Use of estimates in accounts

Is it acceptable to use a directors estimate of unreceipted expenses.

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We have a director that hasn't kept a mileage log for business travel in his private vehicle, he has provided a month's worth journeys he made in pursuit in business as basis to estimate from for the accounting year, is this acceptable. Its a small OMB with two shareholder directors. 

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By Roland195
11th Apr 2024 14:09

Acceptable to who? If you are satisfied that the director did indeed undertake these business journeys and has provided at least some evidence to quantify then that would be good enough for me in this instance (but you obviously don't report to me).

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Replying to Roland195:
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By CW2012
11th Apr 2024 14:29

I was thinking of a general acceptability amongst fellow accountants, also I'm concerned that it opens a door for ongoing poor record keeping because "you didn't need it last year" when I ask for a proper record of miles travelled.

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Replying to CW2012:
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By Roland195
11th Apr 2024 15:05

Some of the accountants on here would advise against claiming for cash register ink if the client enjoys the smell of it so I doubt you will ever get a general consensus.

You can make clear you expect proper records to be maintained going forward - there are many apps for this particular issue readily available.

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By Paul Crowley
11th Apr 2024 14:42

'month's worth journeys he made in pursuit in business'
Odd choice of words.
The stock HMRC reply would be, show me the records of business mileage.
They might wonder why the director did not bother to keep records, if he was genuinely intending to claim the expense.

I expect directors to keep a record, not make it all up a year later.
But it is his company, all you can do is advise.

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Replying to Paul Crowley:
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By Roland195
11th Apr 2024 15:17

Alternatively, if the mileage would represent a significant amount, would the accounts be materially misstated by omitting?

Is there a difference between making a contemporaneous log at the time compared with writing up based on diary entries & the RAC Route calculator at the year end?

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Replying to Roland195:
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By Paul Crowley
11th Apr 2024 15:26

The company was not paying these expenses, the director was.

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Replying to Paul Crowley:
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By CW2012
11th Apr 2024 15:21

I had to almost arm wrestle him for that information, I've tried to get his bookkeeper to record the mileage that the directors undertake in their private vehicles, so far this has been a fruitless task. My point of concern is where is the validity in the accounts statements, is it acceptable to rely on unsubstantiated estimated costs as the basis of preparation, although the list of journeys that I was provided with did appear likely and in keeping with what the business does.

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Replying to CW2012:
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By Paul Crowley
11th Apr 2024 15:35

All a matter of judgement based on the facts.
The point to me was in pursuit of business. Sounds like he was driving around looking for clients.
What would matter to me is that he refuses to keep records and does not claim the expense on a regular basis.
Contemporaneous records are not an unreasonable expectation.
Making stuff up once a year? Not happy with that idea at all.

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Replying to Paul Crowley:
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By CW2012
11th Apr 2024 16:03

Making stuff up once a year? Not happy with that idea at all.

No, neither am I

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Replying to Paul Crowley:
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By CW2012
11th Apr 2024 16:03

Making stuff up once a year? Not happy with that idea at all.

No, neither am I

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Replying to Paul Crowley:
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By CW2012
11th Apr 2024 16:03

Making stuff up once a year? Not happy with that idea at all.

No, neither am I

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Replying to CW2012:
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By Truthsayer
12th Apr 2024 12:17

You can say that again.

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Replying to CW2012:
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By Roland195
11th Apr 2024 15:38

For clients like this though, you are likely going to by relying on all sorts of other unsubstantiated estimates.

Take stock for instance. If the client does not have a formal stock management system or claims they were unaware of the need to conduct a stock take (or just didn't bother), what will you accept?

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Replying to Roland195:
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By 17RDR12
12th Apr 2024 09:13

But the only impact of stock valuation on P/L and taxes is the year on year movement, which is unlikely to be too wild without substantiation. Mileage being completely plucked out of thin air is different in that respect

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Replying to 17RDR12:
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By Roland195
12th Apr 2024 09:33

Not sure I understand the distinction. In preparing accounts for a business such as this with informal financial controls & systems, we are usually going to be heavily reliant on representations from the directors in one way or another. As long as we believe this looks reasonable in light of what we already know & understand about the business, then what option do we have?

In this case, I'm not sure that "plucked out of thin air" is accurate. The director provided an estimate with at least a vaguely plausible method of verification.

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Replying to Roland195:
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By 17RDR12
12th Apr 2024 10:20

CW2012 wrote:

You'd think so but I was met with a barrage of "I'm too busy, do you think I write down every mile I travel etc"

I'm not sure how plausible the method of verification is really. My point is that an over/underestimation of stock will "come out in the wash" eventually in P&L. Over estimation of mileage will not.

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Replying to 17RDR12:
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By CW2012
12th Apr 2024 11:53

As far as I can see its a question of where you draw the line on the lack of proper records and the acceptance of estimates without what appears to be supporting evidence. Interesting point on the stock eventually dropping out but even this has ramifications somewhere, changing tax rates, loss making years, changes of share ownership, depends when the correction appears, starts to feel like profit manipulation. I was interested to see what anybody would do in this situation.

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Replying to 17RDR12:
Stepurhan
By stepurhan
12th Apr 2024 10:30

17RDR12 wrote:
Mileage being completely plucked out of thin air is different in that respect

An estimate is not plucked out of thin air. Even most dictionary definitions say it includes an element of judgement.

Knowing typical places they travel to for work and how often will allow an estimate of miles to be undertaken. If a shopkeeper does a once a week trip to the wholesaler, that would probably even be pretty accurate. The more varied the business travel, the harder it becomes to come up with a sensible figure.

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Replying to stepurhan:
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By 17RDR12
12th Apr 2024 11:10

An estimate shouldn't be plucked out of thin air, no. In reality however...

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Replying to 17RDR12:
Stepurhan
By stepurhan
12th Apr 2024 12:46

17RDR12 wrote:

An estimate shouldn't be plucked out of thin air, no. In reality however...

In reality no accountant should be accepting a figure without some understanding of how the client arrived at it. This comes back to the point I make further down that I won't accept unreasonable estimates. Someone without records is going to have to come up with some basis for their figures if they want me to include them.

I doubt anyone in this thread saying they would include estimates is just accepting any old figure the client gives them.

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By FactChecker
11th Apr 2024 15:25

"he has provided a month's worth journeys he made in pursuit in business as basis to estimate from for the accounting year"

1. Make sure he knows that, from this day onwards, he MUST keep a mileage log (not just miles, but from/to and purpose) IF he wants to have any protection from HMRC.

2. Point out, with regard to the historical (lack of) records that:
(a) he can put any figures he likes, but only so long as *you* are convinced they are 'reasonable' - and that you are more likely to be so convinced if he can provide at least some supporting evidence (such as total mileage for the year from all usage vs 12 x whatever he's claiming for 1 mth of business usage, as a start);
(b) if HMRC decide to question these figures (even in a few years' time) then he, not you, are liable for resolving their concerns - which will undoubtedly require him to provide at least some partial evidence.

Nowadays almost everything, from parking payments to servicing records and even some insurers, maintains a digital footprint that is able to show where/when the car mileage was incurred ... so better that he uses it first before HMRC potentially use it to confront him.

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Stepurhan
By stepurhan
11th Apr 2024 16:03

My response to clients is that we will always include reasonable estimates of missing expenses because we are on their side. I then point out that HMRC are not on their side, and will usually seek to reduce or disqualify expenses with no formal evidence to back them up. Most clients realise they are leaving themselves exposed and buck their ideas up.

If a client must have travelled to do the work, then I would still argue with HMRC against total disqualification. Any accountant that would agree with HMRC in those circumstances is not working in their client's best interests.

The key word is reasonable. Not accepting unreasonable claims is also acting in the client's best interests and any that try to force the issue can go elsewhere.

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By More unearned luck
11th Apr 2024 18:07

If the director had kept a mileage log, any reimbursement for business mileage would still be unreceipted.

What is the company's policy for paying mileage? For a quiet life it may wish to adopt rules that are on all fours with the tax rules, both in terms of rates and what counts as a business mile.

Can't a mileage log be created from the director's appointment diary and Google maps? Delegate the task to the bookkeeper.

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Replying to More unearned luck:
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By CW2012
12th Apr 2024 09:06

Can't a mileage log be created from the director's appointment diary and Google maps? Delegate the task to the bookkeeper.

You'd think so but I was met with a barrage of "I'm too busy, do you think I write down every mile I travel etc"

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Replying to CW2012:
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By Matrix
12th Apr 2024 09:16

What a [***]. This kind of response would not be acceptable to an Inspector so take a breath and decide how to respond. I agree that if you let this one go then it will be a downward path.

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Replying to CW2012:
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By Paul Crowley
12th Apr 2024 12:37

That is exactly where the problem is. Every business mile? Yes that is exactly what is expected by most businesses from their employees and definitely by HMRC.

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By Tax Dragon
12th Apr 2024 09:50

Is this really an accounting question? Director puts a claim in to the company, company pays, that's not an estimated expense - is it?

To me the issue is how the company should apply the tax rules. Should the whole payment be subject to PAYE and NIC? (The director could claim any tax relief due from HMRC.)

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Replying to Tax Dragon:
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By Matrix
12th Apr 2024 10:17

Yes it is because it sounds as if the bookkeeper has booked this to mileage. The OP is looking for guidance on how others would deal with it and it appears to be an [***] client. So OP may choose to go back and advise on the tax implications of not keeping records. Usually any personal amounts are moved to the DLA rather than payrolled. As usual it’s all about client communication.

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By Truthsayer
12th Apr 2024 12:23

My experience is that clients NEVER keep mileage logs (I have never seen one in my life), and their mileage claims are always estimates or pure guesses. All recommendations to keep a proper log will be ignored, as they just can't be bothered, and they think it will never come back to bite them. In such circumstances I use whatever estimate they come up with, unless there is evidence elsewhere that it is overstated. It is HMRC's job to check it, not ours.

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Replying to Truthsayer:
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By CW2012
12th Apr 2024 13:01

Yes but yours / our name is on the accounts and the professional bodies may well view things very differently.

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Replying to CW2012:
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By Roland195
12th Apr 2024 14:00

Your professional body won't likely look at the file beyond confirming you have met & documented your AML requirements & appropriately gendered (or not, I can't keep up) the client.

Again, understating mileage costs & thus over representing profits (depending on where you stand on when if at all, the company has a constructive obligation to pay) should be just as bad from the strict accounting position.

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