Spongebob & DLA

redsjd · Aug 20, 2019

Hi,

I’m hoping for some advice on the best approach for my situation.

I have been operating a Ltd company since 2016 as an IT consultant, and have always kept on top of my taxes. However, due to challenging family circumstances and early termination of my contract, I’m faced with a mountain of commitments and no ability to pay.

I’ve just received the draft statutory accounts from my accountant for the period to 30/6/2019 which shows Corporate Tax of £23k owing. This includes s455 tax of £6k due to a Director’s Loan Account of £19k.

I was aware that I was incurring a Director’s Loan debt, which I intended to repay over the second half of the year. However, my contract was terminated early by the company I was working for. After a period of unemployment I have recently accepted a role as a PAYE employee.

I have no ability to pay the Corporate Tax, as I now have no disposable income with my current role. I have no company assets (other than the DLA). I have no intention of operating a Ltd company again. I can’t afford an IP.

I have read about the Spongebob plan on the forum, but looks like the DLA will be a problem. As the accountant hasn’t yet filed my returns, is it worth attempting to go down the Spongbob route given HRMC would have no knowledge of the DLA?

Any advice would be greatly appreciated!

Lisa Thomas · Aug 20, 2019

What personal assets do you own?

Mr D · Aug 20, 2019

You could go down the spongebob route. Then on your tax return declare the DLA as untaxed income.
If HMRC decide to wind the company up the DLA would be an asset of the company that would be looked at recovering.

redsjd · Aug 20, 2019

Lisa Thomas said:
What personal assets do you own?

I have a car and some personal belongings, but not enough to cover the Directors Loan. I’m going through a divorce currently so it’s not clear how the little equity we have in our house will be split. I’m pretty sure my share of the equity would not be sufficient

redsjd · Aug 20, 2019

Mr D said:
You could go down the spongebob route. Then on your tax return declare the DLA as untaxed income.
If HMRC decide to wind the company up the DLA would be an asset of the company that would be looked at recovering.

Thanks Mr D. I thought I read on one of the forums that HRMC may not pursue recovery of the DLA if accounts haven’t been submitted. If recovery is sought I just have no way of repaying over a reasonable timeframe

Gavin Bates · Aug 20, 2019

Hi

As you will have seen given your personal circumstances it may be that the Spongebob plan is the only way forward.

Yes, it is possible that HMRC may liquidate the Company and then you may be chased for the DLA and any illegal dividends you have received. You are required to declare the DLA on your personal tax return whether you submit accounts or not and this will lead to a personal tax debt.

Regards

Gavin

redsjd · Aug 20, 2019

Gavin Bates said:
Hi

As you will have seen given your personal circumstances it may be that the Spongebob plan is the only way forward.

Yes, it is possible that HMRC may liquidate the Company and then you may be chased for the DLA and any illegal dividends you have received. You are required to declare the DLA on your personal tax return whether you submit accounts or not and this will lead to a personal tax debt.

Regards

Gavin

Thanks for that Gavin. I do have a personal tax debt from the dividends I received/ declared. Are you saying that if I declare the DLA on my personal tax return I will need to pay tax on the DLA as well as potentially having HRMC seeking recovery?

Gavin Bates · Aug 20, 2019

Hi

You will only be pursued for the DLA if a liquidator is appointed. Obviously, by declaring the DLA (which is in effect untaxed income) on your tax return you will be taxed on it.

Regards

Gavin

redsjd · Aug 20, 2019

Gavin Bates said:
Hi

You will only be pursued for the DLA if a liquidator is appointed. Obviously, by declaring the DLA (which is in effect untaxed income) on your tax return you will be taxed on it.

Regards

Gavin

Got it, thanks Gavin!

Mr D · Aug 20, 2019

redsjd said:
Thanks for that Gavin. I do have a personal tax debt from the dividends I received/ declared. Are you saying that if I declare the DLA on my personal tax return I will need to pay tax on the DLA as well as potentially having HRMC seeking recovery?

If you don't declare it on your tax return and its not paid back then are you committing tax evasion?

redsjd · Aug 20, 2019

Mr D said:
If you don't declare it on your tax return and its not paid back then are you committing tax evasion?

I’ll discuss this with my accountant. If I’m required to declare the DL on my tax return I’ll do so

UK Contractor Accountant · Aug 20, 2019

redsjd said:
Are you saying that if I declare the DLA on my personal tax return I will need to pay tax on the DLA as well as potentially having HRMC seeking recovery?

you only declare on your tax return when it is wrritten off or becomes irrecoveable.

Irrecoverable - company is dissolved or liquidator/IP waives right to collection.

Lisa Thomas · Aug 20, 2019

redsjd said:
I have a car and some personal belongings, but not enough to cover the Directors Loan. I’m going through a divorce currently so it’s not clear how the little equity we have in our house will be split. I’m pretty sure my share of the equity would not be sufficient

How much is the 'little equity'?

Is your wife buying your interest as part of the divorce or vice versa?

You might be able to use these proceeds to settle the DLA and write off any balance that can't be repaid.

You might wish to take personal insolvency advice on what options are open to you.

redsjd · Sep 6, 2019

Gavin Bates said:
Hi

As you will have seen given your personal circumstances it may be that the Spongebob plan is the only way forward.

Yes, it is possible that HMRC may liquidate the Company and then you may be chased for the DLA and any illegal dividends you have received. You are required to declare the DLA on your personal tax return whether you submit accounts or not and this will lead to a personal tax debt.

Regards

Gavin

Hi Gavin,

I’m hoping you can clarify something for me.

If I go the Spongebob should I still submit my accounts? My accountant has prepared my accounts for submission but I have asked them to hold off until I decide the best course of action. I have written to HMRC to advise them of insolvency but am yet to submit the DS01. How will HMRC know what my liability is to them if I have not submitted accounts? Will they contact my accountant for this information?

Any advice you can provide would be appreciated.

benjy365 · Sep 30, 2019

UK Contractor Accountant said:
you only declare on your tax return when it is wrritten off or becomes irrecoveable.

Irrecoverable - company is dissolved or liquidator/IP waives right to collection.

If you were to declare the amount on a self assessment return and then pay the tax on it would that prevent having to pay back the overdrawn DLA as part of insolvency or is it too late by then?

The issue that I have is that our accounts prepared by the accountant have my DLA showing as £3.9k. Our IP agreed not to pursue our DLA's as part of the process but seems to be changing his mind. Is it possible to now say that was salary and not dividend and that I have paid all my taxes on it?

I assume the answer is no but thought that I would ask.

Lisa Thomas · Oct 1, 2019

No due to RTI - the taxes should have been deducted at the time so you cannot retrospectively try and change the position to suit you.

Lisa Thomas · Oct 1, 2019

Some unscrupulous IP's will verbally agree a deal on a DLA to try and win the instruction and then change their stance post appointment - it is vital to get any agreements in writing from the IP pre appointment.

Catering Man · Oct 1, 2019

Lisa Thomas said:
No due to RTI - the taxes should have been deducted at the time so you cannot retrospectively try and change the position to suit you.

Surely not all income is declared via RTI? That’s what a self assessment tax return is for isn’t it?

SteveHa · Oct 1, 2019

Catering Man said:
Surely not all income is declared via RTI? That’s what a self assessment tax return is for isn’t it?

All income that is income from employment is declared via RTI.

Where a DLA is released or written off it isn't income from employment, it's a distribution. There is no retrospectively changing its nature in this process. It becomes a distribution at the point of release/write off. Until then, it's a DLA.

London Life · Oct 1, 2019

Can you pay yourself a consultancy fee that is not income from employment - then declare this on self assessment?

Scalloway · Oct 1, 2019

No. All payments made to you must go through PAYE unless they are dividends.

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Spongebob & DLA