ltd company and sole trader

[T'Mighty Tcake]

Hi all.

Ltd company was doing really well until we went into lockdown. One director, no employees, no assets and just me in the business.

As a director, I didn't qualify for any self employed grants etc, and was told that I could use the bounceback loan to pay myself, by my accountant, while the business was forced to cease trading during lockdown.

2021 my accountant told me that I had a higher than usual tax bill and explained that I had gone into an overdrawn directors loan which was subject to a 32 percent interest charge. I had no idea what this was, but he basically said that I took more from the business in dividends than had available in profits in the business, as the boumceback loan did not count as profit.

I did not take increased dividends than I did in previous years, nor was the loan used to buy cars, holidays etc.

since then I have been paying HMRC 200 per month as this is all the business can afford, but this has meant that I have not been able to pay 2022's tax bill and because I am unable to get out of this directors loan account with it's huge interest, every year the DLA will increase with no real way of clearing it.
As it stands, I owe 15k in corporation tax and my next tax return is being done now and my accountant said that there is another £12K to be added to the DLA. I have no idea how it is getting bigger when I take the same amount in dividends each month, but apparently it is because the tax debt is increasing each year leaving less money available to take dividends.

What I'm thinking is to reduce the ltd company, so that it only has enough to pay its debts and therefore stop any further corporation tax debs down the years and the DLA, and its 32 percent interest, becoming overdrawn even more. the way the debt will be chipped away at very slowly, but eventually to a point where it is manageable. In the meantime, I would operate as a sole trader. I don't know if this would be any sort of solution or not. The way I see it, I took the bounceback loan with every intention of paying it back and it is the DLA that is crippling me, as is becoming unmanageable and increasing every year.

I have looked at other alternatives, I cannot afford insolvency fees and have been advised by a business debt charity to strike off the company and they went into great detail about what would happen in terms of objections and what to expect. And if I did strike the company off, then I would need an income, so probably start again as a sole trader anyway (I don't think I would ever want to be a director again because of this DLA)

any thoughts would be welcome, as I'm really not sure what to do. Sorry for the long post!

 

[Lisa Thomas]

Hello

The issue here appears to be that the company is insolvent and you keep drawing it's money, treating it a little like a bank.

Those drawings are therefore effectively a loan by the company to you, which is why they are classed as an overdrawn directors loan account and are due to be repaid by you.

Are you in a position to repay some or all of your DLA (even in instalments?) as this may cover the cost of liquidation.

 

[T'Mighty Tcake]

Thanks so much for your reply.

I am drawing an income from the company - that's the reason why I started the company. I don't intend to use it as a bank, but its purpose really is to provide me with an income. I realise that it cannot continue, so this is why I'm looking at other options.

It would be good to know if I could just leave enough in the company each month to chip away at the DLA,. At the same time, I would operate a separate business in a sole trader capacity, while operating as a sole trader, so that I can draw an income from sole trader business.

the DLA can eventually be paid without the need for striking off or insolvency to the Ltd company. I would not grow the Ltd company any further and will not take any further dividends from it.

I have been advised against it for tax reasons as it would apparently mean that I would be paying more tax. Would I really be worse off?

 

[Lisa Thomas]

Yes you can leave the company open while you repay the debt in instalments, or alternatively liquidate and pay back what you can afford via the liquidator. You might be able to agree to write some of the debt off.

 

[Gill Courage]

It's a matter of you not understanding what you are doing.....your accountant said you can pay yourself. Yes, you can pay salary - but that requires a payroll to be set up and you pay through that. You can get almost £12,000 a year without needing to pay NI and the other advantage is that you get credit for your old age pension. That should always be the first line of pay before dividends. Payroll is an expense and comes out before profits are calculated.
Dividends can only be paid out of profits. If you have no profits, there are no dividends. So you didn't take a divi; you took a loan. HMRC do not like directors borrowing money from their company long term.

 

[T'Mighty Tcake]

It's a matter of you not understanding what you are doing.....your accountant said you can pay yourself. Yes, you can pay salary - but that requires a payroll to be set up and you pay through that. You can get almost £12,000 a year without needing to pay NI and the other advantage is that you get credit for your old age pension. That should always be the first line of pay before dividends. Payroll is an expense and comes out before profits are calculated.
Dividends can only be paid out of profits. If you have no profits, there are no dividends. So you didn't take a divi; you took a loan. HMRC do not like directors borrowing money from their company long term.

 

[Heyes]

A relevant point is that if the company owes 15k in corporation tax HMRC will object to strike-off and require an arrangement to pay if you want to proceed with strike-off.

Regarding your view of 'I don't think I would ever want to be a director again because of this DLA'... although that's understandable, the DLA isn't the source of the problem - it's a symptom of it (the problem being your earlier lack of awareness).

As you now have more knowledge, you should be able to use a DLA appropriately and benefit from the financial advantages thereof (plus the others available from operating through a company).

In an ideal world (one in which I'd have the charm and looks of Cary Grant and a life that wasn't a dumpster fire), we'd all seek and receive proactive advice from an appropriate accountant, and thus avoid various problems later.

I'm dismayed at how accountants are often thought of as book-keepers rather than strategic advisers. And I've also been dismayed by some accountants behaving like book-keepers rather than strategic advisers. Oh well. The question 'Is there anything of which I should be aware?' is used too infrequently.

 

[T'Mighty Tcake]

A relevant point is that if the company owes 15k in corporation tax HMRC will object to strike-off and require an arrangement to pay if you want to proceed with strike-off.

Regarding your view of 'I don't think I would ever want to be a director again because of this DLA'... although that's understandable, the DLA isn't the source of the problem - it's a symptom of it (the problem being your earlier lack of awareness).

As you now have more knowledge, you should be able to use a DLA appropriately and benefit from the financial advantages thereof (plus the others available from operating through a company).

In an ideal world (one in which I'd have the charm and looks of Cary Grant and a life that wasn't a dumpster fire), we'd all seek and receive proactive advice from an appropriate accountant, and thus avoid various problems later.

I'm dismayed at how accountants are often thought of as book-keepers rather than strategic advisers. And I've also been dismayed by some accountants behaving like book-keepers rather than strategic advisers. Oh well. The question 'Is there anything of which I should be aware?' is used too infrequently.

Thanks Heyes.

Yes, I was told by the Business `debt helpline that they would automatically object and then told me what to expect from there.

Yes, maybe it was lack of awareness. I was never in debt prior to the pandemic and ran the business well.

When we were locked down there was a total lack of income. When I received the bounceback loan I specifically emailed my accountant to ask if I could take the usual amount in Directors salary and Dividends and I was told that that was what it was there for. So I did. I really need to point out here, that I never took more than I had taken in previous years.

When I was told about the DLA after the first year's tax, following the pandemic, I was shocked as I had absolutely no idea that there was such a thing! My accountant didn't seem worried, and said that it would just be chipped away at over the years and to trade myself out of it, so of course that's what I did and carried on taking the same amount out of the business that I had always done. I've had two meetings with my accountant at my request, to see what I could do about this DLA and always told the same. I don't blame my accountant at all and I'm not slagging anyone off - it was an unprecedented situation and I relied on the bounceback loan as it's only me in the company and I needed an income, since I wasn't eligible for a self-employed grant or furlough.

So now I find myself in this situation with a DLA that's getting bigger each year, so that's the reason for asking the question about whether I could just keep the other company ticking over and start a new one so that the company with the DLA can just pay its debts over time and then the new company can trade without the worry of an increasing DLA. There would be no corporation tax, as no profit as its sole purpose will be to pay off its debts.

I'm trying to explore all options, so that I can make an informed decision. I'm not in a position to pay an insolvency practitioner and I'm not keen on the strike off, so really looking at other options.

Thank you, Hayes. I really appreciate your reply.

 

[Newchodge]

Thanks Heyes.

Yes, I was told by the Business `debt helpline that they would automatically object and then told me what to expect from there.

Yes, maybe it was lack of awareness. I was never in debt prior to the pandemic and ran the business well.

When we were locked down there was a total lack of income. When I received the bounceback loan I specifically emailed my accountant to ask if I could take the usual amount in Directors salary and Dividends and I was told that that was what it was there for. So I did. I really need to point out here, that I never took more than I had taken in previous years.

When I was told about the DLA after the first year's tax, following the pandemic, I was shocked as I had absolutely no idea that there was such a thing! My accountant didn't seem worried, and said that it would just be chipped away at over the years and to trade myself out of it, so of course that's what I did and carried on taking the same amount out of the business that I had always done. I've had two meetings with my accountant at my request, to see what I could do about this DLA and always told the same. I don't blame my accountant at all and I'm not slagging anyone off - it was an unprecedented situation and I relied on the bounceback loan as it's only me in the company and I needed an income, since I wasn't eligible for a self-employed grant or furlough.

So now I find myself in this situation with a DLA that's getting bigger each year, so that's the reason for asking the question about whether I could just keep the other company ticking over and start a new one so that the company with the DLA can just pay its debts over time and then the new company can trade without the worry of an increasing DLA. There would be no corporation tax, as no profit as its sole purpose will be to pay off its debts.

I'm trying to explore all options, so that I can make an informed decision. I'm not in a position to pay an insolvency practitioner and I'm not keen on the strike off, so really looking at other options.

Thank you, Hayes. I really appreciate your reply.

You should have been entitled to furlough if you had received a Director's salary.

Your accountant IS in the wrong if they advised you you could use the BBL for paying yourself dividends. Dividends can only be paid from retained profit. You could have paid yourself the same amount through payroll and not had any issues. Your accountant should have explained that.

 

[T'Mighty Tcake]

You should have been entitled to furlough if you had received a Director's salary.

Your accountant IS in the wrong if they advised you you could use the BBL for paying yourself dividends. Dividends can only be paid from retained profit. You could have paid yourself the same amount through payroll and not had any issues. Your accountant should have explained that.

You could have paid yourself the same amount through payroll and not had any issues. Your accountant should have explained that.

I wish I had known this. Honestly, this situation is such a mess.

 

[Lisa Thomas]

Thanks Heyes.

Yes, I was told by the Business `debt helpline that they would automatically object and then told me what to expect from there.

Yes, maybe it was lack of awareness. I was never in debt prior to the pandemic and ran the business well.

When we were locked down there was a total lack of income. When I received the bounceback loan I specifically emailed my accountant to ask if I could take the usual amount in Directors salary and Dividends and I was told that that was what it was there for. So I did. I really need to point out here, that I never took more than I had taken in previous years.

When I was told about the DLA after the first year's tax, following the pandemic, I was shocked as I had absolutely no idea that there was such a thing! My accountant didn't seem worried, and said that it would just be chipped away at over the years and to trade myself out of it, so of course that's what I did and carried on taking the same amount out of the business that I had always done. I've had two meetings with my accountant at my request, to see what I could do about this DLA and always told the same. I don't blame my accountant at all and I'm not slagging anyone off - it was an unprecedented situation and I relied on the bounceback loan as it's only me in the company and I needed an income, since I wasn't eligible for a self-employed grant or furlough.

So now I find myself in this situation with a DLA that's getting bigger each year, so that's the reason for asking the question about whether I could just keep the other company ticking over and start a new one so that the company with the DLA can just pay its debts over time and then the new company can trade without the worry of an increasing DLA. There would be no corporation tax, as no profit as its sole purpose will be to pay off its debts.

I'm trying to explore all options, so that I can make an informed decision. I'm not in a position to pay an insolvency practitioner and I'm not keen on the strike off, so really looking at other options.

Thank you, Hayes. I really appreciate your reply.

You have said several times that you cannot afford to pay an IP, but you can afford to repay some/all of the DLA in installments.

As I've said before if that's the case, it's possible those repayments can be used to liquidate the company and the liquidator can be paid from those repayments.

 

[T'Mighty Tcake]

I literally don't have £5000 to pay an insolvency practitioner. Yes I have said several times that I cannot afford an IP - this is the truth! I simply do not have the upfront funds! its a tiny company

I am only making token payments to HMRC, it will take a long time to clear, so this is why I am starting a new company to pay myself and no longer

As soon as I realised how bad the situation was I started looking into ways to resolve the situation.

 

[Heyes]

I don't have the knowledge to authoritatively address this, but the three issues seem to be 'tax due by the company' and 'tax due from you' and the DLA.

The company owes HMRC.
You owe HMRC.
You owe the company.

Without knowing the specific circumstances, including the company revenue/profit and the amount/rate you're withdrawing from the company through the DLA, plus the tax you owe from the director loan... I'm wondering whether the current DLA balance can be written-off by the company, with of course various tax consequences, leaving the company with a payment arrangement to HMRC and you also with a payment arrangement to HMRC. At least this way, the company will have a healthier balance sheet. Additionally, switching ongoing operations to a new company, as you've suggested, may be advantageous. I've seen mentioned on this site 'the spongebob plan' but that's beyond my ability to fully grasp.

There's an immediate and significant problem in that, as advised by Lisa Thomas, the company appears to be insolvent and you continue to draw from it. If the company does end, personal bankruptcy may be an option to consider - of course disqualifying you as a director and leaving you to operate as a sole trader.

Constructively... 'it's only money' and although a huge worry it's relatively easy to sort by discussion and agreement between debtor and creditor - from which all or most of what's owed eventually gets paid through an arrangement.

I suggest you get appropriate professional advice, part of which includes you saying 'Tell me what I need to know' and from which you become aware of the best route ahead - to sort what's happened and to act wisely (and legally) going forward - which, if the company continues, specifically includes knowing how much you can draw and the tax implications thereof.

Many of us screw-up in our lives, so that shouldn't be a source of shame. And to your considerable credit, you at least want to sort the situation rather than ignore it. (Me personally, I've often been the latter - stupidly ignore whatever I can and allow the situation to worsen.)

 

[Lisa Thomas]

I literally don't have £5000 to pay an insolvency practitioner. Yes I have said several times that I cannot afford an IP - this is the truth! I simply do not have the upfront funds! its a tiny company

I am only making token payments to HMRC, it will take a long time to clear, so this is why I am starting a new company to pay myself and no longer

As soon as I realised how bad the situation was I started looking into ways to resolve the situation.

I didn't say you had to find the funds upfront. I specifically said instalments.

 

[T'Mighty Tcake]

Sorry for the confusion, Lisa. I've been told by two Insolvency practitioners that I will need to pay the fee upfront.

This is why I cannot pay in instalments. It would take years to be able to save that amount. Therefore, I'm not looking to liquidate.

 

[Gyumri]

it is the DLA that is crippling me, as is becoming unmanageable and increasing every year.

That's because you're living by borrowing money from your company rather than generating sufficient profis that you could rightfully draw as a dividend.

In that situation it may be time to throw in the towel and incorporate another company and carry on trading leaving the debts of the old company as they stand. Somebody like the bank or HMRC may get around to winding up the company for you which would put you and the company out of your misery for the time being until the official receiver wakes up and smells the coffee and wants to act as a white knight for HMRC by pursuing you for the outstanding DLA (very unlikely).

Anyway that scenario might play out in around 18 months time if at all.

 

[Lisa Thomas]

Sorry for the confusion, Lisa. I've been told by two Insolvency practitioners that I will need to pay the fee upfront.

This is why I cannot pay in instalments. It would take years to be able to save that amount. Therefore, I'm not looking to liquidate.

Understood. That's why it's always worth getting a second opinion. Not all IP's are the same. Some can be more flexible.

 

[Daybooks]

Understood. That's why it's always worth getting a second opinion. Not all IP's are the same. Some can be more flexible.

Hopefully, however, all will ask what has happened to the £79k of taxable profits that gave rise to the £15k corporation tax bill and why funds were being withdrawn without due regard to the Company’s financial position and other creditors.

 

[T'Mighty Tcake]

There was no 79k. The business has never made that much, ever!

 

[Daybooks]

There was no 79k. The business has never made that much, ever!

Unless you are including the s455 charge then taxable profits (not accounting profit) of £79k at (assuming) 19% corporation tax rate is a bill of approx. £15k.

Your "huge interest" on the Director's Loan Account is likely to be the s455 charge - which would get paid back to you if you repay the DLA (and of course have paid it in the first place). It is designed to prevent directors withdrawing funds as loans in order to avoid amongst other things - PAYE etc.

This charge shouldn't stop you from being a director in the future - but it should serve to highlight why you need to understand your accounts and what they are telling you. Planning ahead is always the best thing when it comes to taxes. If you go back to your accountant and understand how and why things have happened you may get a better picture of how it can be resolved and possibly avoid it. Good luck and trust you get through it.