I have taken over a limited company from a very well know accountancy firm
The Company was formed in 2015 and purchased a pub.
The sole director and shareholder took out a loan from his friend and his friend charged interest, The money was paid into the directors personal bank account the director paid the loan into the company bank account less legal fees and other initial expenditure doing up the pub. The loan is shown in the books as a third party loan and the capital/interest is being paid by the company.
There is no formal agreement in place but I assume in substance this is a loan between friends and therefore the interest should be disallowed ? What should have happened is that the director when lending the money to the company should have been entered in director loan account and payments made to his friend should have been offset in the directors loan account. The director should have charged the company interest and capital/interest payments should have been made from the directors personal account since its the director borrowing the money not the company ?
The former accountants have accounted the loan as a company loan not a personal loan. This has gone on for a few years now have to figure out how to correct everything including perhaps filing backdated CT61.
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Perfectly reasonable to ask the 'well known accountancy firm' to provide the documentation that supports their treatment in order for you to fulfil your duties.
What does the client say - was it a personal loan or a loan to the company? I would get the answer to this first before incurring fees for the client.
I think the answer is that there are two contracts - one between the friends and one between the company and the director i.e. the loan repayments albeit paid directly to the friend effectively create two transactions.
You don't say how much money is involved but you do say that it has been going on for a few years (although since 2015 isn't long in my book).
I'd personally treat all of the repayments as a reduction of the director's loan account which should theoretically create a debit for the interest element of the payments - there may or may not be other credit entries in the DCA.
The director should be able to claim tax relief for the interest via his own tax return.
You're then left with dealing with the overdrawn director's loan account and of course the correct disclosures in the accounts.
It's not perfect and I can't see any point in chasing the other accountants as you seem to know what's happened.
Sometimes you just need to rectify these things as best as possible.
It's not perfect and I can't see any point in chasing the other accountants as you seem to know what's happened.
By their own admission the OP doesn’t know - just assuming.
The other accountants don’t need to be chased. The director’s friend just needs to be asked to confirm who his debtor is. Nothing could be simpler.
The OP's third paragraph indicates that he knows exactly what happened but doesn't know how to rectify it.
It's not correct to say that no interest relief can be claimed - it can via the director's tax return.
If he chooses my preferred solution he will avoid the need for retrospective CT61s.
The OP's third paragraph indicates that he knows exactly what happened but doesn't know how to rectify it.
The OP only knows about the flow of funds and the accounting entries, but not the crucial information about who was lending to whom.
As matrix says you need to ascertain the facts first. All you say is that you “assume in substance” that the company’s creditor is the director. That’s nowhere near enough to set a hare running about the previous accountants having messed up by treating the director’s friend as the creditor.
There is a lesson here. Either there was a delay between the client disengaging and appointing yourself or there was a delay in reviewing the handover information.
Unnecessary delays lead to one party having little interest in providing assistance when memories are dull and documentation absent.
To be fair, this is the sort of thing that might only be picked up when the new accountant starts to prepare the first set of a/cs under his watch.