Ventura UK Ltd was a typical small company owned by four director/ shareholders in equal parts. One of the directors (B) lent the company around £240,000 at some point before April 2010.
It was agreed, but apparently not formally recorded, that B would be credited with £16,000 as an annual fee. It was not clear whether this amount was supposed to be a repayment of the loan (there was no loan agreement), or a fee for services (there was no contract between B and Ventura). These amounts were never actually paid, only credited to B’s director’s account with the company, so they failed as loan repayments.
HMRC took the view that the £16,000 annual fees were earnings on which PAYE and NIC were due. The tax was payable by reference to the earlier of the date on which the sums were credited in the company’s accounts, or the date B became entitled to the fee. When HMRC advised the company of the amount of PAYE due in late 2013, the company’s accountant made a prior year adjustment in the accounts to reverse eight years of fees (£128,000) due to B.
HMRC took the view that the annual sums had been accrued and any attempt to reverse the accrual by prior year adjustment was ineffective, so the PAYE and NICs remained due. The tax tribunal agreed with HMRC. The accounting adjustment may have absolved the company of its liability to B (in respect of the £128,000 of fees), but it could not absolve the company of its liability to HMRC.
All of this muddle could have been avoided if there had been a clear loan agreement between B and the company, and a contract for services between the two parties. Some clear notation on the accounting entries would have helped as well.
If you would like to discuss any of these issues further do not hesitate to contact DFC Accountants.