How likely is it a director of a dissolved company could be chased by HMRC for personal income tax?

[Oaktree]

Hi guys,
Going down the route of dissolving a limited company by applying for voluntary striking off. There's an overdrawn directors loan account, and I haven't yet submitted annual accounts which are 6 weeks overdue. All suppliers and customers orders / invoices have been paid, as on proforma.
My question is - IF I am fortunate enough to get the company dissolved without HMRC objecting - what are the chances of me being investigated for personal income tax. Would HMRC ask me for a tax return for the year or National insurance etc (used to be paid by dividend in the passed with a small minimum national insurance payment I think)??
Assuming no official receiver were ever appointed. Would HMRC class the overdrawn director loan money as income to be taxed. How would they know??
It seems pointless to use the spongbob plan if at the end of it I'm hit for personal income tax at a higher rate than corporatation tax, then I'm back were I started, in the S**t??
Any non judgmental advice welcomed?
One other question is could I convert a directors loan into a salary, for last year? If not any other accountancy tricks I could use, to help this crappy situation?

 

[UK Contractor Accountant]

HMRC are starting to get tough on Directors Loans which get written off when a company is dissolved.

In nornal circumstances employee Loan write offs are taxed as income requiring disclosure on your Tax Return.

What did you record the drawings from the company as? salary, dividends or loans.

How much are we talking about here?

 

[SteveHa]

You also need to recognise that you are NOT the company, and your personal tax affairs are handled distinctly and separately from the company's. As such, whether or not the company is struck off is irrelevant when considering what may may happen regarding your personal tax affairs.

If HMRC suspect that you have unreported and untaxed income (including a written off loan as mentioned by UK Contractor Accountant) then they may enquire and you could be hit for tax, interest and penalties. If HMRC determine that your actions were deliberate (which, if you choose not to come clean having asked the question and received your advice they would be) then they definitely will charge penalties.

 

[Lisa Thomas]

For practical purposes, I can''t see how you could retrospectively try and treat it as salary as it would have had to go through PAYE/NIC in real time.

 

[UK Contractor Accountant]

Stephen West V The Commissioners For Her Majesty's Revenue & Customs

Makes interesting reading!

 

[Gavin Bates]

Hi

Whilst I understand your comments above I think you have to look at this in practical terms;

1) I am assuming the Company has no assets and is insolvent so this is why you are looking at the strike off in the first place.
2) HMRC policy is to object to the strike off but sooner or later it will happen.
3) If you are unlucky then HMRC could go for a compulsory liquidation. This would bring into play any overdrawn directors loan account as an asset and you would have to decide how to deal with that.
4) You could consider the voluntary liquidation but you would want to understand how the liquidator would deal with the repayment of the loan account.
5) If HMRC don't liquidate the company but do look at the loan account position then you could be hit with a personal tax bill. I assume you may have an overdrawn position in previous accounts which may alert them? However remember the tax is always going to be less than the overdrawn directors loan account which could occur in either a compulsory or voluntary liquidation.
6) if all else fails you could then look at your personal insolvency options but this would be some time down the line (maybe years).

I hope the above helps.

Gavin

 

[Oaktree]

Thank you for your responses. There is no overdrawn directors loan accounts on the books from previous years.
It's just the last 18 months the position has dertiorated.
At a guesstimate I think the corporation tax for 2015 would be 19k and for this year 8k. The accounts for 2015 are now overdue. (Had one really good job in 2015, but none this year!)
If I took out a loan I could pay it, but if I don't land some decent contracts - I would be in an even worse financial position when 2016 accounts are due...
So to clarify no accounts have been submitted for 2015 nor 2016 yet. Companies house are chasing, threatening fines etc (although called them and they said once i submit accounts or close the company - apply for stricking off they will stop action (fine to be paid if accounts are submitted of £750 though..). Obviously to get the accounts drawn up and submitted is another cost....
But I'm just concerned I do this then HMRC either appoint a receiver, or they over guesstimate the tax owed. Or worse still treat the dividends (advised to take them by my accountant to keep tax down, which I agreed to), could be taxed at a higher salary level, rather than lower corporation tax level.
My vat is up to date, it's just the corporation tax...
What would you guys do in my position; i) take a chance on striking off, if the receiver is appoint get the accounts drawn up ASAP taken out a loan and try to pay it; OR ii) Take the risk of trading on and possibly be completely stuffed financially in October of next year..??

 

[SteveHa]

Based on what you've said, I'd say it's unlikely that HMRC will attack your personal Tax Return on the basis of what the company does or doesn't do, and provided that they have no other reason to enquire into your personal Return they should accept what you tell them regarding dividends.

Striking the company off without fuss may present more of a problem if HMRC believe that there is corporation tax outstanding, and they could block the strike off. As mentioned, if they do and move for liquidation, then the liquidator will likely want to do something about the O/D loan account. It's possible to negotiate with the liquidator, but their job at the end of the day is to have debts paid and liabilities settled as best they can.

Maybe give Lisa a ring (she often offers, I'm surprised she didn't when she responded on this thread). Insolvency is her field of expertise, not mind. I just stick to the tax stuff.

 

[Lisa Thomas]

Always happy to chat! 01752 786800.

 

[Newchodge]

Presumably you have received money from the limited company that you don't intend to declare on your self assessment? Or am I missing the point?

 

[Oaktree]

I usually take drawings, that are converted by the accountant into dividends. Then pay corporation tax on that. I'm struggling to pay what I think that will be. So if the company can be dissolved (without HMRC objecting and appointing a receiver), the hope is to get rid of this debt and mess. If I was to pay personal income tax on these drawings I would assume the amount owed to HMRC would increase, or at best be the same. So ideally declaring the income/ overdrawn directors loan would drop me in the poop, and put me back where I started.
Anyone know what proportion of companies that don't file annual accounts are allowed to be struck off without HMRC appointing an official receiver? Would anyone else take the risk..??

If they did appoint the official receiver, could I simply (at a cost draw up the accounts), and try to pay them. Or do they fine you, and add huge extra costs?
All I want to do is take the path of least risk and hassle, and minimise the risk of going personally bankrupt. The only asset I have is an oldcar worth 10k! But still...
The company holds no stock and only assets are 2 computers and a website.
Would the official receiver (if appointed) go through everything, and accuse me of fraud for taking too much by way of dividend? There would be a few grand left in the account, which the spongbob plan says to move into another account for safe keeping when the business account is frozen.
If I pay the corp tax id need a loan, and would probably run out of money early in the new year anyway. I want to do the right thing, but being in business is feeling like a constant gamble, hoping new business comes in living hand to mouth...
Just don't want to get into loads of trouble if receiver is appointed - then be told I can't offer the books up to try to pay the corp tax at the lower tax rates.

 

[Newchodge]

If the drawings you have taken are not converted into dividends, because the company has no profit on which to pay dividends, I believe that you have to declare that income on your self assessment return. If they are converted into dividends, I believe that dividends in excess of £5,000 are subject to income tax.

 

[UK Contractor Accountant]

if you have received a Notice to complete a 2016 Tax Return from HMRC or have a personal tax liability for the tax year you are obliged to file a completed Tax Return for the year SHOWING INCOME from all sources.

 

[UK Contractor Accountant]

I ? There would be a few grand left in the account, which the spongbob plan says to move into another account for safe keeping when the business account is frozen.

safe keeping from who? Its money due to HMRC so pay it to them.

 

[SteveHa]

I'll cover this again, because you don't seem to have absorbed it. YOU are NOT the COMPANY.

The liquidation/dissolution of the company, and any debts that go with that, does not change your personal obligations. When considering whether to object to strike off, HMRC will look only at the company. If it does object and appoints a liquidator, then the liquidator may seek to recover from you any sums drawn either against your DLA or as illegal dividends (don't panic by the use of the word illegal, it isn't something you will be prosecuted for unless you are the chairman of BHS). If the liquidator goes down this route, there may be room for negotiation with the liquidator over how much is repaid.

If HMRC (or anyone else) doesn't object then the company and its' debts go quietly away. It is possible for a creditor to have the company reinstated, but unless we are talking about a significant sum it's unlikely that they would bother.

None of this affects your tax position personally. If you have received a notice to file a Return (or, indeed, if you have income not taxed at source and giving rise to a tax liability) then you have an obligation to make a Return to HMRC. A Tax Return is not discretionary, and must include all of your assessable income. If you omit any and HMRC get wind of it, best case scenario is they will undertake an open and shut enquiry, and you pay additional tax and interest. Worst case is they claim it was deliberate and concealed, they assess the extra tax, and then charge as much again in penalties, and they still slap the interest on top. You've flagged yourself up to HMRC and they may examine your tax affairs in more detail year after year.

 

[UK Contractor Accountant]

He is asking (shortened version) - if dissolved/strike off happens does the DLA get written off or merely just passes to the Crown with any other assets Bona Vacantia.

Debt write off is INCOME subject to personal tax

 

[Don Smith]

He is asking (shortened version) - if dissolved/strike off happens does the DLA get written off or merely just passes to the Crown with any other assets Bona Vacantia.

Debt write off is INCOME subject to personal tax

That's how I read it as well, he's trying to avoid declaring the income already taken via the DLA. Naighty boy.

 

[Oaktree]

I do understand that I am not the company and the company isn't me.
I am the sole director of the company but there are 2 other shareholders (family).
The account uses all of our tax allowances (as I understand it), but it appears that we pay the majority of tax via corporation tax each year. Not sure of the exact accounting method. But we are advised to take drawings that get converted into dividends each year in this process.
If this way of getting paid means we pay less tax I am generally happy with this.
Where it gets more complicated is in the situation I find myself in now ie - not enough funds to pay the project corporation tax bill.
I think the accountant puts a minimal amount through national insurance etc...
Clearly if I had the money to simply pay the projected corp tax/personal income tax (however the accountant works it) I would pay it now! I wouldn't be worried sick reading up on this stuff until 4am.
I'm not try to be 'a naughty boy' as someone put it. But I clearly need to understand if the overdrawn directors loan account, could be chased as personal income?!
I assumed from the spongbob plan - there is a possibility the whole overdrawn directors loan account could be written off. But clearly if I'm then chased for a personal income tax return, which I haven't been, only a reminder to submit a corporation tax return. Then I assume that tax would amount to be the same as the corp tax bill...this is where I'm confused.
When I say if the company is dissolved there might be 2-3k left in the account, I would put it into another account. So it can be paid over subject to an official receiver being appointed, NOT spent on myself! If I submit the accounts as is ( subject to another 1k + more work on them by the accountant) HMRC will clearly chase for all monies owed approx 19k - so that's why simply giving that 2-3k over without the full accounts isn't a great option.
I'm not trying to pull as fast one, I'm simply trying to not to go personally bankrupt, in which case no one gets anything, and get through this with my sanity intact.
One option suggested to me is to submit the accounts to companies house and HMRC and ask HMRC for time to pay...this could be an option, but it could sink me personally financially.

 

[Ian J]

Assuming no official receiver were ever appointed. Would HMRC class the overdrawn director loan money as income to be taxed. How would they know??

If your income from salary and dividends suddenly dropped significantly HMRC might decide that it's time to pay closer attention to your tax affairs and may well ask you to provide them with bank statements to prove your lack of income

 

[Oaktree]

Hi Ian,
But then how does the spongbob plan work then, as most people using it have an overdrawn directors loan account! Do people using the spongbob plan than pay the personal income tax on the illegal dividends??

 

[UK Contractor Accountant]

It only worked because there was no personal tax due on the dividend up to the basic rate tax limit each tax year- approx £42k income limit.

From 6 April 16 HMRC clamped down on this making all dividends/distributions taxable after the first £5K.

 

[Ian J]

It only worked because there was no personal tax due on the dividend up to the basic rate tax limit each tax year- approx £42k income limit.

Surely if HMRC have seen an annual income of (say) £40,000 by way of salary and dividends and the following year one tries to kid them that they haven't had any income at all they will become just a tad suspicious

 

[Newchodge]

OP you are still confusing the limited company with yourself and, apparently your shareholders.

Your limited company has income and expenditure. the expenditure includes employee salaries. After income and expenses are calculated, the company will, or will not, have a profit. That profit may be paid to shareholders as a dividend. If the limited company is insolvent it will go under and debts owed will die with it. Unless there has been improper removal of funds from the company, via payment of dividends when there were no profits, or drawings by a Director, leading to an overdrawn DLA, the company will be struck off and it and its debts will vanish.

You as an individual has received sums of money from the company. Some will have been salary, from which tax and NI will have been deducted and paid to HMRC. If you received any other income from the company you should be declaring it on your self assessment return and will be liable to pay tax on it.

Whatever your accountant has been doing with the company accounts, 'using all your family tax allowance' is not what happens. Have you considered talking to your accountant?

 

[Newchodge]

The account uses all of our tax allowances (as I understand it), but it appears that we pay the majority of tax via corporation tax each year. Not sure of the exact accounting method. But we are advised to take drawings that get converted into dividends each year in this process.

Your limited company cannot 'use all of our tax allowance'. Neither can 'we' meaning individuals pay the majority of tax via corporation tax. The company is liable for corporation tax, each of you is individually liable for personal income tax.

 

[Oaktree]

Where's Spongbob when you need him??
Surely, there are plenty of companies closing with overdrawn directors loans accounts, are we honestly saying all these offer up these liabilities in personal income tax at a point in their lives when they have no money to pay tax in the first place??

 

[Scalloway]

There is a lengthy article on overdrawn director's loan accounts here from a recognised expert on tax.

http://www.rossmartin.co.uk/companies/checklists/489-directors-loan-account-toolkit


In particular this may be relevant

Write off or release of an overdrawn director’s loan

When a close company writes off or releases a loan made to a director:

a) who is a participator, the amount released is treated as a distribution

 

[Oaktree]

Look, it's perfectly legal to have family members working for a company as shareholders, paid via dividends, out of profits from a company. Whilst at the end of the year the accountant does a personal tax return. Also corporation tax is paid in full. Done the same with this chartered accountant for 15 years perfectly legally. This isn't the issue.

The issue I'm struggling with is this period where business has dropped substantially over 1 year, and the shareholders including myself now have overdrawn directors loans accounts, and will struggle to pay the corporation tax. If that can't be paid and IF the spongbob plan doesn't work now because any overdrawn directors loan account over 5k will be now since April of this year be assessed for personal income tax (as it was an income!).

Really what I'm looking for and I'm sure others in my position is practicle help, what laws can essentially be bent without breaking, and any obvious loop we can use, to move past this crappy phase in our lives.

I get people get annoyed at others appearing to simply avoid taxes. But if it's a choice between, bending the rules or going personally bankrupt (where nobody gets anything anyway!) then I'd prefer to look for spongbob practicle advise rather than puritanical moralising, and sneering comments.

It's easy to knock those that have had the balls, and you do need balls to set up your own company and trade for 17 years. With zero help from anyone and certain no silver spoon the mouth. But markets change, customers from certain countries hits recessions, but when you have two very small children to feed, you can't simply stop taking money from your business to live frugally on! You hope things will pick up, you bust your balls trying to win business, you have countless sleepless nights. I don't want sympathy - I would just some people to empathise. If it weren't for businessman and women like me there'd be no bloody jobs or economic growth. So cut us some slack!!

 

[Newchodge]

Look, it's perfectly legal to have family members working for a company as shareholders, paid via dividends, out of profits from a company. Whilst at the end of the year the accountant does a personal tax return. Also corporation tax is paid in full. Done the same with this chartered accountant for 15 years perfectly legally. This isn't the issue.

It is perfectly legal to have family members working for a company.

It is perfectly legal to have family members as shareholders, who receive dividends out of company profits.

The fact that the accountant does a personal tax return at the end of the year is perfectly valid and completely irrelevant.

Why haven't you asked your accountant?

 

[Don Smith]

Where's Spongbob when you need him??

Hopefully the thieving git has been brought to justice and is doing time.

He's not someone to admire, and has been pointed out his dubious "advice" is out of date anyway. Why the hell this forum is promoting him, by the way if making his "plan" a sticky, is a mystery.

 

[Oaktree]

Don - I'd say the Spongbob is one of the few posting on here, with meaningful, real world advise!
As opposed to comments like yours that are judgmental.
You appear to think the tax side steppers likes of Google, Amazon, Starbucks, and Snakes like Philip Green, are using the spongbob plan....well they aren't. They are using expensive 'legal' tax avoidance tricks - which is where your anger should be being directed.
People on here using the spongbob plan owe probably on average 5-30k and are trying not to lose what little possessions they have left in the world after playing a straightbat regarding tax etc for year upon year. Often people on here using the spongbob plan are in fact victims of the banksters, and dodgy politician enduced ression, and crappy low growth economy, or worst still, the victims of multinationals like Amazon undercutting the high street as they don't have to pay VAT!!
Then what happens is jo average businessman is hung drawn and quartered - as easy to get low hanging fruit when their companies fail. It's utterly shameful!
So I'd say give Spongbob a medal, his plan might need some adapting regarding person tax, on overdrawn directors loans, but he's one of the few as far as I can see who actually try's to help!
Rant over.

 

[Don Smith]

Oaktree, you need to read Spongeblobs other threads to get a full picture. Try the one where he takes the wife on holiday instead of paying his CT, or the many posts where he says it's ok to phoenix and lose other people's money "because that what a Ltd company is for".

The problem is, if you owe HMRC is because you've made a profit and spent money that was never your's in the first place (CT, personal tax & class 4's are only payable if there is a profit made, VAT at no point is the company's money). It's difficult to be sympathetic. This is where we now get the sob stories about "personal issues we know nothing about", or how "the money was spent trying to keep the business afloat". The real truth is all about bad financial management and burying heads in the sand, or in some cases a lack of morals and gambling with other people's money in the name of "business". Then there are the downright criminals, who feature on programs like Watchdog who just screw customers over, ignore HMRC altogether and serial phoenix.

I never mentioned multinationals, but many people who owe HMRC use the likes of Amazon as their defence. Not sure why, unless you don't know the difference between tax evasion and tax avoidance.

 

[Lisa Thomas]

If you manage to get the Company struck off and dissolved the DLA/illegal dividends will not be called in as there will be no-one to call them in (on assumption Co not reinstated in next 20 years and Lqr appointed to investigate, which is unlikely).

That will leave you with just personal tax to pay on the drawings, meaning you get off lightly and have managed to 'bend the rules' as you put it sufficiently to avoid having to repay the funds you took from the Co.

Of course you can always not disclose the income drawn since the last filed accounts and perhaps no-one will be any the wiser and you will get away with it but I can't advise that and personally wouldn't recommend taking the risk.

 

[Oaktree]

Don - I'm sure Spongbob is being sarcastic when he talks about taking his wife on holiday, and he went through (from what I've read all this years ago), so these comments aren't current.

I don't owe any suppliers or customers any money, I pay pro-forma to avoid these very issues. However, a Ltd company should mean limited liability if a company becomes insolvent, it should offer those few brave individuals that risk everything to start up a company, employ people and massively help the economy some protection IF and when they hit hard times.

Yes, you are completely right in saying money should only be taken out of the business based on profits made after an allocation is made for corp tax and personal tax. Most people do this, BUT once you have invested years of your life into setting up a business, building relationships with suppliers and customers, not to mention having fixed costs such as advertising, staff cost , accounting fees, rent, not to mention the dividends / salary to pay a directors'a rent or mortgage, food to pay for to feed your kids etc etc. Simply stopping after a quiet couple of months (which we all have), isn't realistic. You aren't living in the real world with respect.

Most people in business are a little maverick (they'd take a safe modestly paid 9-5 if they weren't), but also they quote for new business free of charge , bust their balls and work excessive hours to correct those poor positions after a quiet few months. Normally this works and the book balance!

What is nearly impossible to predict during recessions, or economic uncertainty is the level that customers will stop spending, and the very quick drop in trade. With big fixed costs you can easily rack up an overdrawn directors loan account of 5-15K in a few months.

So what do you say to those people, that take minimal salary and dividends (dividends is basically a salary) that have hit this quick sudden down turn in business? Tough, pay up, or we will make you and your family homeless, bully you with aggressive bailiff action? Or do you show a little compassion, and common sense, and write it off. After all HMRC will still receive nothing if they force that businessman into personal bankruptcy!

Yes, I'm sure there are a few smart arses small business men and women that avoid tax. But most of these avoidance by taking cash in hand, and they don't invoice or account for it - we all seen/met them!

Materially the difference been 'legal tax avoidance' the multinational use v's small business people trying to write off small amounts of tax 'illegally' is capital. The multinationals can position themselves (due to their wealth) in tax free countries, yet still sell to the UK. The multinationals like Starbucks make huge profits in the U.K. Yet off set these against other start up costs in places like China. Morally the spongbob plan is helping those in dire straights whereas the multinational tax avoidance (is down to damn right greed, they could pay if they wanted to, but don't! They get away with it simply business of their size and money. So, yes I can see why many with nothing, that have seen their markets dwindle are angry, and use the moral case that tax avoidance v's evasion nothing more than a get out of jail free card for the fat cats.

 

[SteveHa]

So you are basically advocating doing something that you admit is illegal because you can't afford to do something that is legal?

Or, you are asking the rest of the honest taxpayers to bail you out because your business failed?

 

[Newchodge]

Limited company protection exists for all the reasons you have set out, Oaktree. You, however, want to take it one step further - close the company because it is insolvent, leaving debts that do not have to be met, whether to HMRC or to suppliers is irrelevant, which is limited company protection, even though you have taken money from the company to which you are not entitled, which happens for the reasons you mention, AND not pay any tax on the income you have taken. It is that last step that is completely illegal, and for which there are no legal get outs.

 

[Oaktree]

SteLacca - the alternative is going personally bankrupt which is legal. The end result to HMRC is net gain would be exactly the same. I think the Spongbob route could well be a short cut.
By the way, businesses such as mine, have massively over contributed over the years in tax collection for HMRC, I wouldn't be bailed out by the tax pay, by going down this route, simply be not chased for money I haven't got!
The empathy on this forum is second to none...

 

[Oaktree]

Newchodge - if I had paid paye, or real time tax then defaulted (between the 3 shareholders) all doing this, the debt would be written off as a salary, anyway. You say it's illegal, you might be correct, but the difference between dividends and salaries that leave the company short of funds to meet it's tax obligations are surely slim.

 

[Newchodge]

Newchodge - if I had paid paye, or real time tax then defaulted (between the 3 shareholders) all doing this, the debt would be written off as a salary, anyway. You say it's illegal, you might be correct, but the difference between dividends and salaries that leave the company short of funds to meet it's tax obligations are surely slim.

But you didn't. Also, if you had paid this as salary, you personally would have received the amount less tax. The difference is in what you personally receive.

 

[UK Contractor Accountant]

Also, if you had paid this as salary, you personally would have received the amount less tax.

and NI, don't forget the NI.

Time to blame the Accountant again for that small salary and large dividend combo!

 

[SteveHa]

The empathy on this forum is second to none...

It's not a lack of sympathy for your situation, but rather for your solution, which is to evade tax. You have not "over contributed" in previous years, you have paid what was legally due. We could have the arguments over whether or not the rates have been set correctly by government all day, but it doesn't alter the fact that all you have paid is what was required to be paid. So have I, but I don't expect that to mitigate payments in the future.

Your other option is to be honest, make a complete Return to HMRC, and then come to an arrangement for payment of any resultant tax, though you appear to be rejecting this out of hand. Is it, therefore, any wonder that you are getting the response that you are?