Apologies for always seeming to ask questions lately rather than contributing to the forum, it is just these damn clients keep getting in the way.
Anyway, I have another issue for a Ltd company that I do the bookkeeping and am starting to do the payroll for. The client who is director of ltd company and only employee pays himself just over £1k per month and this is not put through the payroll so no tax or nics are calculated and paid nor has a year end return been made. The ltd company does not make sufficient profits for these to be declared as dividends. He also receives income from two other sources but these are not related to the ltd company in any way. So my questions are, how do I deal with the tax/nic and year end returns for 2009/10 and would he have to have a self assessment return completed for the income received for the other two sources.
Thanks for your help, will now try to spend some time trying to offer my advice on here.
I'm wondering about director's current account instead of payroll, do you think that might be more appropriate? I don't know what sort of trouble the company would be in for not paying tax, NI etc (also there is the employer's NIC, of course, which I guess has not been done at all).
You mention there not being enough money for a dividend, is that because this money has been classed as wages ie an expense and there is nothing left? Obviously if it had gone to director's current account there would be more profit and therefore it can be paid as a dividend, which could be used bring the current account to zero. But that leads to the various tax implications.
I would expect the director to have to complete a tax return due to the complexity of his income, but it sounds like he has not heard anything about that from HMRC, if it were me I'd call them to check, in case they arent aware of his income sources.
Are there any reserves in the company that dividends can be taken out of? Like Ruth suggests, what is the state of the directors loan account? Of course dividends need to be taken out after taxed profits so if it ends up that no dividends can be legally taken or the loan account would become overdrawn then the two options are to go with the loan account and declare a S419 tax liability onthe overdrawn loan account (this will need to go on accounts and CT600). The tax can be reclaimed when the loan is repaid but this is not instantaneous. Alternatively it is to run it through payroll. How is his other income received, via another paye scheme, self employment, investment income? Whatever you would need to ascertain his tax code and if possible put it all through as 2009/10. Obviously there will be tax, ees and ers ni so may nbot be the way to go.
Probably had too much wine to drink to explain this with much clarity!
firstly talk to the director and see what his take is on this.
As mentioned already the case could be that there is a positive directors loan account for which no PAYE is payable.
It doesn't sound as though he's using the company as a piggy bank as it's a set sum every month that is being taken out.
It may be that the director was paying until they exceeded their tax free income in the belief that as the company doesn't have a lot of income the income may run out before the tax free amount did.
If this is indeed salary then just annualise the amount deemed as salary and calculate the tax, EMPR and EMPE that would leave the amount actually taken from the company already as the net amount.
If there is insufficient money remaining in the company to pay the PAYE then the director will need to reimburse the company the excess salary taken sufficient to enable the recalculated PAYE to be paid.
Regardless of the company tax year from the directors personal perspective we're already past April 19th so the guys already in trouble for this. Thankfully we're not past May 19th so at least we're not past penalties date for finalised P14 and P35 time yet.
Reimbursement and recalculation is not good practice at all and the director must be made to understand that if this is necessary it is a one off in order to get his books back in order.
Some directors of one man bands do believe that they can just take money from the company without repercussions and I've had one case where a director stated that whilst the company did not have the money at the moment he would be paid soon for the current month so could be taken from that.
Trying to get through to people that income and expenditure must be matched against the period to which it relates (See Accruals concept in FRS18) can sometimes be a real uphill task.
I think that the worst part of this is the timing (post April 19th). The client needs to understand that they are likely to suffer a penalty due to late payment and that it is non of your doing as it's only now after the harm has been done that you're getting to sort the mess out.
Good luck with this one Mark,
All the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I think it would be better to go with the overdrawn loan account. Yes there will be a S419 liability but it can be claimed back at some point in the future whereas the paye/nic/fines etc are lost.
The director does need to get some advice on running this side of things and my guess is that he has been told i the past to transfer an amount (probably £1000) every month to his personal account so he does not use the co account for personal expenditure. This is good advice but only if there is sufficient profit in the company to allow for it.
We're only talking about £12k here taken (potentially) in salary.
Assuming that £5750 is put down as Salary (using the lower NI limit as the basis) so that no PAYE would have been payable and treat the remainder as you suggest then the client is going to lose a years contributions towards their state pension.
Whilst such shortfalls can be purchased later I think that compared to the potential fine it may prove more effective to take the hit on the fine than pay the lost year later.
I don't know the exact figures off the top of my head but I'm sure that's the real calculation that needs to be made to determine where the client would be better off taking your route or mine.
I think that Mark needs to be careful here as the wrong advice will cost the client and open Mark up to being sued for giving advice that he should not as a bookkeeper really be expected to be giving anyway! (So it is unlikely that his PII would cover him).
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
There are gaps in the scenario so it isn't clear whether the director has salary elsewhere as Mark says there are other income streams he receives. If it is salary then his PA would already have been used up (and potentially ni paid) and so tax at BR will be on the whole £12k plus ees and ers ni will be payable, off the top of my head that will be around £4k plus potential fines/interest. S419 will be a little less than this and he could reclaim it at a later date once the loan has been repaid.
Absolutely right that Mark needs to be careful and not offer the advice but I think this puts him in a position to say 'I feel these are your options but you needto discuss with your accountant' or for Mark to talk directly with the accountant and ask how he wants it processed.
Things are a little sad Shaun, I answered this post originally at around 11pm on a Friday night and on a bank holiday weekend I'm still here! Still my daughter is going for a sleepover tonight so I'll have a proper night out then!
As you state, we're not privy to the full picture in relation to this client so we can only give suggestions as to the direction that Mark needs to take. Must be one of those weekends, I'm doing some prep work for a meeting on Tuesday. Seems to take more time to put together a pretty powerpoint presentation than it does to do the actual work. Just discovered why I needed the Pro version of Visio rather than the standard version that I have as I'm missing the UML and BPMN templates that I use in the office so it took an absolute age to find equivalent shapes. Oh well, got to do something to keep the taxman in the manner to which he's become accustomed. Fingers crossed we'll both be done by Monday so we at least get one days break. Quite fancy taking my boy to see Iron Man 2 as it looks a seriously fun, leave your brain at home movie.
Talk later matey,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I hope that you are having a good weekend and many thanks for your advice
The other income that I rerred to is rental income from properties and agents commission so neither are taxed and would be included on his Self Assessment and there are insufficient reserves for this to be used as dividends and if transferred to the loan account it would certainly overdraw it.
