To set the scene:
- 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.
- 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.
- 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.
- 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).
- 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).
- 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.
- 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".
- Depreciation on his car is being calculated at 25% reducing balance. OK.
- Depreciation on a computer is being calculated at 10% reducing balance!
- The only thing he has that I've never had in my own business is WDA for his car.
So - my assumptions/plan:
- He has paid the invoices already - so this is now capital introduced. There are no liabilities.
- 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.
- 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.
- 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).
- 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.
- 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.)
- 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.