Corporation tax arrears - can't pay

[Davo1]

I am new to this site and would very much appreciate advice on my corporation tax arrears.

April 2011 was the second year in a row where I did not have the funds to pay my corporation tax of about £7000. They agreed to monthly instalments but now I can’t pay my instalment at the end of this month and may not make it for next month either. It is a relatively small amount but I haven’t had contracts and can’t even pay personal credit cards etc.

I did contact HMRC and explained my situation where I was told that it has been noted and they will get hold of me at a later date.

I am Ltd Co. selling my labour off shore, turnover between 45-70 k, a strong possibility of work picking up again soon but having sleepless nights.

What are they more than likely to do? If worst comes to the worst how long before they come knocking on my door?

 

[TotallySport]

I am new to this site and would very much appreciate advice on my corporation tax arrears.

April 2011 was the second year in a row where I did not have the funds to pay my corporation tax of about £7000. They agreed to monthly instalments but now I can’t pay my instalment at the end of this month and may not make it for next month either. It is a relatively small amount but I haven’t had contracts and can’t even pay personal credit cards etc.

I did contact HMRC and explained my situation where I was told that it has been noted and they will get hold of me at a later date.

I am Ltd Co. selling my labour off shore, turnover between 45-70 k, a strong possibility of work picking up again soon but having sleepless nights.

What are they more than likely to do? If worst comes to the worst how long before they come knocking on my door?

This might be a silly question but do you have an accountant?

 

[Davo1]

Yes I do have an accountant.

 

[TotallySport]

Yes I do have an accountant.

I have little experience in other businesses but 7K in Corperation Tax on a 70K a year turn over seems alot.

What does he say?

I am sure someone with more experience will be along tomorrow.

 

[Davo1]

Thank you for the reply.
Salary drawn is 20k, expenses about 3k (only claim taxis to the airport, public liability insurance, tools and work clothes) and the rest in dividends and directors loans. Because of my personal debts there is often not much left in my business account. Not the best way to work but seems my only choice at the moment.

 

[DarrenTSO]

So you already spent the money you had in before setting aside some for tax etc?

 

[Smallbusinessman]

The situation as stated is a bit complicated.

However, in general terms, you are an employee, director and shareholder of a limited company. The corporation tax is a liability of the limited company. Your liability as a shareholder is limited to any amounts unpaid on issued share capital. I doubt whether anybody will knock on your door for CT issues. You must argue that you have acted in good faith but the company has fallen on hard times. I suggest that you keep acting in good faith and promise (as a director) to pay the CT when cash flow permits.

However, there will be income tax implications for you on the dividends and the drawings might count as a distribution. Possibly another contributor can advise further. Just keep the channels of communication open. As regards any personal IT liability, if they lose patience, make sure that you sell your car and buy a very cheap one as they have been known to seize a debtor's car if it is worth more than a thousand pounds or so. If you go to a meeting with them, don't take your car or let them see your car registration or they will check the MOT status on the internet and value your car for auction before they seize it.

In future, to help you manage your money, pay yourself a salary and pay over the NI and PAYE every month.

 

[Davo1]

I don't feel so alone on this now....much appreciated.

I do actually pay tax and national insurance on 20k per annum every quarter although due to my large personal debts I usually have my business account drawn to the max. Because of this, as I have been led to believe, my dividends are too high so to compensate I get directors loans.Not too sure how that works yet but what has kept me awake at night is wondering how the HMRC are going to react.....I do feel a lot easier about that now though.

 

[Smallbusinessman]

Try to be more precise in your use of terminology as it will make it easier for people to help you.

Eg "business account drawn to the max" is very unclear - do you mean that your business bank current is either £0 or overdrawn to the limit"?

Keep reading the other posts here and go back over previous posts. I assume that you want to keep the company going and not let it go into administration / be struck off.

Everything that I said about cars is true - this was done to a person I have known for 15 years who fell on hard times - sole trader - sales slumped - they took his car and auctioned it off for 'buttons'. Then he bought a £1K car with some more sales revenues and told them at the next meeting so they left it alone as it wasn't worth anything.

Director's loans are a minefield - read up on them - they will probably count as a distribution (i.e.a dividend) at the tax year end.

Keep chipping away at the personal tax liabilities whenever you can.

 

[Davo1]

Yes, there is usually 0 left in my business account and I certainly want to keep my Ltd Co going.

I think that is very good advice about the car.

 

[Smallbusinessman]

Just in case they do send round bailiffs, read up on what to do if bailiffs arrive at your door. There are certain things that you should and shouldn't do in that situation. Don't assume anything. Read up on it.

The obvious step that they will take is to seize your car so be very careful and remember what I said. Don't take your car to a meeting with them. If they get awkward, sell it before they seize it - at least then you will obtain the full value of the car to give to them without it being sold for 'peanuts' less bailiff's fees.

 

[Dazz12]

I have had experience of a number of my clients having difficulty paying the Corporation Tax. The best advice is to keep in regular contact with HMRC (at least every month) and try to speak to the same person who is dealing with your case, letting them know the present situation. This will show them you are not burying your head in the sand.

It is a problem when a payment agreement is not met, they do take some persuading to give you more time, but it is not impossible. As I said before, keep in contact and let them know what you are going to pay at the end of the month and if you do give a figure make sure you know you can pay it and make sure you do pay that amount. It is unlikely they will go into a new payment schedule, but if you get a sympathetic person dealing with the case they will see you are trying and keeping your promises and as the debt is being paid (however slowly), they may give you the time. It is not certain as once the payment agreement is broken they are within their rights to seek payment immediately.

I am a little concerned that no-one has mentioned you could be liable for the Corporation Tax debt personally. If you owe the company money, which I believe you do (you talk about directors loans) and HMRC force the company into liquidation, the liquidator will try to get money from all those who owe the company money and that will include you for the loans it has given you.

 

[Spongebob]

I am a little concerned that no-one has mentioned you could be liable for the Corporation Tax debt personally. If you owe the company money, which I believe you do (you talk about directors loans) and HMRC force the company into liquidation, the liquidator will try to get money from all those who owe the company money and that will include you for the loans it has given you.

This is confusing the issue unneccesarily.

Davo1 is not personally liable for the Corporation Tax and never will be. The tax debt is a liability of the company and the company alone. If the company ceases trading or goes into liquidation Davo1 will not be liable to pay any of the tax owed.

What he will be liable for however, is the full amount of his director's loan account. It is important to understand that it is not HMRC who will chase a director for repayment of a director's loan, but the liquidator as and when one is appointed. It will almost certainly be a lot easier to come to an affordable arrangement with a liquidator (particularly if the liquidator is the Official Receiver) for repayment of the director's loan than with HMRC for the original tax debt.

If I was Davo1 I would most definitely be forming another company today for possible use as a lifeboat in the near future...



What is the value of your director's loan account, Davo1?

 

[Smallbusinessman]

There are also some useful postings on the "Legal" forum here, including
http://www.ukbusinessforums.co.uk/forums/showthread.php?t=233776

 

[Smallbusinessman]

This is confusing the issue unneccesarily.

Davo1 is not personally liable for the Corporation Tax and never will be. The tax debt is a liability of the company and the company alone. If the company ceases trading or goes into liquidation Davo1 will not be liable to pay any of the tax owed.

Is there is any possibility of 'personal liability' for 'trading while insolvent'? Is this more theoretical than likely to arise in practice?

 

[Business News]

I suspect the OP will be in hoc to the tax folk for lots more that the missing Corp Tax. It appears he has stripped the company bare and assumed it as dividends which will have overrun retained profits and therefore that potrion should have been drawn as PAYE payroll. It also appears that his drawings exceed the threshold before additional personal tax is due. Messy.

 

[Spongebob]

I suspect the OP will be in hoc to the tax folk for lots more that the missing Corp Tax. It appears he has stripped the company bare and assumed it as dividends which will have overrun retained profits and therefore that potrion should have been drawn as PAYE payroll. It also appears that his drawings exceed the threshold before additional personal tax is due. Messy.

Which is why he would be well advised to dump the company and start a new one now.

HMRC would then wind up OldCo through the High Court and the Official Receiver would be appointed liquidator. The truth of the matter is that the OR is unlikely to be too interested in the technicalities of dividends, PAYE, directors loans, etc and will view the situation simply as a bloke getting in a bit of a mess over a relatively poxy amount of money. Note that HMRC have no further involvement once the company is wound up.


There is a very good chance that the case will be cleared off the OR's desk in a couple of hours and the OP will walk away scot-free. Meanwhile he will be trading as usual under the banner of 'NewCo'.


The very worst case scenario would be that he was required to repay a proportion of his directors loan over a period of time. This sounds to me to be a far better position than he is in right now.

 

[Davo1]

Thank you all for your well valued advice.
My directors loan is in the region of 17K.
Darryl, if HMRC do decide to demand the full sum due to a missing instalment, how long will I have before it gets to court?

 

[Dazz12]

[FONT=&quot]If you are able to talk to them (which is not always easy) and explain the situation they should be sympathetic and give you some more time. But, it is likely once you default on the next instalment you will receive a letter from HMRC demanding full payment, this is automatically generated and will still arrive even if you have spoken to someone. If you do get the letter call the number and explain the situation. Unfortunately you will discover HMRC have many departments dealing with this and there is little communication between them, you will call many people and find that you have to keep repeating things. Make sure you keep detailed records of who you spoke to, dates and times and what was discussed, this will help you tell everyone the same story.[/FONT]
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[FONT=&quot]As I said earlier if you are able to make a payment tell them and make sure you do make that payment. They will see you are paying off the debt (even if it is slower than 1st agreed) and hopefully five you more time. I’m afraid there is no firm answer as it will depend on the person dealing with you case at HMRC, if you get an experienced person you may be OK.[/FONT]
[FONT=&quot]The main thing to do is contact HMRC and keep them informed about how things are going, it takes time and effort but hopefully will give you the time until the new orders come in.[/FONT]
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[FONT=&quot]One more thing that may not be relevant, if your turnover has dried up completely and you have made a loss in the year to 31 July-11 you can carry that loss back to 2010 and reduce that tax liability. There is a problem with this plan, it relates to the £17k of director’s loan as this will give rise to a section 419 tax charge (unless the loan is repaid to the company with 9 months of the year end). Your accountant will be able to let you know where you stand on that.[/FONT]