Backdating Transactions After The Event
This article Backdating Transactions looks to highlight a number of matters, including but not limited to the suggestion that it is unlikely to be permissible to vary the substance of transactions after the event.
This article looks at the issue of backdating transactions generally and then cherry-picks a factual case involving unlawful dividends to demonstrate the uncertainty surrounding such transactions.
Backdating Transactions After The Event
Backdating transactions after the event might be referred to in the alternative as follows:
- varying transactions after the event
- an after the event construction
This article is closely linked to another post Can You Backdate Your Salary? which is based on another Court case. In both cases, the overwhelming position is that you cannot backdate dividends and you cannot backdate salary. This is so important because what this is saying is that you cannot at a later date change your position on why a transaction took place. You know why it took place at the time ie. its PURPOSE. Changes in circumstances after the transactions have been completed cannot then be used to say that the purpose has changed.
WHY? Well, because it has already happened and been completed. Therefore the explanation must be the one as to why it was done AT THE TIME.
How Does Backdating Transactions Cause Problems?
Where people can get themselves into a bit of mess in such matters is that there will often be records and also there will often be cases where there may be no records as well but if there is an explanation as to why a transaction took place then changing the story afterward does not look good. It really does not look good if records exist and say for example only, have been filed with HMRC such as with Real Time Information for company payroll, if someone then tries to argue that a payment was something other than salary when it has already been declared as such.
This is the fundamental problem with backdating ie. a person’s credibility and believability can be called into question. In more extreme cases it CAN be considered fraud when documents are amended and changed.
A Mistake Can Be Potentially Cured Without Backdating Transactions
However, a mistake can always happen and there may well be no problem with that provided there are not so many mistakes that competence is an issue. However, to demonstrate the point, for example, if you make a mistake on a VAT return that has been filed with HMRC then you need to correct it in the next VAT return or file a correction form with HMRC. What you cannot do (and HMRC’s processes do not allow this either), is amend the historic VAT return and then use the backdated one as if it was the true one.
Global v Hale Unlawful Dividend Case
Consider the following two paragraphs from the case of Global Corporate Ltd v Hale  EWCA Civ 2618. What is so useful about this judgment is that it highlights that once a transaction has taken place err it has taken place and the fact that it should not (perhaps) have taken place does not change that factual reality. However, the point that is so important is that if a transaction should not have taken place then whilst there may be limited options available, one of those options is NOT to attempt an after the event reconstruction of what did in fact already happen. In fact to attempt a reconstruction could make the problem even worse.
This judgment demonstrates from the following extracts in a real case certain issues involving varying transactions after the event and how a Court viewed the matter:
Whatever may be the legalities of such a process…
22. I have two difficulties with this analysis. The first is an evidential one. Although under examination by the judge Mr Hale did accept in the passages quoted above that the decision to declare the dividends was not, in the judge’s words, definitive, when one looks at this in the context of his evidence as a whole this means no more than that it was open to the accountants to recommend and arrange a different treatment for the payments if it subsequently transpired that they could not lawfully be paid as dividends. Whatever may be the legalities of such a process it does not mean that the payments, when made, were not declared as dividends or, as the judge put it, were not declared definitively or at all. On the contrary, the payments were expressly declared by the directors as interim dividends; were declared to HMRC as such; and were taxed accordingly. Their payment therefore had real legal consequences. In some previous years the accountants had advised that the dividend payments be treated as salary but, in relation to the payments we are concerned with, that never happened. The accountants, according to their letter, believed that the payments were lawful, and no steps were taken to adjust the arrangements retrospectively before the Company went into liquidation.
That cannot cure the illegality of the original payment.
23. My second difficulty with the judge’s analysis is that the payments were clearly distributions within the meaning of s.830 CA 2006 when they were made and that is the time when their legality must be tested. There was no evidence that Mr Hale and his co-director had service contracts to which these particular payments were attributable and they clearly chose to pay and receive the money to themselves as shareholders and not as remuneration for past services which would have been taxable as income under Schedule E. At the point of payment the monies were therefore gratuitous distributions from the Company’s assets which had the effect of increasing the deficit on its balance sheet. Section 830 is directed to distributions as and when they are made (“may only make”) and it is immaterial that a subsequent realisation that the distributions should not have been made would prompt their being treated as remuneration. That cannot cure the illegality of the original payment. The most it can do is to allow the monies to be notionally repaid and then re-applied in a way which does not contravene the provisions of s.830 and is otherwise a lawful application of the assets of the Company.
When Does Backdating Transactions Get Discovered?
Backdating transactions will typically be discovered in one of two instances:
- When a company goes into Liquidation and its affairs are investigated by a Liquidator.
- When HMRC interrogates transactions as part of a review of a company’s tax affairs.
In a great many instances such investigations by either a Liquidator or HMRC will involve a review of transactions that appear in an Overdrawn Directors Loan Account and or connected company transactions such as management charges.
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