Other Creditors - Balancing figure???

Laura8192

I have been told by my clients past accountants that the other creditors figure of over £20k in the TB is a "Balancing Figure"

My client says he owed no one any money at year and and doesn't know what the £20k related to.

If I have to reverse this in this years accounts, it will increase his profit by £20k and his tax bill by over £4k, he is not going to want to hear that!

I have gone back to the accountant to ask (again) what exactly the breakdown is but fear that I am going to get nowhere, I fear that they have "invented" £20k of expenses and posted the double entry to Other Creditors.

Does anyone have any advise for me please? What would you do in my situation? Thank you

Neillaw

If your client has a computerized system it may be worth having a look at the previous years TB and comparing it to your current years.

This may highlight your £20k movement without going back to the previous accountant.

If not I would tell your client you have an issue with this amount, he may be able to shed some light on it or may have more luck contacting the previous accountant.

jamesm96

Might you be able to ask the previous accountant for profit reconciliations for the previous year(s). They'll probably be reluctant to provide them, or want to charge for them if it's outside the usual scope of their work, but it can't hurt to ask.

If you gently insinuate that you have concerns over the accuracy of previous accounts then their concerns for their own liability might encourage them to help. Of course, though, they always have the comeback that 'the accuracy of client accounts and returns are the responsibility of the client and we can accept no responsibility... etc', but it's worth a try.

The 'correction' also might not belong in the P&L; could it not be that there's an asset in the Balance Sheet that's overstated by £20k (maybe a poorly reconciled bank or sales ledger), or maybe director's drawings overstated / capital introduced understated by £20k?

reader

Laura8192 wrote: »

I have been told by my clients past accountants that the other creditors figure of over £20k in the TB is a "Balancing Figure"

If I have to reverse this in this years accounts, it will increase his profit by £20k and his tax bill by over £4k, he is not going to want to hear that!

I fear that they have "invented" £20k of expenses and posted the double entry to Other Creditors.

Does anyone have any advise for me please? What would you do in my situation? Thank you

If the previous accountant has told you that it is a balancing figure by e-mail I would keep a copy of this e-mail with the signed accounts just in case there is a HMRC inspection.

The £20k creditor could be anything, e.g. un-reconciled personal credit card, trade creditors paid personally, suspense balance, under declaration of vat, deferred tax movement, etc. So if you write it off to the p&l you'll just be making things even worse.

I'd just tell your client that you'll have to leave it on the balance sheet until you establish what it is or if the client is desperate to get rid of it then make an account in the p&l called "creditor write off" and write it off through that account (and adjust for this on the tax comp so the client doesn't pay any extra tax).

Laura8192

Thank you all for your advice.

The bank reconciles to the penny and there is no sales ledger as such, he only contracts out to one company at a time and is always paid promptly.

I am getting absolutely nowhere with the previous accountants. I have posted about them before, they are not a member of any professional body (the owner was, but he resigned) and are currently under a very large investigation by HMRC.

Reader - they did tell me on email so at least I have that as backup. Would you simply leave it on the balance sheet then? The client (one man Limited Co) doesn't understand accounts really so doesn't particularly want it off the balance sheet, I can leave it there, but I just don't know that we are ever going to establish what it relates to.

If I do write it off, and create the "creditor write off" account, you say I can adjust for this on the tax comp so that the client doesn't have an increased tax bill, would I again just use the email from the previous accountant to support this?

deanshepherd

If this is a former client of Christopher Lunn and Co. then those accounts will have more holes than a horse-traders mule (don't ask!).

Assuming the voluntary disclosure process has been completed for that client and signed off by HMRC then I would go down the prior period adjustment route and restate the correct balances, posting the difference straight to reserves.

It is unusual to have a large credit balancing figure, most of the accounts I have seen have a large debit balancing figure simply recorded as 'bank' with no reference to the actual bank balances, which are usually negligible.

Providing the voluntary disclosure process is complete, and any underpaid tax to date sorted, then HMRC will not be too concerned with the mess of a balance sheet that is left.

If it was a debit balance then there would likely be an overdrawn DLA problem to contend with for both S.455 tax and beneficial loan interest. Yours is probably the easier scenario to deal with.

Laura8192

It is indeed a Lunn client and no voluntary disclosure process has been completed yet...

To be honest I don't even know where to start about the prior year accounts, and what needs to be done regarding checking them, was trying to get this years sorted first but maybe I should go back and look at prior years. Any idea how many years I'll need to go back and where to start?

deanshepherd

If you are just doing the accounts then it is only the comparatives you may need to restate (e.g. opening balances).

For the disclosure your client will need to go back anywhere up to 20 years depending on how long Lunn has been acting for them.

If you are going to be handling the disclosure then you need to brace yourself. I have typically charged between £2,000 and £3,000 for handling a disclosure and even then it wasn't worth it for the aggravation.

If you want to do it 'for fun' then read every thread in this forum. You will get the full background and an agreed process for presenting the disclosure.

Personally, after about a dozen of them, I will be glad not to see another!

Laura8192

I am not sure when my client started with Lunns I'll check, but he has been trading since 2007 and has at least 3 years accounts with Lunns that I know about.

I have seen the letters from HMRC asking for disclosure but haven't looked into what I need to do at all. I have registered on the forum you recommended and will read through the posts once I get access.

The only thing I can see straight away that Lunns were doing wrong is completing sole trader accounts as well as limited co accounts for my client to reduce tax liability.

Do you have any tips on where I can start? Client doesn't have very good records to be honest, they trusted Lunns and sent them everything....

deanshepherd

Each case is slightly different but here are some things that probably apply:

- Accountancy fees are likely to be significantly overstated in both the sole-trader and limited company accounts.

- Your client is very likely to have been invoicing only as a company (or only as an individual) making the other entity a sham.

- There was probably no PAYE scheme operated for the directors salary.

- The company was probably formed (off-the-shelf) a year before your client really incorporated and a years worth of sole-trader income may have been 'allocated' to the company retrospectively.

- Use of home as office will have flitted between £10 per week and £20 per week with no reference to actual costs.

- The bank accounts will not have been reconciled and are probably balancing figures.

- An overdrawn DLA was probably ignored or called something else on the balance sheet.

- A number of personal expenses were probably claimed (evenings out, clothing, personal grooming).

The forum has a full list of 'areas of concern' in a word document sent out by HMRC.

Laura8192

Wow that's a lot to go through!

I guess I would need to re-do the accounts from scratch and work out what should have been declared...

There was no PAYE scheme in place for directors salary but this was under the LEL so I thought that was ok (have since set one up and increased his salary to £641 a month).

He is a reasonably small client, as in volume of transactions, so I could start with 2012 accounts prepared by Lunns and effectively redo them I guess.

I think I am lucky that my clients business is quite cash rich (and he doesn't take much out as dividends generally) so there is no overdrawn DLA to contend with. The one bank account closing balance on the balance sheet did match the physical bank account balance as well.