Advice needed...very messy ltd co records

Katie2014

I am hoping someone can give me some advice please...

I have recently taken on a new client...2 husband and wife directors running a limited company. They decided to incorporate following the advice of their previous accountant and have been running all personal and business expenditure through the limited company account. Husband was a sole trader builder before incorporation. Since incorporation, wife is the other director and also works in the company doing invoices/admin.
The reason they have left their previous accountant is because they were unhappy with the service as they were receiving no advice and certain things were not being done.
The previous accountant told them that they could take any money they needed out of the company account and that they would sort it out at the end of the year. So the client has been transferring cash into personal bank account as and when it was needed under the heading 'salary'. Only some of this amount has actually been put through the payroll.

I am doing the accounts for the year ended 31st Jan 16. The amounts that the directors have transferred out as 'salary', are not the correct amounts that have been put through payroll. Is the only option to submit updated and correct payroll figures to hmrc, according to what the directors have categorised as 'salary'? I'm presuming none of this can be recorded as dividends instead now due to the legal issues surrounding dividends?

I have set up a directors loan account for the personal expenditure and have advised the clients what they should be doing ongoing although I cannot see the situation getting much better.

One director uses a van for purely business purposes. Van is not in the company name, it is still in the sole trader business name however director has been paying for ALL fuel and van maintenance/repairs etc through the company. As the company is not the legal owner of the van I believe I am right in thinking that the director should have been paying for all the van expenses privately and claiming back the expenses from the company? As this hasn't been done at all is there anything I can do to correct the situation now? Apart from advising of the correct way forward ongoing?!

Any help or advice would be appreciated I have been running different scenarios through my mind for weeks and I cannot decide the best way forward!

Thank you.

MarieNoelle

Hi @Katie2014

It does look messy but unfortunately it is not unusual especially for someone who was a sole trader before incorporation. You are correct in treating all personal expenditure and amounts over and above their salaries (as filed on payroll) as a director's loan.
Regarding the van, is it owned outright by the sole trader or is it on HP? if owned outright why didn't the sole trader transfer the asset to his new company? Have cessation accounts been drawn already for the sole trade business?

As it stands you are correct that van expenses should go through his director's loan. The director may claim some expenses back from the company if wholly, exclusively and necessarily for the business however no CA can be claimed.

How large is the director's loan now you have corrected the entries? Are the owners aware of the reportable BIK on cheap loans if it has exceeded £10,000 at anytime in the tax year? If the loan is not cleared 9 months after the year end there is also a s455 tax to think about (standing at 32.5% now I think?). Of course if there are enough profits to declare a dividend this may clear some of the loan.

Going forward you will have to explain the implications of their actions. They may want to declare a larger salary even if it's not as tax efficient.

Good luck!

Katie2014

Hi @MarieNoelle

Thank you for your quick reply!

The van is owned outright and I do believe that the van was sold to the new company however I am still waiting to see the documents to prove this! This will obviously help if it has been done. The last sole trader return was filed however I do not have much paperwork to go by. As I said there were lots of issues with previous accountant.

If the van was transferred to the company and its just that they haven't changed the paperwork to reflect the new owner, can all the van expenses go through the company? Or will they still have to go through the directors loan account?

I am still waiting for queries to be resolved so I do not know the exact figure on directors loan however it is going to be high. I did previously inform the directors of the possible tax charges if the loan does exceed £10,000 and is not repaid on time, which I doubt it will be.

In regards to what you mentioned about the reported payroll figures, are you saying that only the payroll figures that have already been submitted to hmrc will count as salary and that all the amounts above that will definitely have to go to the directors loan account now? Is there no way of sending updated payroll figures to hmrc or is it to late for that now (as the cash has already been taken)?

Sorry for all the questions, it seems the further I get with this, the more complicated and confusing it all gets!

Many thanks

Katie

TreadStone

All sounds very familiar.

Regarding the van, I would imagine in reality not many of those that incorporate actually update the registration documents to reflect the change in ownership. It should be done but personally I wouldn't worry too much if it hasn't. I would allow the van expenses to go through.

As far as the salary goes, I would leave the amounts submitted to HMRC as is and post the excess to DLA. I would concentrate on getting things correct moving forward.

That's just me though

Katie2014

Thank you for your help @TreadStone