Its been a while since I was on the Forum so hoping someone out there can help with two queries:
1. I've recently taken on a new customer who is on cash accounting for vat. He provided a spreadsheet on his accounts and his paperwork so I could prepare the vat return. The spreadsheet had a list of his expenses incurred throughout 2012 and the expenses were actually paid during October. I included the all his expenses up to Sept 2012 in the latest vat return because they had been paid back to him in this quarter. He has said:
"I would have preferred if the cash expenses were logged as they were billed, rather than when recovered from the business bank account, to keep it consistent with previous submissions. There aren't any cast iron rules on this, so we could have kept it the same as before. But this can be addressed when we get to sorting out adjustments for last year."
I haven't seen previous vat returns but thought I'd done the right thing including the expenses in this return on a cash accounting basis.
2. For new customers I've taken on recently a few of them seem to be making regular drawings throughout (i.e. a 4-5 each month) and calling them 'dividends'. These are all limited companies where they are taking a small salary. My understanding is that Dividends should be paid when the company is in profit and its good practice to do this quarterly on production of management reports. I said to my latest new customer that Directors should be careful not to make too many regular dividend payments as HMRC could view them as salary payments and therefore liable for PAYE and NIC. He has said my advice is wrong (he's asked his accountant).
Sorry for the long questions, any comments would be appreciated.
1. Not really sure what you are asking but if on cash accounting the VAT on any invoices paid or received in the VAT quarter should be declared on the VAT return.
2. Have minutes of dividends and dividend certificates been prepared? If not then doesnt really matter what the client calls the withdrawl in the records. The dividend is only a formal dividend if minute and certificate has been prepared. To avoid challenge would certainly not prepared minutes and certificates more than twice a year. That way you can split the dividends in the year between up to two tax years. As you say for dividend to be legal they have to be made from distributable profit and only way of being sure have distributable profits is to prepare some management accounts. If not distributable profits and client is withdrawing then only way can treat is as a salary or drawdown of directors loan account. Which may go overdrawn leading to possible s455 and benefit in kind implications.
Thanks for replying. I realise i'd written a lot of waffle
1. I guess I needed a sanity check really, that I should of included the expenses in the vat return.
2. I don't know if any minutes or certificates have been prepared - I doubt it though. He is calling them dividends and I was trying to make the point about the regularity of payments and that they could be viewed as salary payments. Really they are withdrawals to the Directors Loan account.
there is nothiNg to stop someone taking weekly amounts to directors loan and call them "dividends", but only a dividend when the relevant paperwork is prepared.
I spoke to his accountant and got their perspective on both points. I guess its just a different way of working and approach to what I'm used to. It was also the abruptness of his response saying I'm wrong that made question my understanding.
As you state, my understanding is that you are perfectly correct on the VAT side, because as a business you choose to account for VAT either when you receive or issue invoices (tax ref date on the invoice is the date to adhere to for reporting purposes) i.e invoice basis or cash accounting basis (i.e. when money changes hands for purchase or sale even if the invoice is dated for the previous reporting period). So if he's using a cash basis for all his normal invoices, he can't suddenly use an invoice basis for selected expenses on selected months depending on what mood he is in!
Mark and you have a very good point re the frequency of the 'dividends', however legally I think you can take dividends (providing you have distributable profits) as many times as you want providing you have meeting minutes to declare the divs and the relevant dividend distribution doc to back it up.
I was surprised at your comment re his attitude towards you...not sure whether it's in relation to the VAT or the dividends, but if it's the former then that suggests he's gotten away with talking his previous book keeper into doing whatever suits him best and he's not too happy that you know your onions
Mark and you have a very good point re the frequency of the 'dividends', however legally I think you can take dividends (providing you have distributable profits) as many times as you want providing you have meeting minutes to declare the divs and the relevant dividend distribution doc to back it up.
Just think it easier and less open to challenge to take the "drawings" to DLA and declare a dividend once or maybe twice a year. At some point HMRC are going to challenge this so why open yourself to the risk. Remember the Arctic case of a few years ago.
Avoids having to do a minute and certificate possibly once a week or month.
And as you say you need to have distributable profits to declare a dividend. In theory the revenue could ask you to prove this (though never seen it happen) and if you take say weekly dividends you would need to produce weekly management accounts to prove distributable profits.
Just saves a lot of hassle and for the same end result to declare two dividends a year so you and split dividend allocation between tax years (unless of course your year end is 6 April in which case your accounts would be in sync with the tax year).
