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When is a loan not a loan?

Director's company lends a substantial amount to brother (e'ee)...

... company has audit... director does not want (a) any reference in RP note to brother, brother's name, or even an employee (b) nor disclosing as a DLA & pay  s455 (>£80k).

He would prefer it being disclosed as an "investment" as the loan is secured against brother's property.

... & I would like to run off with Elle McP

Just before I tell him, very diplomatically of course, that there isn't a hope in hell, its a £30k job that I would hate to lose to a competitor who knows a simple way around this prickly issue...

 

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14th Feb 2019 13:24

Does the loan have any specific purpose, repayment/interest terms etc?

Options for avoiding BIK/section 455 charge are going to be very limited but full facts are needed. And that's before you even consider the accounting treatment/disclosure requirements.

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to Wilson Philips
14th Feb 2019 13:52

Yes, but nothing formal drawn up as it was supposed to be repaid almost immediately... problem was, it wasn't & now doesn't look as though it will be in the near future.
Interest is being charged on the outstanding balance at 3% pa.
I'm not particularly bothered about the numbers, more the disclosure, or hopefully, lack of it...

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14th Feb 2019 13:52

What was the purpose of the loan and was it covered by a loan agreement? (I suspect the answer will be no)
How did the loan get to the brother? A direct payment naming him or via the director

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to bernard michael
14th Feb 2019 13:55

I'll refer you to previous response... apologies, bit slow in replying.

BACS directly to the brother...

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14th Feb 2019 14:19

Are the accounts done under FRS102 1A?

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to Duggimon
14th Feb 2019 14:29

No, FRS 102

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14th Feb 2019 14:24

Are you the auditor, or an accountant preparing accounts to be audited by someone else?

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to johngroganjga
14th Feb 2019 14:28

I'm no auditor, but that is exactly my thought process. Surely this isn't a job for the auditor?

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to Adam12345
14th Feb 2019 14:32

Ensuring that the accounts contain all the disclosures required by the Companies Act and the relevant accounting standards is one of an auditor's key responsibilities.

My thought was that if the OP wasn't the auditor he could just step back and let the auditor deal with it.

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to johngroganjga
14th Feb 2019 14:40

John & Adam...

We are both... it happens. We audit accounts provided by the client... in some instances, we advise accordingly... this is one of those instances.

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to Glassback
14th Feb 2019 15:11

Then there is no-one else to do the job for you!

Is there an argument that the loan was made because the debtor was an employee, regardless of him being the director's brother? I guess probably not, but it is one of the relevant questions, which I do not think has yet been raised.

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to johngroganjga
14th Feb 2019 15:47

John, I appreciate your comments... can I refer you to my response to Mike Bath, below.

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14th Feb 2019 14:31

@ Glassback (OP).

Forgive me, but “nothing formal drawn up” (per your 13.52 post) appears to be in conflict with the words, in your initial question, of
“the loan is secured against the brother’s property”.

Fundamental to helping answer your question is determining whether the loan was made by (i) the director or (ii) the company.

Could you clarify, please.

Basil.

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to fawltybasil2575
14th Feb 2019 14:46

Basil, the company lent the money & it was paid directly from them to the brother 12 months ago... it was supposed to have been repaid almost immediately, but wasn't.
The company has now obtained a charged against the brother's house to secure the loan.

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14th Feb 2019 15:26

Unless the company concerned is a bank, or another business where lending money is a principal activity, if you're reporting under FRS 102 then there's no way you can avoid disclosing as a RPT, including naming the counterparty. The fact that the loan is secured would also have to be disclosed. This applies whether the loan is shown as a debtor or as an investment.

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to Mike Bath
14th Feb 2019 15:44

Mike, at least your comments brought a smile to my face... as its almost word for word what I'd told my client.
Unfortunately, that was why, as a last resort, I posted my question. Sometimes clients either don't listen or don't want to understand the laws and regulations they are bound by & see it as us being pedantic.

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14th Feb 2019 15:41

How material is the loan to the company's liquidity.You might have a going concern problem
Also I would have thought that a 3% loan is not a commercial rate so is there a BIK situation for the brother.
Although the brother has given a charge over his property is there enough equity to cover the loan
Is the director the majority shareholder and if not do the other shareholders know about the loan and have they agreed to it
Everything so far is leading to a disclosure being required

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to bernard michael
14th Feb 2019 15:48

Bernard, I appreciate your comments... can I refer you to my response to Mike Bath, above.

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to bernard michael
14th Feb 2019 16:01

bernard michael wrote:

Also I would have thought that a 3% loan is not a commercial rate so is there a BIK situation for the brother.

Provided that the interest charged (and paid) is at least equivalent to the interest chargeable using HMRC's Official Rate there should be no BIK.

We still haven't been told what the loan was used for - it may have been exempted from the BIK rules.

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14th Feb 2019 15:51

Good luck

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14th Feb 2019 16:03

I didn't check - I thought i was more

Can you get loans commercially @ 2.5% - the HMRC rate

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to bernard michael
14th Feb 2019 16:34

Yes, the one I have on my mortgage is lower than that.

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14th Feb 2019 16:36

Why is the director so strong of the opinion about the loan not appearing in the accounts?

I have not been in audit for a very long time, but generally when there is someone at a client who is making a big deal about something, there is a good reason behind it, and it certainly pays to understand the reason.

Do I assume some of the shareholders do not know about this loan to the brother?

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to ireallyshouldknowthisbut
14th Feb 2019 17:07

Hmmm... being very diplomatic, it was a FU... he was expecting it back, & he didn't get it... & so he doesn't want anybody to know about it... & yes, I believe him.

Unfortunately FRS 102 takes precedent.

There is only one shareholder

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to Glassback
14th Feb 2019 17:48

Sounds plausible. On the plus side, if he is the only shareholder who exactly is going to be reading these accounts anyway? I imagine the audience will be rather limited. Moreover if suppliers etc need them for credit scoring, then like they will really care. Most employees probably don't even know you can see them online, and even if they did, probably would just look at the P&L and not even read the balance sheet, let alone the notes which if you are clever you can bury in the middle of some other text!

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By frankfx
14th Feb 2019 21:17

Have a word with the tech team of your Accounting body.
May cover all points and assure client of your competence.

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15th Feb 2019 09:17

Was it actually a private loan from the director to his brother, but the company accidentally or just to simplify things paid it directly to the brother? In which case directors loan account instead.

Problems with that - potential tax, disclosure, and why the company registered a charge for a loan it didn’t make.

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16th Feb 2019 12:49

@ Glassback (OP).

On the highly probably correct assumptions that (as I have determined from your initial question and later posts) :-

(i) The loan was from the company, and
(ii) The loan was made to the brother because he was the director's brother, as opposed to his being an employee [it would be sufficient that his being the brother was the major reason for the loan being made (in the unlikely event that one cannot dismiss the possibility that the loan was made partly because he was an employee)],

then I must respectfully DISAGREE with comments above that the Financial Statements prepared under FRS102 require that the brother's NAME be disclosed: this is NOT the case.

Here is a link t0 FRS102:-

https://www.frc.org.uk/getattachment/69f7d814-c806-4ccc-b451-aba50d6e8de...(March-2018).pdf

Please note Para.33, especially 33.2 and (most especially) 33.9.

One has to indicate the relevant CATEGORY, but there is no requirement to "name names". It is thus entirely correct for the DISCLOSURE NOTE to include wording such as "a loan of £xxxx to a close member of the director's family" (complying of course with the other requirements indicated in Para.33).

Given that your sole concern was avoiding indicating the brother's name, then hopefully the director will be duly satisfied with the wording of the disclosure note suggested in my previous paragraph above, which ACHIEVES the stated aim of NOT showing the brother’s name in the Financial Statements.

Basil.

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16th Feb 2019 12:33

Skimming most of the replies, I agree some disclosure NEEDS to be made (but see FawltyBasil's last reply).

Whilst this is a nuclear option, do they NEED an audit? A few years ago, a client put us as auditors in an impossible situation and it looked unlikely we couldn't qualify. After a long hard chat, and informing loan note holders who were demanding the audit, we decided to abort the audit and prepare unaudited accounts (they were small) with said disclosure missing.

We informed them the accounts didn't comply with the Companies Act yadada, removed our accountants report and handed over unaudited, no-accountant report financial statements for them to do with what they wanted.

This is not an ideal answer.

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16th Feb 2019 13:10

With a £30k fee it's likely to be big enough to require an audit

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