Any Accountants around to offer some urgent advice/comfort?

[Adayforthinking]

Hi there,

I will make this as brief as possible.

My Dsis and BIL own a Restaurant/Pub/B&B. They also own a restaurant and three flats which are all leased/rented out. Each month these additional properties bring in around £2k which is put straight into their current business. With this additional £2k their business just about breaks even.

Because of the financial situation, neither Dsis or BIL take a salary, therefore they claim tax credits.

The tax credits help feed and clothe their 3 DCs aswell as going towards their household utility bills. The tax credits are the only income that they have.

Their Accountant has (for some reason) put the rent from the properties down as profit in the tax return instead of off-setting it against the current business (as I said, they see none of this £2k, it goes straight into their current business to keep it afloat) and now the tax office are asking them to repay over £10ks worth of CTC.

My sister is in a really bad way and has no way of getting the money.

My Dad thinks her Accountant has made a massive mistake and they are going to see his Accountant a week on Friday (earliest appointment they could get).

In the meantime, does anyone know what the reality might be? Has their Accountant screwed up?

They have tried to sell their current business, but no-one is buying pubs/restaurants at the moment, understandably.

Thank you in advance.

is the business a sole trader, partnership or Limited company?

the rules on where to put things for tax return purposes are different from those of tax credits. so if they have made a loss, which it sounds like they have, and assuming they are a partnership then see this link for how to put them on the tax credit award.

You need to know what has gone on the tax credits form and what's on the tax return to know if the accountant has done it right.

Thank you Eddas. I know that my sister put that they don't earn anything on the Tax Credits form, because neither of them take a salary, they literally live on the tax credits. It appears that the Accountant has put that the £2k a month that comes from the rent is 'Profit', or money that goes directly to them as opposed to the business. However, I think the rent when it comes in (by BACS from the tenants of their other properties) goes into the Restaurant bank account, as opposed to their own non-business bank accounts. Hence the mismatch. He's said that the money is going to them and they're actually putting it into the business to make ends meet.

They are taking all their paperwork to my Dad's Accountant so hopefully he will be able to sort it out.

Thank you for responding.

But if I were doing the accounts & tax return I would also put the rents seperately, this is the correct way to put them on the return.

They are not business income, they are monies put into the business by the owners.

Who owns the flats legally? If it is your sis and bil as individuals I think the accountant is right it is their income. If they then choose to put this into the business it is still their income from a tax credits pov. It would be like if your were employed and said 'well I don't earn this money because it goes to pay off personal debt'. You can't do that.

If however the flats are owned by the limited company this would be a different matter as it is a separate legal entity.

What I don't know from a tax credits perspective is if business losses are taken into account as presumably without the 2k per month the business p&l is making an extra 24k loss.

It depends who owns the properties that generate the income. If they personally own them then it's income, wherever they choose to put it. They potentially could be faced with a tax credit overpayment. I suggest they seek independent advice as well as see their own accountant.

Who owns the flats if they do then it's their income. The fact that they use it to subsidise the business means that the business is building up a large loan to dbil ds increasing every month. If the business is sold the debt could be repaid if assets exceed debts.

If the flats are owned by the business and they don't draw a wage I can kind of see why they might qualify for tc but I'm very sceptical.

In any case they own the capital assets in the business and the flats and that brings in more than a lot of people earn each month.

Oh dear, poor them

I think everyone is right. They can't class their income from one element of their assets (the 2nd restaurant, and three flats) as 'not there' because the other asset they have (the 1st restaurant/pub/B&B) is running at a loss.

If they personally own the 1st restaurant/pub/B&B, and the 2nd restaurant and 3 flats, then what happens each month is this:

2nd restaurant & 3 flats income = £2000

BIL and DSis income = £2000

1st restaurant/pub/B&B = -£2000

Your BIL and DSis choose to inject £2000 into the 1st business, but they are not obligated to.

also see my post to your thread on freelancers

Thank you to everyone who has take the time to respond. It's not looking good for them is it? I don't believe that their flats are under a company, I think they're under them as a married couple.

I have no idea now what they will do. My dsis was in such a state today and is generally such an honest person that the thought that she may have claimed money that she wasn't entitled to is as bad as the fact that they will likely now lose everything as they won't be able to keep going.

Thank you all again.

I should say - offsetting losses against other income for tax purposes is acceptable,. but this is a different thing altogether.

To be fair, I can see why they thought it was ok. Because if they look at it like this:

Income Rest/Pub/B&B 1 = - £2000
Income Rest 2 & 3 flats = £2000
----
Total Net Income = £0

But, if you extrapolate that, then logically someone could say:

Income Job 1 = £2000
Expensive Hobby 1 = -£ 500
Expensive Hobby 2 = -£ 1500
----
Total Net Income = £0

Etc., etc. So in effect, everyone could write off their income at source by spending it.

The fact that it goes straight into the business bank account is again a red herring. Otherwise, we could all have a personal account and a 'bills' account, and say 'ah, but the money goes straight into the bills account, so it isn't really income'.

You can see that those examples above would be outrageous, can't you?

did you read the link in my 2nd post though, all may not be lost, but I can't say for certain without seeing all the info. But look at the link, tax credits you are allowed to offset a loss in the year against other income. which is different from what you can do on a tax return.

It does depend on how things are set up though, from your posts it sounds like they have a partnership for the pub and own the rented properties as a couple. But it depends if the pub makes a profit or loss, from what you've said the likely scenario is the pub makes a loss without the £2k per month they put in, which if they are a partnership is capital introduced and NOT included in the profit and loss, which would probably mean a loss for the pub.

All the above is pure speculation without seeing the facts.

so there may be hope

Has this not come up in previous years tax returns? Or is this their first year of claiming ctc?

Morning all,

Apologies for not coming back on last night.

TheSecondComing, when you put it like that, you're absolutely right. (I could never be self-employed - I'd never work it all out...).

Thank you to everyone else for their input and for taking the time to respond. I have made the decision not to talk to DSis about the responses that you've provided because I think if she realised how dishonest her actions look, she would be mortified. She honestly would not have realised. When she sees the other Accountant a week on Friday, he will put them in the picture, so I think I'll leave it to him to deliver the news.

Whatevertheweather, I honestly don't know how this works (I have no business knowledge from a 'self-employed' POV at all...), but she was saying yesterday that in previous years the Accountant had reported a loss in the business but this year had somehow recorded a £20k profit. Would that make a difference? But they will need to see the paperwork on this because if he's taken the information from bank information, that would have included the £24k a year that the flats bring in (although they are still mortgaged so it's not that money in effect) and from the sounds of the info that's been given on here, that shouldn't be included in the profit for the current restaurant, it should be separate.

See what I mean, I really have no idea... . Anyway, thank you all again for your assistance.

Eddas, sorry - thank you for the link! Once they have spoken to the other Accountant and he has delivered his news I will speak to them and provide them with the link.