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I sold services as a...

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I sold services as a UK Representative/Agent of a foreign supplier. I would collect the payments from the sales I made and retain a commission for my services. The Foreign supplier went out of business over a year ago with me still holding payments from sales I have made. Nobody has chased me since the foreign company went out of business. On previous sales I have paid my taxes on my commission element on my self-assessment returns. I am still holding the balance of funds that in theory belong to the foreign company as I expected somebody may chase me in the future for them. My questions are;
1. At what point do I need to realize the balance I am holding and how do I account for it?
2. Does Statute of Limitations apply if I held it for 6 years and the foreign company doesn't contact me?
3. Would the balance I am holding be then classed as income or a windfall and is it subject to taxation?
Thanks
Submitted: 2 years ago.
Category: Tax
Expert:  UKSolicitorJA replied 2 years ago.
Hello,
To answer your queries:
1) you may place these funds in a separate account in your name on trust for the foreign company's receivers or liquidators, there is no time limit for realising the same;
2) 6 years under English law if you had a contract with the foreign company which was governed by English law.
3) this money is not income and would not be subject to income tax. It would be a windfall.
You may try and find out who the company's receivers or liquidators are and let them know about the funds you are holding as the money legally belongs to them to distribute to the company's creditors. However, you will not get in trouble if you do not do so, it is a moral duty rather than a legal one.
Hope this helps
Customer: replied 2 years ago.

1

Expert:  UKSolicitorJA replied 2 years ago.
Excuse me?
Customer: replied 2 years ago.

Sorry timed out lat time;

Hello,

Thanks for your response, just a few points for clarification.

1. Does it make a difference if I am a sole trader or just an Agent working on commission? The reason I ask is that that I am currently preparing my self-assessment return and previously I have submitted this as other income and not submitted and profit and loss as a sole trader.

2. When does the Statute of Limitations apply from? Is it from the initial contract date, last order/invoice date, last communication activity date or other? Again the reason I ask is when the foreign company went out of business I had no direct contact with the company or any receiver, however I did have contact with one of the ex-directors who suggested I assign all sales to him. I advised him that the contract is non-assignable and I would wait for the receiver to contact me to confirm before I could do that. I never heard anything back after that.

3. Is the Statute of Limitations the same whether you are a individual, sole trader, partnership or a limited company?

4. The original contact does not state a governing law, the foreign company is based in the UAE, I am based in the UK and all the sales activity was carried out in the UK. What governing law would apply?

5. Would the value of the outstanding sales amount make any difference to the taxation status? or whether it is classed as income or a windfall? and I assume if it is classed as a windfall it is not taxable?

I notice from your profile that you specialise in immigration law, so is this area of debt/taxation something you also have expertise in? If so; if I wanted/needed a formal letter of advice given is this something you or your firm would be able to provide?

Thanks,

Expert:  ajlaj01 replied 2 years ago.
Hi,
Thank you for your question and welcome.
My name is ***** ***** I will assist you. I note my colleague has opted out.
I am afraid we cannot offer a formal letter of advice, this is simply a question and answer service.
I can answer your questions as follows:
1. The fact that you are a sole trade makes no difference - this money does not belong to you, you are holding it on trust until such time that the other party either claims it or becomes statute barred from claiming it;
2. I would not assign these monies to the director under any circumstance. They should only be delivered up to the liquidator. The monies belong to the company not the director personally. The Limitations Act 1980 - the limitation period runs from the date the cause of action arose. So it is 6 years from the date you became obligated to transfer the money to the company.
3. Yes it is the same for everyone. It is the cause of action or type of claim that determines the length of the limitation.
4. Without a jurisdiction clause you assume the jurisdiction should be where the defendant is based (i.e you) and where the trade actually happened. So in this circumstance probably the Uk. However if a UAE court decided to accept jurisdiction of the agreement then, I believe the limitation period in the UAE is actually 10 years - you would need separate advice on this.
5. When the monies become legally yours, you will have to pay some tax on it. How much money is it? Whether to treat it as income or capital would be something you will need to check with an accountant.
In my opinion if you want to keep the money you need to let sleeping dogs lie and hope that no one from the company contacts you in the next 6 years.
Is the money in a UK Bank account?
Kind regards
AJ
Customer: replied 2 years ago.

Thanks AJ,

That clears up a few of the points, but I am still unclear on the taxation part of it.

The money is currently held in an investment account in my personal name, and is around £30000.00 (US$50000.00). The other expert seemed to suggest that after the 6 year limitation it would be classed as a windfall and not subject to taxation. I am doing my self assessment return at the moment and wanted to know whether to account for it now as income or leave it as I may need to pay it back. If I leave it and the 6 year limitation passes how do I account for it then?

If I chose as you say let sleeping dogs lie and say in 6-12 months the receiver or someone from the original company contacts me, is the statute of limitation still from the original due date or is it reset from when they make contact again?

I did take advice from an accountant but he was unsure and advised I speak to a tax advisor or solicitor, hence I am here using this forum. Once I know where I stand with this, I need to get some formal advice as well, so if in the future if anyone came back to me I can say I took formal advice on this.

Thanks,

Expert:  ajlaj01 replied 2 years ago.
Hi
Thank you.
You cannot declare for taxation money that you are not the owner of. That money does not belong to you at this point in time. I would therefore just make sure you have evidence to show you are holding this money for the benefit of another person. I would account for the money in the same way as you would have previously accounted for it, had you had to pay it out.
You can think about whether you should pay tax on it once you are the legal owner. I would agree it is not income tax - it may be subject to a capital gain tax - but this really is the remit of your accountant to confirm.
The limitation period runs from the date the cause of action arises. If you keep getting demands for the money then the limitation period will start again. You need to go 6 years without demand for payment.
I look forward to hearing from you.
Kind regards
AJ
Customer: replied 2 years ago.

Thanks AJ,

Just need to get this issue of taxation sorted out, my accountant suggested it maybe be classed as a windfall but was unclear. He didn't think it's classed as capital gains because it not a gain from an investment/property/shares etc. But again need to confirm this.

Is the request from the ex-director be classed as a demand for payment or would it have to be from the liquidator/receiver? As far as I can tell there has not been one appointed so far.

Any ideas?

Expert:  ajlaj01 replied 2 years ago.
Hi,
Thank you.
If the company is in liquidation then the directors are no longer acting on its behalf so this cannot be a demand.
Having looked at HMRCs information, I do not think this falls into either income or capital per say. I think either way you should consider declaring it (once the limitation period has expired) even if you do not pay any tax on it.
Kind regards
AJ
Customer: replied 2 years ago.

Ok thanks,

I think I am clear on all the points expect for the taxation part, do you know any tax experts out there that might know a definitive answer?

1. Is it a windfall, is it income, is it capital gains or other?

2. When and how should it be accounted for?

Expert:  ajlaj01 replied 2 years ago.
Hi,
Thank you.
I can re list this into the taxation category.
Any feedback in the mean time is gratefully received.
If you would like to discuss any further legal matter please do not hesitate to contact me.
Kind regards
AJ
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Customer: replied 2 years ago.

That would be great thanks,

Expert:  bigduckontax replied 2 years ago.

Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.

1. You should hold it as a creditor in your books of account and pay it when and if requested so to do by the foreighn entity.

2. After 6 years limitation applies and you can take it out of creditors and use it as income.

3. It counts as part of your sales income and would be subject to Income Tax in the normal way.

I do hope that I have been of assistance in solving your conundrum.

Customer: replied 2 years ago.

Hi Keith,

Thanks for the answer, I am still a bit confused though.

I would understand your answer if I ran a business, produced accounts and that was actually my sales income, but it's not, I only take a commission as an agent. The money never really belongs to me I only collect on behalf of the company, so they are not a creditor to me but to the customers I bring to them. On my previous self-assessment returns I have just submitted my commission as other income.

Are you suggesting that I now actually submit it as a business and treat it as sales income and a creditor? If I did it that way would it not then affect all the previous returns I have submitted. Also then would there not be other taxes I need to consider such as VAT, PAYE, NI etc. on the sales I have made previously and these outstanding ones?

My accountant seemed to suggest that this would be classed as a windfall but was not sure how or if taxation applies. The previous solicitors answers also seemed to share this view.

Any more thoughts?

Expert:  bigduckontax replied 2 years ago.

Firstly it has to be held somewhere in your books of account and creditors is as good as any other suspense account.

It might well be a windfall, but windfalls are still subject to taxation, so when you bring it to account at the end of the Statutory Limitation period it forms part of your profit.

I am so sorry to have to rain on your parade. Please be so kind as to rate me before you leave the Just Answer site.

Customer: replied 2 years ago.

Thanks Keith,

So what should I tell my accountant when preparing my self-assessment return, to hold it as a creditor and where?

Also could you point me to the relevant rules on the taxation of this as a windfall or other so I can inform my accountant also.

Expert:  bigduckontax replied 2 years ago.

Hold it in suspense until the Limitation Period expires. If you are asked for it then it is available for repayment.

There are no 'rules' for windfalls. They are income, but in some cases eg inheritances, pools or gambling wins, Premium Bonds payouts, gifts they are, of course, tax free.