Loan Account Query

Devilish Bird

Hi Guys,

Have a question hopefuly someone may be able to help. I already have an idea of the answer but just looking to get it confirmed.

I have been approached by a new client who last year brought out a family member from the partnership they were in. Unbeknown to them at the time the family member had been paying themselves rather handsomely and all the tax due out of the companies accounts. The client just thought the business was not performing well and did not think to question it!

The previous accountant showed a capital page in the last set of accounts produced showing the ex-partner's liability and the loan etc and thought it could just be written off as a bad debt which HMRC have picked up on and are investigating. I immediately thought that was not handled correctly or how I would do it but looking for anyone else who may have expierienced this situation and what they did.

Anyway the details are as follows - the client took out a business loan of £47k to buy out the family member "share" which was duly paid across and all relevant paperwork sorted however the family members drawings is at £66k, of which I think the client is going to have to take the hit, as short of suing for that money back (which they won't) then I don't think it should be showing the ex-partner on any future accounts as they are no longer in partnership and is now a sole trader. They are also never going to recover those monies back so am I right in thinking the client is going to have to take the hit as drawings?

Thanks in advance!

stevo5678

I think your post is not very clear which may explain the lack of replies. That's the case for me personally.

I'm guessing that it's always been a partnership / Unincorporated business and your reference to 'companies accounts' is just an error.

The thing I'm unclear of is whether these 'drawings' were from before the business was bought or after. If they are before that's not really an issue and if they are after it is actually a legal issue if the selling partner had no profit rights at that point.

The level of drawings does not affect the tax it is purely the profit shares.

I've asked some questions in CAPS just to be crystal clear.

Steve

Devilish Bird wrote: »

Hi Guys,

Have a question hopefuly someone may be able to help. I already have an idea of the answer but just looking to get it confirmed.

I have been approached by a new client who last year brought out a family member from the partnership

SO IT WAS RUN AS A PARTNERSHIP?

they were in. Unbeknown to them at the time the family member had been paying themselves rather handsomely and all the tax due out of the companies accounts

THEN IT WAS A LTD COMPANY?? "companies accounts" . ALSO WHEN YOU SAY 'PAY' FROM THE 'COMPANY'S' ACCOUNTS DO YOU MEAN A DIRECTORS LOAN AS A DIRECTOR, RATHER THAN SALARY OF DIVIDENDS OR JUST DRAWINGS FROM THE PARTNERSHIP?

The client just thought the business was not performing well and did not think to question it!

The previous accountant showed a capital page (WHEN IT WAS A PARTNERSHIP OR STILL IS?) in the last set of accounts produced showing the ex-partner's liability and the loan (DIRECTORS LOAN OR LOAN ON THE PARTNERSHIP BALANCE SHEET? BANK LOAN?) etc and thought it could just be written off as a bad debt which HMRC have picked up on and are investigating. I immediately thought that was not handled correctly or how I would do it but looking for anyone else who may have expierienced this situation and what they did.

Anyway the details are as follows - the client took out a business loan of £47k to buy out the family member "share" (SHARES OR SHARE IN A PARTNERSHIP?) which was duly paid across and all relevant paperwork sorted however the family members drawings is at £66k

IS THIS IN THE ACCOUNTS AFTER IT WAS PURCHASED OR FROM THE PREVIOUS OWNERSHIP?

, of which I think the client is going to have to take the hit , as short of suing for that money back (which they won't) then I don't think it should be showing the ex-partner on any future accounts as they are no longer in partnership and is now a sole trader (I'M GUESSING THAT IT WAS NEVER A COMPANY FROM THIS STATEMENT) They are also never going to recover those monies back so am I right in thinking the client is going to have to take the hit as drawings

I DON'T KNOW WHAT YOU MEAN BY TAKING A HIT ON THE DRAWINGS. IF IT IS AN UNINCORPORATED BUSINESS AS SUGGESTED FROM YOUR POST THEN THE PROFIT IS WHAT THE TAX IS PAID ON AND NOT THE DRAWINGS. IF THE DRAWINGS WERE FROM BEFORE THE PURCHASE THEN HE WILL DECLARE IS SHARE OF THE PROFITS FOR THE RELEVANT PERIOD. IF THE DRAWINGS WERE AFTER THIS THEN THIS IS A LEGAL MATTER AS HE IS STEALING. HOWEVER LIKE I SAID, THE PROFIT IS THE PROFIT.

OR DO YOU MEAN TAKE A HIT SIMPLY BECAUSE THE MONEY HAS BEEN STOLEN? AGAIN THIS IS A LEGAL ISSUE.

Thanks in advance!