Historic accounting error has come to light

Treated as company share buy back, the paperwork actually shows the company lent the director money

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Around 10 years ago as part of acquiring full control of a company a 25% shareholder director was lent money by the company to buy the shares from the exiting director shareholder. For ease, let's say it was for £100k

The previous accountant treated this as a company buyback of shares, with a share premium account.

The annual returns and accounts supported this treatment, and audited accounts were signed off.

We took over the client a couple of years ago and this treatment continued. As part of a sale due diligence, it now transpires that it wasn't a sharebuyback. The company actually lent the director the money to buy the shares personally (albeit the cash may have gone directly to the departing shareholder from the company)

The accounts are materially wrong, but we're comfortable with correcting these. From a tax persective, how far back do you correct? Overdrawn DLA, interest, BIK, new CT 600s? There has also subsequently been a share for share exchange using incorrect share details. Presumably this also now needs to be have some additional correspondence to recognise the error?

Any similar experiences and steers would be appreciated. 

Thanks

Replies (16)

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By johngroganjga
03rd Feb 2022 10:56

Are you sure that all concerned agree with your interpretation, including the person who you say the company made a loan to which is still unpaid?

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Replying to johngroganjga:
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By jpg80
03rd Feb 2022 11:19

Hello John,
Thanks. It's been picked up as part of a sale due diligence which involved confirming the ownership of the shares asking for share certificates etc. As part of this, the purchase agreement from 10 years ago has been reviewed, and highlighted that it wasn't a company buyback, but drafted as a personal purchase, and company cash was used to fund that.

I should note that the final "signed" documents haven't come to light, but the correspondence enclosing the documents to sign indicate the above. So it is possible that accounts are correct, but the paperwork doesn't support that.

Unsurprisingly, the purchasing firm want it sorting ASAP.

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Replying to jpg80:
By johngroganjga
03rd Feb 2022 11:57

Thanks but what is the answer to the question I asked? Are all concerned on board with the new interpretation of the facts, including in particular the company’s unwitting debtor?

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Replying to johngroganjga:
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By jpg80
03rd Feb 2022 13:12

Hi John, the shareholder isn't fully onboard, since it is creating stress and uncertainty with unquantified tax and timescale for resolution. He therefore just wants it to be settled.
The buyers equally want certainty that what they are acquiring is correct, so it's not ideal for them either.
The ideal scenario is that additional paperwork is identified which shows it was later changed to a company buyback. But in absence of that we have a mess and my question is for a steer on how others would approach it.

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By Paul Crowley
03rd Feb 2022 12:07

An unsigned thing from 10 years ago was probaby version 1 of a series of paperwork and prospective agreements
I recon the final version was seen by the auditor at the time and in compliance with the audited accounts.
Do all shareholders think it was wrong for all that time?
This looks like sellers are scared that the deal will fall through and are blaming the idiot that gave the unsigned thing to the buyers

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Replying to Paul Crowley:
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By jpg80
03rd Feb 2022 13:02

Hi Paul, there is only one shareholder and it's come as a surprise. Fundamentally he still owns 100% of the co, but the company reserves position is now in doubt.
It's quite possible that 10 years ago, when acquiring full control it wasn't properly explained and my suspicion is the old accountants / auditors processed the company buyback on the grounds that it was more tax efficient than a DLA.

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Replying to jpg80:
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By Tax is always taxing
03rd Feb 2022 14:46

Have you considered just ignoring the unsigned document that doesn't prove anything?

Give the purchasers whatever warranties they want regarding ownership of shares and move on.

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Replying to Tax is always taxing:
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By paul.benny
03rd Feb 2022 15:38

+1

If the deal is based on net asset value, the potential correction will increase the net assets by the supposed DLA amount, giving director the funds to repay it. Net effect nil.

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By paul.benny
03rd Feb 2022 12:39

Has Client considered approaching the former auditor?

Offering to reimburse costs of trawling their archives may encourage cooperation. If, of course, they still have retained their documentation from that long ago.

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Replying to paul.benny:
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By David Ex
03rd Feb 2022 13:01

paul.benny wrote:

Has Client considered approaching the former auditor?

Offering to reimburse costs of trawling their archives may encourage cooperation. If, of course, they still have retained their documentation from that long ago.

They didn’t make much of a fist of auditing the “buy back”, did they?! Maybe they could now help sort it out pro bono!

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Replying to David Ex:
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By jpg80
03rd Feb 2022 13:04

Old auditors no longer exist and I'm sure under GDPR exclient records from 10 years ago no longer held...

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Replying to jpg80:
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By David Ex
03rd Feb 2022 13:15

jpg80 wrote:

Old auditors no longer exist and I'm sure under GDPR exclient records from 10 years ago no longer held...

Arthur Andersen? Say no more!

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By CJS88
03rd Feb 2022 17:18

I do not understand why you wish to prefer an unsigned draft agreement as a better record of the facts then the accounts audited at the time and the memories of the participants.

If key documents are missing then the solicitors can prepare warranties as already noted above.

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By More unearned luck
03rd Feb 2022 19:32

What entries are in the register of members and register of transfers? What relevant minutes are there in the minute book? How have the ARs & CSs been completed?

I think you would need very good evidence that there was a loan and sale to the continuing director to oust out the way the matter has been treated until now. The preponderance of evidence that you have cited to date indicate that noting is wrong. At the moment it looks like a mare's nest. I concur with CJS88 at 17:18.

Follow the advice of L/cpl Jones and on the cover of THGTTG.

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By D V Fields
03rd Feb 2022 22:38

I think the current director needs to establish whether he bought the shares from the departing shareholder or not. If he didn’t buy the shares and the paperwork (Company Registers / Companies House) suggests otherwise then he should insist they are rectified notwithstanding it is the directors responsibility to approve the accounts.

My experience is that the buyer will want the registers correctly reflecting the facts, even if that means them being updated and will seek all the warranties they consider appropriate.

Once resolved if it means there is a loan to be accounted for then so be it. The loan is going to become current. In a similar undeclared BIK issue I came across, I addressed it by calculating the full liabilities from inception and got the company to settle all liabilities after suitably grossing up. Penalties were levied I believe for five years (£200 for each year I think) along with interest. Part of the interest became subject to a voluntary payment and agreement as HMRC stated they couldn’t enforce it back to the inception of the error.

The buyer and seller will ultimate reach agreement or otherwise taking into account whatever is decided. The legal team should earn their money here!

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By tonyaustin
04th Feb 2022 13:00

If there was a buy-back of shares, the share capital of the company was reduced and the other shareholder's holding was unchanged. If there was a sale of shares by one shareholder to another, the share capital is unchanged and the other shareholder's holding increases, as does the total cost of his shares. What do the documents filed at Companies House say?

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