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Old invoices paid using personal credit card

Old invoices that were paid at the time using a personal credit card - do we need to do anything?

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To set the scene:

  1. I am not an accountant or a book-keeper - I have had my own sole trader business for over 20 years and my own company for over 8. I fully understand all that *my* accountant has done for *my* businesses. I keep my own books, and do my own SA return.
  2. A friend is past retirement age. A few years ago, his business (sole trader) turnover fell dramatically and unexpectedly. He paid as many invoices as he could using the business account, then paid the rest using a personal credit card.
  3. He told his then accountant that he had these invoices "outstanding" (at least, that's the term he keeps using with me). It appears - from looking over old accounts - that these were moved to liabilities at some point, which implies that they were expensed first in the year in which they were raised.
  4. He came to see me recently because of (1) above, and said he wanted to retire completely but couldn't because he has these invoices to clear... and he'd be able to clear them more quickly if he wasn't paying his accountant a huge percentage of his income each year (he only does odd bits of work here and there, but I understand why the bill is what it is - it took me best part of two evenings to go through his paper records for last year and understand them).
  5. I haven't managed to see all his old accounting records yet, so cannot check my assumption about these invoices having been expensed (many of the invoices are dated 2014).
  6. Because (in his mind) the "business" hasn't paid the invoices (even though as an ST he *is* the business), he believes he cannot retire until he has earned enough to cover these invoices. Each month that he earns a couple of hundred pounds, he "includes" an invoice in his paper records and takes the corresponding money out of the business account. He does incur a few current expenses, but not many.
  7. What I am humbly requesting from this group is a sanity check that my understanding is right - I can't believe his accountant hasn't talked to him (he drops the books off and then picks them up) to sort out what worries me and I thought would worry an accountant...? On paper, he's been running at barely break even for the last 5 years because of these "liabilities".
  8. Depreciation on his car is being calculated at 25% reducing balance. OK.
  9. Depreciation on a computer is being calculated at 10% reducing balance!
  10. The only thing he has that I've never had in my own business is WDA for his car.

So - my assumptions/plan:

  1. He has paid the invoices already - so this is now capital introduced. There are no liabilities.
  2. Worst case scenario is that the invoices haven't been expensed - but this is only an issue if he has paid tax that he needn't have paid. I will check this morning, but I have a feeling he hasn't been earning enough to pay tax since the turnover dropped regardless of the presence or absence of expenses. Failing to include expenses benefits HMRC (in theory) as there is less to offset against income. But it doesn't disadvantage my friend because he wouldn't have paid tax regardless. So he can just draw a line.  
  3. I intend to transfer all these "liabilities" to "capital introduced", and he can take money out of his business as drawings. His business isn't something that can be sold, so any impact on the "value" of the business in terms of clearing the liabilities is irrelevant.
  4. Only expenses incurred in the year will be expensed from now on (should he choose to continue working - which he might when he realises he's not obliged to).
  5. I can complete the depreciation of the computer (it's at least 5 years old) by just stating the change in policy and clearing it this year.
  6. I assume I need to find out when the car was purchased. I understand the concept behind the 18% WDA amount (I've seen the last tax return and investigated a little) but I'm not sure whether this is over a number of years or whether it's on a reducing balance basis. I also don't know how many years the WDA has been claimed. (I can probably find out.) If it's only been claimed (for example) for 2 years but it's not making any difference to my friend's tax position - it remains at zero liability with or without - can I just ignore it? (Having just spoken to him - his car is nearly 6 years old, purchased half-way through his accounting year. I have no idea how the first year was dealt with... not including WDA is *probably* not going to affect his tax position.)
  7. Finally, is it worth complaining to the current accountant? As soon as I saw the books, I asked why invoices dated 2014 were being presented and why weren't they being paid... that's when I found out they had been. I recreated the APE 2019 accounts to see if I could work out what the accountant had done using the close of 2018 figures and the "books" - and discovered that 1) All expenses dated for that financial year were expensed, as expected; 2) *Some* of the old invoices appear to have been expensed - I haven't been able to determine the pattern, but assuming the accountant is applying some form of due dilligence, these may be older invoices that hadn't previously been expensed for some reason; 3) The majority of the old invoices (or at least, the money withdrawn that equates to their value) has been offset against liabilities, reducing that... It may be me, but wouldn't all this ring warning bells?

Thank you for any help you can offer.

Alison

Replies (20)

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RLI
By lionofludesch
10th Jan 2020 09:38

Are you saying, in an unbelievably long-winded way, that his accounts show liabilities to himself ?

Legally, you can't owe yourself money.

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By Tax Dragon
10th Jan 2020 09:46

I too don't have time to read this essay. (But thank you for providing full details nonetheless! :-))

Has the credit card bill been paid?

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Replying to Tax Dragon:
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By alison-jane
10th Jan 2020 09:54

Sorry for long-windedness... I read repeatedly "Give all the information". :-)
Yes, the credit card bill has been paid.
I agree - can't have liabilities to yourself. Surprised the accountant did it this way.
What about the WDA? Can I just ignore it as it's been (probably) at least 5 years anyway?

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Replying to alison-jane:
RLI
By lionofludesch
10th Jan 2020 10:06

alison-jane wrote:

What about the WDA?

What about it ?

Is there a question buried in there ?

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Replying to Tax Dragon:
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By alison-jane
10th Jan 2020 09:55

Appeared twice :-)

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Replying to alison-jane:
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By Tax Dragon
10th Jan 2020 10:01

alison-jane wrote:

Appeared twice :-)

Happens a lot.

The individual is the trader. Paying costs from a 'non-business' account is simply introducing those funds to the business. It might show on the balance sheet but has no impact on either P+L or tax.

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By lesley.barnes
10th Jan 2020 10:01

If he is a sole trader, you claim he doesn't earn very much and you make no mention of him not paying the correct amount of tax why are you worrying about past accounts now? He just needs to retire, get his accountant to do his final accounts and tax return and put his feet up. All the work you putting in won't change anything. The liability he is showing is a liability to him for paying the invoices in a personal credit card. In my opinion you are wasting your time.

Thanks (4)
Replying to lesley.barnes:
RLI
By lionofludesch
10th Jan 2020 10:20

Actually, what you need to do is change the old gimmer's mindset.

To whom does he owe money besides himself ?

If nobody, he can safely close down his business.

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Replying to lionofludesch:
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By alison-jane
10th Jan 2020 10:23

"change the mindset" - yep, working on it. I think light is dawning.
Of the school "I give them the stuff, they sort it out - I don't know how or why" and in this case, ignorance was not bliss. :-)
Thank you, everyone (sincerely).
I have just rung him and told him if he *wants* to keep working, no-one is stopping him but he definitely doesn't *have* to.

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Replying to lesley.barnes:
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By alison-jane
10th Jan 2020 10:21

I just wanted to be 100% sure that I was right. As I'm not an accountant, I didn't want to say to him "Don't worry, your accountant has just made a mess of things" if there *was* something to worry about. He has been worrying - a lot.
I'm happy if my assumptions are right - that there is nothing to worry about. :-)
I will just not put WDA through this year. (If he has to pay an accountant for another year, most of what he did last year will go to pay that bill...)

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Replying to alison-jane:
RLI
By lionofludesch
10th Jan 2020 10:37

alison-jane wrote:

I just wanted to be 100% sure that I was right. As I'm not an accountant, I didn't want to say to him "Don't worry, your accountant has just made a mess of things" if there *was* something to worry about. He has been worrying - a lot.
I'm happy if my assumptions are right - that there is nothing to worry about. :-)
I will just not put WDA through this year. (If he has to pay an accountant for another year, most of what he did last year will go to pay that bill...)

Why are you doing anything ?

He has an accountant.

If he ceases trading, there'll be no WDA, there'll be a balancing allowance or charge. You'll need to establish the wriiten down value.

There's no evidence here that the accountant has mis-stated his porofits. True - I would say that the inclusion of monies owed to the trader is unusual, but that in itself is cosmetic.

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Replying to lionofludesch:
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By alison-jane
10th Jan 2020 10:48

I'm doing something because he is my friend... and wants to know if he needs an accountant for the year just ending or not. He thought he did because he thought he still owed money somewhere, and the accountant fee was going to take a lot of what he'd earned. I'm not claiming the accountant did anything wrong, just that there was a communication glitch and lack of understanding.
Thanks for the mention of the balancing allowance/charge. That may tip the balance in terms of needing one. :-(

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Replying to alison-jane:
RLI
By lionofludesch
10th Jan 2020 11:02

The barrier to that is you're going to need a copy of last year's tax comp, analyses of prepayments and accruals, maybe other balance sheet items, and overlap relief, if there is any.

The previous accountant will have all this information.

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By SXGuy
10th Jan 2020 11:09

Are you sure hes self employed? I have seen an awful lot of people in my time claim to be self employed when in actual fact they are a director of a limited company.

Self Employed - cant owe money to himself
Ltd Company, can personally pay receipts from own money which company is due to repay.

The way you describe the situation, is as if he is actually a director and has personally paid company debts, and is waiting for the company to earn enough to repay himself before he retires.

That would make more sense strangly, although if he was the only creditor he wouldn't have to wait to close it down, he could just forfeit being repaid.

You gave so much information that sadly I had to skip most of it, but the info you did provide seems to contradict itself.

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Replying to SXGuy:
RLI
By lionofludesch
10th Jan 2020 11:14

SXGuy wrote:

Are you sure hes self employed? I have seen an awful lot of people in my time claim to be self employed when in actual fact they are a director of a limited company.

And, on the other hand, a lot of self-employed folk will refer to their "company".

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Replying to lionofludesch:
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By alison-jane
10th Jan 2020 11:26

I am sure. No limited company. I have the tax computation sheets for last year from the accountant, a copy of the SA tax return, including the self-employment pages completed by the accountant, and every possible invoice I could ask for (but I don't particularly want to go through them). I may have to suggest he bites the bullet one more year, but this time asks questions instead of just collecting the books.

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Replying to alison-jane:
RLI
By lionofludesch
10th Jan 2020 11:34

alison-jane wrote:

I am sure. No limited company. I have the tax computation sheets for last year from the accountant, a copy of the SA tax return, including the self-employment pages completed by the accountant, and every possible invoice I could ask for (but I don't particularly want to go through them). I may have to suggest he bites the bullet one more year, but this time asks questions instead of just collecting the books.

I would remind you of your opening gambit ...

"I am not an accountant or a book-keeper"

but good luck.

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By Accountant A
10th Jan 2020 11:55

alison-jane wrote:

To set the scene:

I am not an accountant or a book-keeper

https://www.accountingweb.co.uk/about-accountingweb

"AccountingWEB.co.uk is the largest independent online community for accounting and finance professionals ..."

If you want to help your friend, tell him to speak to his accountant or get a new one.

This site is not intended as a means for non-accountants to "help" other non-accountants deal with their tax affairs.

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Replying to Accountant A:
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By alison-jane
10th Jan 2020 12:29

OK. Sorry. Message understood... leaving the forum.

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By atleastisoundknowledgable...
10th Jan 2020 12:08

Just wanted to say “thanks for providing so much info” and “what you say seems to make sense”.

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