be done and the consequences you mention. Raj will now need to file a SAR whether he takes it on or not.

Thanks (0)
Replying to Matrix:
avatar
By RajD
06th Jun 2020 10:47

Why would I be requesting a subject access request? Sorry if a dumb question or misunderstanding.

I'm not sure I will take this on but then I don't want him just passed around accountants who don't want to touch it either. Its not like he's Philip Green. He come with a lot of openness. It's not surprising he took the advice and has got himself in this position. He's answered everything I've ask him pretty honestly and happy to put things right.

I like clients like this, I think we all do. Certainly beats anything else I have right now and is the first challenge in a long time to make me use my whiteboard for more than lunch orders! Haha

Thanks (1)
Replying to RajD:
My photo
By Matrix
06th Jun 2020 10:50

SAR Suspicious Activity Report

Thanks (0)
Replying to RajD:
Psycho
By Wilson Philips
06th Jun 2020 10:52

SAR means something else.

Edit - snap!

Thanks (0)
Replying to Wilson Philips:
.
By Cheshire
06th Jun 2020 11:05

Specific Absorption Rate.

Ah, Subject Access Request, that made me giggle though.

Thanks (1)
Replying to Cheshire:
avatar
By RajD
06th Jun 2020 14:40

haha. yeah fair point. I haven't had the need to submit a Suspicious Activity Report yet but a client of mine has to request Subject Access Requests all the time so I see "SAR - £50" charges every few days.

Thanks (0)
avatar
By bernard michael
06th Jun 2020 10:55

You haven't still answered one very important question
Who prepared the accounts for the last 6 years that he signed off
If it was the prospective client do NOT take him on unless you are prepared for a long battle with HMRC.
If you do - make sure you get your fees up front

Thanks (1)
avatar
By RajD
06th Jun 2020 11:09

Ah suspicious activity. That makes more sense. I'm not going down that route. Not for someone who trying to fix things.

He has prepared his own accounts using Xero. Done all the bookkeeping, avoided cash in hand work, kept all receipts, statements stack up etc better than 90% of my other clients. Even finance directors have worse records.

He just didn't ask the right questions and is naive. That isn't suspicious to me. He's been pretty shocked and upset at how wrong he's got it.

Thanks (0)
Replying to RajD:
avatar
By Accountant A
15th Jun 2020 18:22

;ojbk;kj

Thanks (0)
avatar
By lesley.barnes
06th Jun 2020 11:20

I wouldn't touch this client - you will need to redo all the accounts correctly for starters. Reading between the lines - this client hasn't come to you because he's had a relevation and suddenly realised his accounts are wrong. He has decided to come clean because he needs a mortgage and has been told he needs an income to do this. You can't rewrite history so payroll is out, you know he has left the company with no profits each year, he will have a directors loan account. He will need to pay Corporation Tax, is his VAT correct if he has claimed personal expenditure? He could end up with considerable personal debts repaying the DL account. This could be such a headache especially as HMRC are likely to take an interest. If his annual turnover was £120k thats some level of business expenses every year. You also mention he employed some people who had been let go by their employers because of covid. Is he payrolling them? I've just noticed you are not going to file a SAR - you might need to reconsider this when you've read up on money laudering regs.

Thanks (1)
avatar
By bernard michael
06th Jun 2020 11:31

Mortgage companies often check with Companies House.
How do you think they'll react when they see 6 sets of accounts dutifully filed year on year and then 6 sets of amended accounts filed within a short period of time??
You stated he prepared his own accounts using Xero. As far as I was aware Xero doesn't produce Statutory Accounts. Did he prepare Stat A/cs o r not??

Thanks (0)
Replying to bernard michael:
avatar
By RajD
06th Jun 2020 13:00

Hi Bernard, he submitted them online using Hmrc and companies House tools. Xero produces annual accounts. You just can't submit them through Xero. I use tax filer for that but Xero will produce the accounts, a tb or can now link TB automatically.

Thanks (0)
David Winch
By David Winch
06th Jun 2020 12:53

I would suggest that if you decide not to submit a Suspicious Activity Report you keep a full and careful note of the information you had and your thought process in arriving at the conclusion that a SAR is not required.
It does seem to me that his new accountant (whether it is you or someone else) will need to do some work on past accounts to see that they were sensibly prepared and that there were no serious issues with tax compliance (including VAT, s455 tax, etc) and advise the (potential new) client to correct any significant errors that come to light.
If the client has, up to now, believed that his and the company's tax affairs were in order, and proposes to have any past errors corrected reasonably promptly then you may well conclude that he has not been dishonest, so (while there may have been negligent under-declarations) there has been no criminal tax evasion and no money laundering - and therefore no need to submit a SAR.
David

Thanks (6)
RLI
By lionofludesch
06th Jun 2020 13:04

I'd only take this on if the client agreed to paying back the tax on the exaggerated expenses. I'd probably be open with HMRC and agree a timescale with them - could be four years, could be when he started - and trawl through the records for disallowable stuff and agree a settlement with HMRC. The whip hand is with HMRC but it at least seems that the client had other sources of funds for his living expenses.

The deal would depend on me, the client and HMRC all being happy with it. If not, I at least have the luxury of being able to walk away.

So far as the client's mortgage is concerned, he'll have to rely on the lender being happy with his company's retained earnings. He's been a fool but - hey - there are plenty of folk like him who don't see problems coming because they're not wick enough to seek advice from a professional.

Thanks (1)
avatar
By RajD
06th Jun 2020 14:33

Hi,

Thanks for everyone's input. Appreciate the caution around MLR regs and Suspicious Activity but I do have a different view. We are accountants and someone is looking for help. I spoke to a friend who is a solicitor about this and he put it to me like this.

"If someone has found out they might be guilty of something they were unaware was a crime or even is a crime, has walked into my doors for help at the first instance they know they think something wrong, my duty is to help them understand their situation and outline their options. If I was to take down their name, details and account of what might be wrong and call the police - what was the point in me going to law school?"

If it appears that there is malice, intent or premeditation of tax-evasion, then yes, that it worthy of reporting. But right now, a guy has just asked for professional help. He has said he has about £20k in savings left and is happy to rent if that is his reality for the moment and forego a mortgage. He will also use those savings to pay back-taxes if required. He will also pay himself through paye and use those to pay what he needs.

I appreciate we deal with people trying to play the system all the time but what are his alternatives? He calls the HMRC and deals with it himself? Surely we don't all trust the HMRC all of a sudden - he'll probably end up in jail!

I agree with David Winch and lionofludesch - I may not take him on but I would like to give him some options. I spoke to him about discussing it with HMRC and he has no problem with that. But doesn't want to go in blind and without showing he has tried to sort out his affairs.

Thanks (0)
Replying to RajD:
By petersaxton
06th Jun 2020 14:59

Your solicitor friend is an idiot

Thanks (0)
Replying to RajD:
By petersaxton
06th Jun 2020 15:00

How much tax do you think he would need to pay to get the mortgage he requires?

Thanks (0)
Replying to RajD:
David Winch
By David Winch
06th Jun 2020 15:27

Hi Raj
With respect your solicitor friend is talking to you about a rather different situation. What would you say to a client who told you that he charges no VAT on the sale of milk and also charges no VAT on the sale of chocolate because that's the same thing?
The solicitor is talking about a situation where a lawyer is approached for legal advice about a possible breach of criminal law. He can give that legal advice which is covered by legal professional privilege and he does not have to complete a SAR or report the client to the authorities.
You are talking about a situation in which an accountant is approached for assistance in obtaining a mortgage. You are not a lawyer and you are not being asked for legal advice. In the course of responding to that request you ask questions. The answers to those questions lead you to suspect there may be non-compliance with tax requirements. You then raise that issue with the client. You may then commence to give him legal advice concerning his obligations to submit relevant information and appropriate figures to HMRC.
But (importantly) the information which forms the basis for your suspicion of tax irregularities did not come to you as a result of a request for legal advice or in the course of giving legal advice. Have a look at s330 Proceeds of Crime Act 2002, particularly s330(10) & (14).
So the issue for you is, do you suspect the client of deliberate dishonesty - or merely ignorance? If the latter, do you suspect that when he understands the tax requirements he will deliberately dishonestly fail to put matters right?
David

Thanks (2)
Replying to davidwinch:
avatar
By RajD
06th Jun 2020 15:59

Thank you for this David. Love a reference! I will certainly go and read.

You have highlighted something which may have been lost in translation. This gentleman has not approached me to help him get a mortgage. He wanted a mortgage and spoke to his friend, my client. His friend took him through what he had to provide in the course of arranging his mortgage. During this conversation, it became apparent that he was not doing anything close to the same accounting practices as his friend. So he was introduced to me.

He called me and explained this, the background, gave me logins to Xero and asked me to help him work out what he has done wrong and what he can do to fix it. Again, I am not being approached to help him get the mortgage based on his records or cover anything up but get his affairs in order now he wants to apply for one. I did not find this stuff during the course of my accounts preparations or investigation, he has explained what he has done upfront in the first conversation.

Money is not his problem, he appears to be able to earn very easily, has even said that he could do some contracts that he has avoided doing and get the money in a few months. He only wants a mortgage because he hasn't rented before and has said he tried to hire an accountant in his city but the communication was so bad he gave up and then met the Xero people when looking for a replacement. They apparently told him "this is all accountants do anyway".

Perhaps this clarification was needed earlier.

Thanks (0)
boxfile
By spilly
06th Jun 2020 17:06

Has anyone sued Xero yet? A lot seems to be resting on the advice that this chap was given by the Xero sales rep.
If I was him I would be pretty annoyed with a) the Xero rep, and b) myself for being naive and believing accounting was just a matter of inputting data.

Thanks (1)
Replying to spilly:
avatar
By RajD
06th Jun 2020 17:41

haha! I wish. I hate them. I was one of the first accountants to use them. We shared the same building in Milton Keynes. I watched them go from "partnering" with accountants and selling them the world to completely shafting them once the business model worked in the UK.

I sat through a sales pitch that basically translated to "you won't make money from bookkeeping anymore... but your great and can consult because you have expertise". Yes but the bookkeeping pays the mortgage!! excuse the pun.

Their caveat is the network of accountants that they "promote" and the recommendation in literature to use one. I work with a lot startups and have heard the "you don't need an accountant" for my own ears.

Thanks (1)
By Tim Vane
07th Jun 2020 02:21

That's what this site needs more of. An accountant who refuses to acknowledge his MLR responsibilities, throws them back in the face of his fellow professionals and steadfastly refuses to accept his client has done anything wrong. Cut and thrust; great stuff.

Thanks (0)
Replying to Tim Vane:
avatar
By RajD
08th Jun 2020 09:21

Useless response Tim. But thanks for dropping by.

Thanks (1)
avatar
By bernard michael
08th Jun 2020 09:15

What will he say to the mortgage company when they ask for a HMRC tax overview or SA 302 ? He surely won't give them the existing ones and say that they are all wrong and are going to be changed.

I still think HMRC will feel his collar

Thanks (0)
avatar
By RajD
08th Jun 2020 11:16

Thanks for everyones input. I've introduced this chap to an ex-Hmrc tax investigator I've used before as a consultant. They are going to decide what needs to be done then he is going to come back to me.

Regards MLR - he isn't a client yet. When we know the facts I can submit a SAR. He has agreed this and has no problem.

Regards the comments about flouting MLR and taking the client on - I came here assistance from accountants about accounting. I appreciate that you are looking out for your fellow accountant and the exposure/risk of this type of person BUT without a solution to the issue, it doesn't help the person approaching a member of the accounting profession.

Thanks again. Hope all are doing ok under the circumstances.

Thanks (1)
Replying to RajD:
David Winch
By David Winch
08th Jun 2020 11:32

Hi
Just to clarify a couple of points.
A SAR is required (unless an exemption applies) where you have a suspicion of money laundering as a result of information which has come to you in the course of your work in the regulated sector. Whether or not your suspicion relates to a client is irrelevant.
In this case an exemption may apply (as you may take the view that PoCA privilege applies under s330(10) PoCA 2002).
Alternatively in this case you may conclude that there has been no money laundering (as you may conclude that the client believed he was doing everything properly) and therefore there is no suspicion to report.
So, to be clear, I am not saying that you need to make a report - I am just saying that whether this chap (or chapess) is a client is irrelevant to that issue.
David

Thanks (2)
Replying to davidwinch:
avatar
By RajD
08th Jun 2020 13:44

Thank you David. Fair point.
I have read the previous link and re-read the guidelines from ICEAW on MLR for Accounting providers, the input from this forum and gov.uk guidance.

Thanks (0)
Replying to RajD:
.
By Cheshire
08th Jun 2020 13:09

[quote=RajD]

''When we know the facts I can submit a SAR. He has agreed this and has no problem''.

Isnt that tipping off?!

Thanks (0)
Replying to Cheshire:
David Winch
By David Winch
08th Jun 2020 13:09

Cheshire] <p>[quote=RajD wrote:

When we know the facts I can submit a SAR. He has agreed this and has no problem.

Isnt that tipping off?!


Technically, no it's not tipping off (because no suspicion has been reported).
David
Thanks (3)
Replying to davidwinch:
.
By Cheshire
08th Jun 2020 14:34

Thanks David.

Thanks (0)
Replying to Cheshire:
avatar
By RajD
08th Jun 2020 13:50

No as I do not believe there is suspicious activity and also I do not believe that it would prejudice any further investigation.

As I mentioned earlier, he has handed over every bit of his "bookkeeping" to date and Xero has audit trials.

Thanks (0)

Pages

Share this content

Related posts