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How do I record this entry in bookkeeping?

A director has reintroduced funds from the sale of an asset not recorded in a previous year

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I have a client who has been investigated by HMRC for the accounting periods 2012/13 to 2017/18.  I took over his accounts in 2018/19 and had to deal with the investigation after the previous accountant refused to assist.  In 2012/13 the company bought an asset from the business bank account.  The accountant claimed AIA in full and depreciated the full amount of the cost rather than depreciating the asset in line with the NBV.  Therefore when the asset was sold in 2013/14, the proceeds of the sale were paid straight in to the Directors personal bank account.  HMRC have investigated and advised the Director to pay back the £25k from the proceeds of the sale in to the business bank account and charged him the £5000 Corporation Tax which he has now paid.  I have included the £5000 Corporation tax paid as a Corporation Tax expense but don't know how to account for the £25000 re-introduction of the funds that the Director has paid in to the business bank account.  If I include it as a gain on disposal (my initial thought), the Corporation Tax will be charged again in this tax year but he has already paid it through the assessment.  I just don't know what to do for this and any help or advice would be greatly appreciated.

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By johngroganjga
02nd Jul 2020 11:00

The gain wouldn’t be taxed again because accounting profits on sales of fixed assets are by their nature not taxed at all, are they?

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By daniel_
02nd Jul 2020 11:02

When the company sold the asset:
£25k Debit directors current account
£25k Credit profit on disposal

The company is charged tax on the gain
£5k Debit tax expense
£5k Credit tax payable

The director pays the corporation tax
£5k Debit tax payable
£5k Credit Director current account

If tax has already been charged on the £25k profit then adjust in the CT computation.

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Replying to daniel_:
By johngroganjga
02nd Jul 2020 11:44

Tax hasn’t been charged on the accounting profit, it’s been charged on the balancing charge in the capital allowances computation. The reason why the accounting profit on disposal needs to be adjusted in the tax computation is not because it has already been taxed, but because no such profits are ever taxed.

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By Ian Bee
02nd Jul 2020 11:09

If I have understood the question correctly, you need to deal with an earlier entry.

In 2013-14 the asset was sold and the proceeds were paid directly into the director's bank account. How was this done? The proceeds were for the company as it owned the asset and for the director to get the money it must have been a dividend (unlikely if there is no documentation) or a loan.

All HMRC seem to be suggesting is that the transfer of £25k is a repayment of the loan.

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Replying to Ian Bee:
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By Lisa Edney
02nd Jul 2020 11:53

Thank you for your response. The thing is, there was no directors loan outstanding on the balance sheet when the accounts were handed to me so if I off-set the repayment of the £25k against the Directors Loan, it will show as a liability owing to the Director. I need to cancel the loan out so that there is no balance at my year end and I'm not sure how to do this. Do I need to create a historical journal entry to create a starting balance for the Directors Loan Account? If so, how do I do that? If I create the directors loan liability from the retained profit, it knocks my starting point on the balance sheet out.

Thanks (1)
Replying to Lisa Edney:
RLI
By lionofludesch
02nd Jul 2020 12:08

Lisa Edney wrote:

Thank you for your response. The thing is, there was no directors loan outstanding on the balance sheet when the accounts were handed to me so if I off-set the repayment of the £25k against the Directors Loan, it will show as a liability owing to the Director. I need to cancel the loan out so that there is no balance at my year end and I'm not sure how to do this. Do I need to create a historical journal entry to create a starting balance for the Directors Loan Account? If so, how do I do that? If I create the directors loan liability from the retained profit, it knocks my starting point on the balance sheet out.

Dr Cash
Cr Profit on Sale.

There is no longer a Director's loan.

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Replying to Ian Bee:
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By Lisa Edney
02nd Jul 2020 11:54

Thank you for your response. The thing is, there was no directors loan outstanding on the balance sheet when the accounts were handed to me so if I off-set the repayment of the £25k against the Directors Loan, it will show as a liability owing to the Director. I need to cancel the loan out so that there is no balance at my year end and I'm not sure how to do this. Do I need to create a historical journal entry to create a starting balance for the Directors Loan Account? If so, how do I do that? If I create the directors loan liability from the retained profit, it knocks my starting point on the balance sheet out.

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Hallerud at Easter
By DJKL
02nd Jul 2020 11:27

Remove asset and depreciation from balance sheet re the asset sold earlier nor recorded back then, treat funds in from director as proceeds re same posting to gain on disposal, remove gain on disposal in the tax comp and do not bring proceeds received into pool re CA as has already been dealt with during the investigation. Add a note into the tax comp if your software allows explaining treatment.

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Replying to DJKL:
Caroline
By accountantccole
02nd Jul 2020 11:40

What DJKL says

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RLI
By lionofludesch
02nd Jul 2020 11:44

I'd include it as a profit on sale but I wouldn't include it in the tax comp and I'd include a note saying why. "Profit on sale already assessed directly 00/00/0000).

Bit of a cheek to insist on him repaying it though. If he wants a £25000 director's loan, with all that entails, surely that's his business.

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Replying to lionofludesch:
By johngroganjga
02nd Jul 2020 11:54

lionofludesch wrote:

I'd include it as a profit on sale but I wouldn't include it in the tax comp and I'd include a note saying why. "Profit on sale already assessed directly 00/00/0000).

There is nothing out of the ordinary in the tax comp to add a note to explain. Profits on sales of fixed assets are always removed in tax computations. This one would be no different. What is different from the norm is that the sale proceeds would need to be omitted from the CA computation. That is where I agree an explanatory note would useful, and good practice.

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Replying to johngroganjga:
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By Lisa Edney
02nd Jul 2020 11:58

Thank you, this makes sense to me. I appreciate your advice.

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Replying to johngroganjga:
RLI
By lionofludesch
02nd Jul 2020 11:59

I see the CA comp as a mere part of the tax comp - but I take your point.

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By Calculatorboy
02nd Jul 2020 18:12

HMRC "advising" the client to repay it ..really ? I dont believe that one. They would just treat it in accordance with the facts..and charge tax interest and penalties

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Replying to Calculatorboy:
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By Tax Dragon
03rd Jul 2020 09:36

That's a fair point, Pinkboy. Which also brings into doubt some of the other information provided by the client (e.g. that the previous accountant refused to assist).

Watch yourself, Lisa. And get an interim fee raised and paid before you finalise. (And ask yourself why the previous accountant might have stopped work, if that happened.)

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Replying to Calculatorboy:
Psycho
By Wilson Philips
03rd Jul 2020 15:09

Perhaps simply something lost in translation. I came across something similar many years ago where the Inspector agreed not to raise an assessment for s419 (sic) tax provided the director cleared his indebtedness to the company.

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Replying to Wilson Philips:
RLI
By lionofludesch
03rd Jul 2020 15:13

Wilson Philips wrote:

Perhaps simply something lost in translation. I came across something similar many years ago where the Inspector agreed not to raise an assessment for s419 (sic) tax provided the director cleared his indebtedness to the company.

Yes - I've found that they're often open to a deal for a quick result.

Probably explains the insistence on repaying the money forthwith.

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By Tax Dragon
03rd Jul 2020 06:52

Has HMRC raised the issues of the s455 charge (never declared) and the BIK (never declared)? If he gets away without penalties on those aspects he is IMO very fortunate.

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By Bobbo
03rd Jul 2020 14:24

Lisa Edney wrote:

Therefore when the asset was sold in 2013/14, the proceeds of the sale were paid straight in to the Directors personal bank account.

I particularly enjoy this sentence as it, presumably accidentally, suggests that the proceeds of a company asset sale being paid into the director's personal account is the natural thing to have happened.

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