Allowable expenditure?

jilt

I have a sole trader client who is a specialist shoemaker. In November 2009 he set up a limited company which was to be a second business making orthotics (insoles to you and me). He intended to start trading in January 2010 but then decided to reloate his business to my area and put the second business on hold. He has since decided not to have it as a separate company and make and sell them in his original business.

He's paid for some leaflets to advertise the new business, and for filing the annual return in 2010 out of his sole trader business account. Should these payments be classed as drawings? I've looked back through Sage (transactions haven't beeen cleared since it started in 2003!) and I can't find any expenses incurred to set up the limited company so I guess he must have paid for it himself.

Just wanted to check what anyone else thought before I disallow them.

stefanboro

Sounds like you could classify it as a directors loan.

The accounting treatment would be to cr the directors loan account and dr the appropriate expense providing you have documentary evidence on hand to show that the expenses were incurred by your client and that they were entirely for the limited company.

In terms of taxation you could then simply classify the repayment of that amount as repayment of the loan thus reducing the amount of dividends (when and indeed if) they arise in the future and thus allowing the director to have less taxable income.

Does this sound right to anyone else? I'm simply going from what I have experienced in practise.

stefanboro

Ah but yes, from the perspective of his sole trader business I would personally not say that it is an allowable tax expense (unless the leaflets also advertised your clients sole trader business) and thus would be drawings.

Again, I am quite tentative in giving advice so would appreciate someone else backing this up!

Monsoon

jilt wrote: »

I have a sole trader client who is a specialist shoemaker. In November 2009 he set up a limited company which was to be a second business making orthotics (insoles to you and me). He intended to start trading in January 2010 but then decided to reloate his business to my area and put the second business on hold. He has since decided not to have it as a separate company and make and sell them in his original business.

He's paid for some leaflets to advertise the new business, and for filing the annual return in 2010 out of his sole trader business account. Should these payments be classed as drawings? I've looked back through Sage (transactions haven't beeen cleared since it started in 2003!) and I can't find any expenses incurred to set up the limited company so I guess he must have paid for it himself.

Just wanted to check what anyone else thought before I disallow them.

Annual return fee is disallowable for the sole trader.
If the leaflets advertising the new business are being used in the sole trader (as he's moved that trade from Ltd Co to sole) then I don't see the problem with allowing it.

Disallowable expenses just code to drawings in his sole trader account.

If the Ltd Co hasn't traded (did I get that bit right?) then there's no expenses in it and it's dormant. If it did trade then in the Ltd Co books as Stefan says, it would be Dr Expense Cr DLA, and CR bank, DR drawings in the sole trader books for the company expenses.

jilt

Thanks guys. No the limited company didn't trade it is dormant and my client wants to remove it from the register.

I am presuming the leaflets were advertising in the name of the limited company, however it's work that sole trader business is now doing so I did wonder if may that could be allowed. Think I'll ask to see one.

Monsoon

jilt wrote: »

I am presuming the leaflets were advertising in the name of the limited company, however it's work that sole trader business is now doing so I did wonder if may that could be allowed. Think I'll ask to see one.

Even if it's in the Ltd Co name, if that advertising is being used by the sole trade, I would be inclined to allow if the money spent on the expense is being used wholly and exclusively for the business.

jilt

It is yes and it's only £236 so I'll leave it in advertsing for now and make a final decision when I do the year end.