Claiming expenses, dividends, salary retrospectively? Mess...

[AngelFlonne]

Hi all, first post.

I've always been a sole trader and filed my own accounts as my average turnover is too low to merit an accountant. In the 2010-2011 tax year at the bequest of a new client I began trading as a limited company.

I knew limited company accounts were separate from my own but received bad or at best unclear advice from an accountant I had for 2009-2010 and unfortunately I've have been running my limited company accounts as though I was still a sole trader including gulp...

01. I've been drawing sums every two months for personal living costs and company expenses.
02. I mixed the company funds in with my high interest *personal* savings account (ouch).
03. I neglected to pay myself a salary.
04. I paid all company expenses from my personal bank account.

I've now opened a separate savings account and will transfer the company funds over as soon as possible. That's the best I can do about mixing bank accounts now unless someone advises I notify HMRC as well.

I've two questions...

For the company drawings, of around £2,000 a time, can I itemize them as salary and dividends providing I do the appropriate paperwork retrospectively for both? Salary would be under NI requirements and therefore not require registering for employee status.

Second question, how do I claim company expenses I paid from my personal account? Do I have to invoice my company, complete some claim form or just enter it in my expenses spreadsheet? And as its being done after the tax year has ended is it a liability now on that tax year's balance sheet or just chargeable against 2011-2012?

What a mess. Thanks for any advice.

[northernladuk]

Sorry but if it is a mess isn't getting another accountant to sort it out for you a better idea? We can give you advice on individual questions but we can't advise on the things you don't know.

Bearing a director of an LTD means you are responsible for the accounts so it's on your head. Could be worthwhile asking an accountant just to make sure you haven't missed anything.

[Taxless]

Sorry but if it is a mess isn't getting another accountant to sort it out for you a better idea? We can give you advice on individual questions but we can't advise on the things you don't know.

Bearing a director of an LTD means you are responsible for the accounts so it's on your head. Could be worthwhile asking an accountant just to make sure you haven't missed anything.

I have to agree, there are too many issues to answer easily. There is a solution but the correct input is required and I would recommend some professional input is required.

As an aside, HMRC do not like retospectively dated/prepared documents.

[xoggoth]

Most undesirable to pay company money to a personal account because your personal accounts will then be inspected in any enquiry, not actually against any rules AFAIK, could be wrong. Just be sure you have all the bank records. Paying from is less of a problem, most occasionally have to pay expenses from a personal account for various reasons.

The first thing I'd do is to set up a proper directors loan sheet showing all the payments/expenses so you know exactly what has been transferred either way and exactly what you owe company or vice versa. That is relevant to what may be a taxable benefit. HMRC are probably not going to be concerned about procedural balls ups in a first year as long as you sort it and they get the correct tax.

If IR35 does not apply you may be able to pay salary as a director's bonus up to a year after the normal end year payment date. Register for PAYE first probably.

Director's Bonus

Second question, how do I claim company expenses I paid from my personal account? Do I have to invoice my company, complete some claim form or just enter it in my expenses spreadsheet? And as its being done after the tax year has ended is it a liability now on that tax year's balance sheet or just chargeable against 2011-2012

A sheet is fine, make sure you have receipts etc. Usual to put them in accounts for year incurred although if money is not available to pay expenses they can be claimed in subsequent years. Makes sense to pay back expenses before dividend/salary as not taxable.

PS There was another person in a mess here:

http://forums.contractoruk.com/accou...t-problem.html

[xoggoth]

PS A neighbour had HMRC look at his personal accounts. Problem is that personal accounts are so complex with various other payments in that might be undeclared earnings, make sure you know what all paymenst in are.

[AngelFlonne]

Thanks everyone for the advice. @xoggoth that's especially helpful, cheers. I spoke to a retired accountant the other day and he told me I hadn't actually broken any HMRC rules as such. Fortunately because the sums transferred between bank accounts were fixed large amounts and not daily drawings its easy for me to itemize and account for them.

I agree it would be worthwhile asking an accountant, I just don't agree with what it will cost me as a percentage of my earnings for the year. Ironically, I got into this mess through an accountant who advised me of none of this. Without him I'd have looked all of this up for myself. As I mentioned I've done my accounts and submitted full balance sheets as a sole trader for years.

I'll do some more reading, thanks for the links @xoggoth.

[Hex]

This is what I would do based on the limited information you have given us:

• Company money in your personal account => correct it now by moving it into a company bank account.
• Expenses paid from Personal Account => Create yourself an employee expense claim form on your Limited Company Headed paper. It needs a date column, a description of expense incurred column and an amount column. Fill the form in with a row for each expense you have paid. File the expense claim form in your company file. Pay the total amount to your personal account from your company account as an expense payment. You may want to split this into more than one form if the expenses paid straddle your company year end. If you haven't had the company for a year yet then you will only need one form.

For the amounts you've spent, depending on how near the higher rate tax limit you are the options may be different, but presuming you are not going to hit higher rate tax this is what I would do:

• Create yourself a dividend tax voucher and company minutes which minute that the directors declared a dividend for each of the amounts you paid yourself. Put the company minutes in the company file, put the dividend tax voucher in your personal file. Back date the minutes and dividend voucher to coincide with when you paid the amounts. PM me if you want some sample company minutes and dividend tax vouchers.
• Pay yourself a salary of £7072 as a one off payment for this year (director's salary). You will need your company to be PAYE registered to do this.

This may need adjusting if some of your payments were prior to April and some after as that was the start of a new tax year. If you made payments before April I would classify them all as dividends and forget about salary. You can't pay salary anyway unless you are registered for PAYE and if you are you will have already done your PAYE returns for the tax year that ended in April gone, so you will not be able to pay salary for that period.

I am presuming you are director of your own company.

Be aware I am not an Accountant and you may wish to get proper Accountancy advice before doing any of this.

[AngelFlonne]

Thanks @Hex, I'm going to give what you suggest a go. I applied for a new bank account the other day which will be ready next week, I'll transfer the amount I transferred to my personal savings account. It seems then I can allocate my salary retrospectively for the year, I was worried about losing my personal tax allowance.

I've just been through all the company transactions for the financial year and there are only two I'm now concerned about.

01. A transfer of £3,000 to my personal bank account.
02. A payment of £3,820 direct to Inland Revenue.

Item 01. can be a dividend payment as you suggest. Item 02. is a bit embarrassing, I discovered I paid Inland Revenue's tax bill for my old sole trader business directly to HMRC from my new limited company account. In other words, I paid one company's tax bill from another company, jeez. I take it that's classed as taking money out of the company for personal use since the tax bill for my last sole trader business is my personal liability.

As the £3,820 went directly to Inland Revenue, can I still itemize it as a dividend? If not I can itemize it as a Director's loan. Its under £5,000 so I don't have to pay 25% interest immediately and I can repay it back next week when my new account is open.

I have to say thanks for the help everyone, its made the week a bit easier.

[Taxless]

Sorry to spoil your mood with a word of warning.

Before you can pay a dividend you have to have paperwork available to illustrate that the company had sufficient undistributed reserves to pay a dividend at that level.

I am sorry to be blunt but it is clear from what you have said previously that your records are in such a state that you would find this very difficult to achieve.

If I am reading this correctly, then even if this hurdle could be overcome, you are then going to back date formal company minutes and paperwork to make everything fit. Boy are you asking for trouble.

HMRC are committed to undertake 50,000 business records checks each year for the next 4 years. At the moment, if they can establish that your business records are inadequate (and they think that 40% of SME's records are inadequate) then they can impose a penalty of up to £3,000.

How much of a penalty do you think you will be looking at if they find you have back dated documentation?

The payment of £3,820 direct to HMRC cannot be a dividend as a dividend can only be paid to a shareholder.

[AngelFlonne]

OK, that's fine, and thanks for feeding back but you don't make any suggestions? What I'm looking for is advice on what is the best way to resolve it, do you have a recommendation? I'm more than happy to contact HMRC and ask them for guidance but every time I call them I get a strong Indian accent I can only half understand referring me to their website.