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I'm a bit concerned about some of my clients

I'm a bit concerned about some of my clients

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I ask my client's to tell me when they take dividends. Normally we agree a figure they are going to withdrawl from the company each month and I do the necessary  paper work. Some of my clients I only see once a year and I discover they have been taking money out form the business bank account in variable amounts ie not sticking to the agreement (even though I do contact them during the year to ask if anything has changed).

For these clients I now process the dividend payments I make during the year as a credit to their DLA and when I get the bank account details from them (after the year end) I debit their withdrawls against the DLA. I know this is not perfect and HMRC may well not like it, but I'm sure Im not the only accountant with these types of clients.

What do the rest of you do? I can't affrod to ditch them.

 

 

Replies (35)

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RLI
By lionofludesch
10th Nov 2016 16:58

Ach - well, it's their risk.

There's nothing illegal about taking money out as a director's loan but it may not be the cheapest way.

Topical example - money taken out before 5th April 2016, dividend not declared until now. Magically, the money is liable to dividend tax at a needless cost of 7½% tax.

Also, not to be overlooked, is that, in the event of some catastrophe, they still owe than money to the company.

You can only advise folk. You can't live their lives for them.

I did have a client who did this. His company had a big bad debt (£50000+). His hitherto profitable company went bust. The bank wanted repayment of the overdraft. The liquidators asked him for the money he'd "borrowed" over the previous 15 months. He got another mortgage of around £20000 to pay them.

True story. It's not a bad idea to bandy these stories around. It concentrates clients' thoughts in a way quoting tax legislation doesn't. I haven't completely eliminated the gullible fool client but I have, I think, reduced their numbers.

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By Manchester_man
10th Nov 2016 17:15

I have picked up a few clients like this and I find the issue is teaching old dogs new tricks - some don't understand and some don't care.

The thing I struggle with sometimes is getting clients to understand how it all works. I find that most small company clients can not grasp the idea of a directors loan account. They look puzzled and retort with "no, I've not borrowed anything, I take them dividend things I think, as my old accountant said that's the best way".

How do other practitioners get the point across?

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Replying to Manchester_man:
RLI
By lionofludesch
10th Nov 2016 17:40

How ?

Ask them for copies of the minutes authorising the dividend. And the dividend vouchers.

Asking for proof that there are available profits is, perhaps, a step too far.

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Teignmouth
By Paul Scholes
10th Nov 2016 17:51

Hi Alex999

The problem of random withdrawals like this, or any other weird accounting entries, not becoming obvious till months after the year end, can be resolved at a stroke by moving clients onto cloud accounting.

It enables you & clients to keep their books up to date and accurate meaning not only that the year end accounts become a side issue, but that errors and corrections are dealt with as they happen, and clients are therefore far more likely not to repeat them.

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Replying to Paul Scholes:
RLI
By lionofludesch
10th Nov 2016 18:10

At a stroke ?

If you can find out what the clients are actually doing. I don't expect many of mine to be entering their own transactions onto computers and things.

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Replying to Paul Scholes:
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By Manchester_man
10th Nov 2016 23:09

I do agree with Paul in theory, and I have a handful of clients like that myself - some do their own inputting and others we do it for them, but with, say, 100 such fully-cloud based clients, that's a lot of work, logging into each clients' software each month to check for errors and loan account debits.

Do you do this every month Paul for every client? Or do you mean quarterly?

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Replying to Paul Scholes:
By JCresswellTax
11th Nov 2016 10:42

Although the theory is good with this, the practical is a different matter.

If I provide a year-end service to 200 clients, at what point do I go through their records (during the year) to check their accounting entries are correct?

It just isn't practical.

Maybe if you have 5/10 clients then fair enough, but if you have a lot of clients, and aren't providing a bookkeeping service, this will be very difficult to do.

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Replying to JCresswellTax:
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By Manchester_man
11th Nov 2016 13:09

Indeed, this was my point exactly. I cannot see how it would work in practice.

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Replying to Paul Scholes:
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By Joe Soap
11th Nov 2016 16:57

[quote=Paul Scholes]

Hi Alex999

The problem ..... can be resolved at a stroke by moving clients onto cloud accounting.

Most clients like this only have the vaguest idea as to the meaning of "books" and "up to date" or even "accounting".

Mainly they just are not interested in all that stuff - which anyway is what they pay you to do.

You need to back up the hearse and let them smell the flowers - tell them what might happen if they don't get it right; and tell them every time you talk to them. And put it in writing so you have something to show your PI insurers when the fan gets a bit smelly.

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Replying to Paul Scholes:
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By asillahi
16th Nov 2016 15:42

Tried it but they don't want to adopt due to cost. The other problem if they did would be finding the time to monitor the accounts and correct all the errors.

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By Briar
10th Nov 2016 18:45

I liken the DLA to a bucket. Salary and division go in and drawings come out. The bucket does not like to be upsidedown (overdrawn) as HMRC then get upset ! Clients seem to understand this better than talking debits and credits.

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By Manchester_man
11th Nov 2016 13:10

Love the bucket analogy! I will use that. Sounds better than 'pot' which I have used previously.

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Teignmouth
By Paul Scholes
11th Nov 2016 18:47

Hi All

I have contact with and train several accountants and bookkeepers every month and it's clear there is a wide spectrum of practice with cloud accounting, from the firm that uses it in exactly the same way as they did with deskbound software (keeping the books themselves or only looking at the client's data once a year) to those who encourage and/or train their clients to keep accurate, up to date, books and login monthly or quarterly just to top up or check that things are going OK.

I'm in the latter group and the investment time in getting to that stage pays dividends in significant reductions in year end work and clients that feel in control and able to rely on their books to give them decent information throughout the year and not just once a year, 6 - 9 months after the year end.

When bookkeeping firms question the benefits of enabling clients to do some of the work, or "year end" firms question the benefits of more regular contact with the clients and their books during the year, I turn the questions around and suggest that these methods of working were only required in the first place in order to cope with paper or deskbound computer accounting.

So yes, I login to all my clients books once a month or once a quarter, sometimes for just 5 minutes. I now have a small number of clients but with the benefits it has brought me, I'd have done the same with my larger practice and client base.

And before anyone asks, all but one of my clients is a micro businesses or self employed and, of them, all but 2 had no accounting experience before they moved to cloud accounting. They all now keep over 90%+ of their bookkeeping, including payroll.

I know that may all seem a bit didactic, it's not, it's what suits me but I have been extremely lucky, I was reducing my practice to free up home time and only then did I start down this path. If I was still running a 6 day/week practice, where most of the time was taken up with year end stuff, and knew what I do today, I'd have freed myself of far more time wasting clients in order to make the most of the ones I could move to the Cloud.

The OP has not mentioned how many clients, s/he says "some" and I'd suggest that exploring the possibility of shifting a few of the some, may well be worth it.

Anyone interested, especially those new to the Cloud, I've prepared an accountants' video for Clear Books as an intro to how to make the most of Cloud accounting (as well as some key features of CB). PM me if you want the link.

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Replying to Paul Scholes:
RLI
By lionofludesch
11th Nov 2016 21:38

Paul - can you have a chat with my mum ?

She can't use a microwave because no-one's shown her how to work it and hasn't used the video player since my dad died because no-one's shown her how to work it.

Do you think you could get her to keep her tax records on her mobile ? At the moment she keeps it turned off because no-one ever rings her on it.*

*The smart readers may have spotted the flaw in her reasoning.

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Replying to lionofludesch:
Teignmouth
By Paul Scholes
12th Nov 2016 16:09

Hi Lionofludesch - I take your point(s), I immediately thought of my Mum, she's OK with a microwave but can only use a tiny % of the buttons on her smart box remote, won't have a smart phone or a computer.

But then my Mother-in-Law regularly, Texts, Whatapps & emails me (sometimes with the same messages - just to make sure).

The moral of these observations? You can't choose your Mum but, thankfully, you can choose your clients.

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Replying to Paul Scholes:
RLI
By lionofludesch
12th Nov 2016 16:12

I can - but I believe it's unethical to throw taxpayers to the HMRC wolves, just because they're thick.

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Replying to lionofludesch:
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By Joe Soap
13th Nov 2016 10:41

Lion - that is a bit harsh.
They are not thick (well not all); they are just not interested and probably have better things to do. Which is why they want all the paperwork and filing and such exciting things done by saddos like (some of) the people on here.

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Replying to Joe Soap:
RLI
By lionofludesch
13th Nov 2016 10:54

My point is that thick - or disinterested - people have a right to be properly represented. Choosing the good clients and rejecting the bad ones seems unethical to me.

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Replying to lionofludesch:
Teignmouth
By Paul Scholes
14th Nov 2016 15:54

Hi again

Firstly, we may have to differ here in that, whilst I agree with you that every client has the right to expect proper representation, I have the right to chose the clients I can best represent. It's a 50:50 relationship not Master:servant.

We are not barristers (well I'm not) and so nobody has the right to approach me and expect me to represent them and, with regard to only picking "good" clients, surely, with the variety of humans (not robots) in the roles of clients and advisers, who is to define good and bad? I can give many examples of the kind of client I don't want to act for ("thick" or not) but I'm quite certain there will be a firm up the road that will snap them up.

With regard to "thickness" as a determining factor, I would imagine that the majority of my cloud accounting clients would have described themselves as accounting illiterates (a far more reasonable description) but they have been encouraged to learn and have done so.

Then, yes, there are the disinterested people but, again, this covers a wide spectrum. They may be too busy running their business, in which case they pay for an "interested" bookkeeper, or they just may not want to know, much in the same way that a child may not want to know about the benefits of eating vegetables or going to bed at a reasonable hour...."it's just so unfair".

After over 35 years of dealing with some of the latter, I've done my bit and so now, yes, I regard those as cat D clients. As I say above, there are loads out there (and on here apparently) who will snap them up, so they won't go unrepresented.

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Replying to Paul Scholes:
RLI
By lionofludesch
14th Nov 2016 16:55

You have no need to apologise, Paul.

Your strategy is yours to choose.

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Replying to lionofludesch:
Teignmouth
By Paul Scholes
15th Nov 2016 10:45

I know - I didn't?

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By Homeworker
16th Nov 2016 11:18

I don't wish to sound smug, but I train all of my clients to do it right from the start, by telling them that there are only four ways they can legally take money out of the company - as salary, dividends, expenses and return of capital. Having drilled this in to them, with instructions to email me when they wish to take a dividend, we have had no problems yet.

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By Myshkin
16th Nov 2016 11:22

And how pray will MTD deal with all this on a quarterly basis?

(Paul Scholes lives on a different planet to the rest of us.)

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By ArianBloodwood
16th Nov 2016 11:35

The 'bucket' analogy is excellent - clearer than what I usually say to clients.

Surely the easiest way to deal with this issue is to assume all director's withdrawals from company bank are loans against their DLA, then at year end after tax calculations the director declares some of that money is annual Director's fee, some is dividend, and if there's any left it continues as a loan - with the requisite tax paid on it.

Isn't this the whole point of having a DLA in the first place??

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By GRETTONPARTNERSHIP
16th Nov 2016 12:08

Just to be awkward may I put forward a different view for discussion.

Before posting the withdrawals to DLA should we ask our client what the payments were for? If the client says the payments were those “dividend things” my old accountant told me to use, then the client is saying they were dividends. Is it permissible to draw up a schedule of these payments and get the client to sign to confirm they were dividends? The client may not have minuted it at the time the money was withdrawn but the client apparently made a conscientious decision at the time to pay a dividend and did pay a dividend – at that time and not several months’ later when the accountant does the paper work.

So what evidence of dividends do people ask for from their clients and when should that evidence have been prepared? HMRC apparently like a minute but when should that minute be drawn up? Can it be drawn up several months later so long as it is an honest record of what happened and not backdated? Is any other evidence acceptable?

I am aware there have been previous discussions on this subject and not everyone seemed in agreement. Do people now feel that if there is no minute at the time then the payment cannot be a dividend?

What constitutes a minute? In a one-man band company if the shareholder makes a payment and records it as a dividend in the records of account is that evidence?

I agree it is better to advise a client at the start that minutes are needed, but can no one put forward an argument to defend their clients who have not kept formal minutes?

In Alex99’s original post did he prepare paperwork for the year assuming dividends would stay the same and did the client sign those forms? Where he sees a client once a year what advice does he give the client at the start of the year about dividends. Does he advise them to calculate the amount of available profit each month? Does he advise them about minutes?

I do think there is more to say on the question raised by Alex99, before digressing into the merits of cloud computing though I admit it can have a role to play.

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Replying to GRETTONPARTNERSHIP:
Teignmouth
By Paul Scholes
16th Nov 2016 12:34

Hi GP - this is a discussion that happens regularly on here, much of the time, I'm sure, prompted by "who cares" or "nobody checks".

To my mind if the director says at the time, or writes in the "cash book" or sends an email that the payment was a dividend, then I'm sure s/he's most of the way there but, having only once been bitten, if nothing was said or recorded at the time of the payment, trying to justify it months later can be tricky, or in one client's case, costly and grief inducing.

TBH it is so easy to avoid this confusion and grief, all we did was send our clients a word doc with the minute & vouchers and they'd complete them every dividend they paid. These days for most of them, Clear Books does it all for them/me.

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Replying to Paul Scholes:
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By GRETTONPARTNERSHIP
16th Nov 2016 15:08

I agree with Paul that it is preferable to get it right at the time and that is what I try to do for my clients. Sometimes though we all may pick up a new client part way through the year or even after the year end and we are faced with a problem. I am interested in the circumstances of the client’s case which Paul says was costly and grief inducing. Who challenged the dividends and what arguments were put forward?

Taking a theoretical case where there are withdrawals let us ask the sole shareholder what they were for. He replies they were dividends, we ask how he calculated the dividends, he says he considered the profit levels and what he thought the company could afford. We ask when he did this and he says it would have been the same date as the payment. We ask about minutes and he says he did not appreciate the need for minutes as he is the only shareholder and what has it to do with anyone else. His profit calculations have not been retained. Let us say we write this all down, head it up as minutes of a meeting and the client signs to say it is a true record of what happened even though the minutes are typed up 20 months and 20 days after the meeting (just before the filing date). Now then, how should that be shown in the accounts? What tax year would the dividends fall into?

I appreciate that for many of us the answer most likely to be received may be “I do what I like, it is my money, and my previous accountant used to sort it with no trouble”.

The above example is purely theoretical, but one of the respondents did say “I take them dividend things I think, as my old accountant said that's the best way “. So the client had every intention that what he was doing was taking a dividend. Should a client suffer the new dividend tax just because all they missed was a minute or an email to their accountant?

Just out of interest does anyone know case law or statute law which gives a clear indication of the true position? I have seen different views over the years and in my ignorance have not seen anything conclusive. I am not interested in the “who cares” or “nobody checks” approach. I was more genuinely surprised that all respondents seemed to go down the route that the payments were not dividends without first asking for a bit more information. Are there no circumstances that could justify a different approach?

Put another way, if you took on a new client where HMRC were already querying the dates of dividends would you tell the client to roll over and accept HMRC’s arguments that without a minute the dividends were not valid, or are there any counter arguments that you would put forward.

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Replying to GRETTONPARTNERSHIP:
Teignmouth
By Paul Scholes
16th Nov 2016 17:10

Thinking about it two cases now stand out, both involving disputes with old accountants/shareholders, the first where the accountant used to record the dividends in the books and prepare the minutes 9 months after the year end, the client fell out with him and came to me. That one ended up with the ICAEW solicitor "advising" the accountant to stop being silly.

The other involved a dominating shareholder/director who ran the books and primed the accountant to pay dividends to cover his drawings without telling the other shareholder/director and with no paperwork, they fell out and the other director brought the business and tale of woe to me (via here funny enough). Had there been paperwork, agreed by both directors, a 2 years dispute and thousands in legal fees and court costs could have been significantly reduced.

Obviously the same would not happen with a one person company but, as I say, why risk it when all it takes is a bit of paper with a signature. Also, if the books are up to date and there's a P&L and balance sheet on the day that indicate sufficient profits, you even reduce the risk of claims for illegal dividends.

I may be on another planet, but, on this issue, my life is a lot easier than it was 10 years ago, so I'm staying.

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Replying to Paul Scholes:
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By GRETTONPARTNERSHIP
16th Nov 2016 17:16

Thanks Paul for the extra info.

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RLI
By lionofludesch
16th Nov 2016 15:57

I have a client company - husband and wife director/ shareholders. The scenario is ....

Jack and Emma are out in town. They have no money.

"Don't worry", Jack says. "We can have a dividend from the company. We made loads of profits last year, the bucket's overflowing. I'll just draw £200 out of the cashpoint and we'll have half each."

"OK", says Emma.

Is this a valid dividend? Needs some minutes writing up but probably yes, it's grand.

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By Mister E
17th Nov 2016 09:58

In my crystal ball I see that under MTD HMRC will introduce reporting of close company dividends at time paid, so they can update the individuals DTA with them and save any inputting.
If it is not reported at the time it is not a dividend....
Backdating dividend issues gone. ?

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Replying to Mister E:
RLI
By lionofludesch
17th Nov 2016 10:40

We used to have a system like that. Quarterly reporting of dividends (inter alia) on form CT61.

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Replying to lionofludesch:
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By Mister E
18th Nov 2016 11:03

Yep, what goes around comes around.....
bit like "simple assessment" back to the days of issuing assessments and appeals.
On this basis a self assessment system will be introduced in about 20 years time. :D

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Replying to Mister E:
RLI
By lionofludesch
17th Nov 2016 11:11

Yet another duplicated post deleted

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Replying to Mister E:
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By Joe Soap
18th Nov 2016 10:58

Back dating of documents is, I believe, a crime. So that is already ruled out.

Not reporting a dividend does not mean it is not a dividend it means that there has been a failure to report it - which may become, at some stage, lead to a penalty.

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