Liquidating with ODLA caused by BBL

[Castamere]

Hi there - after some advice. Wife took out a BBL for her company during peak Covid times, cashflow helped her through that time but ultimately the business hasn't bounced back and she's fallen behind with BBL repayments and looking to liquidate due to insolvency. Been quoted around £4k plus vat for a CVL.

The problem is she was badly advised by her accountant at the time who never set her up on payroll and money she was taking out each month to live on (nothing excessive, same as pre-covid around £1,500 a month) was taken out as dividends and subsequently built up a big overdrawn directors' loan account. The BBL was used ethically throughout... money was invested in marketing, payment platforms, event costs etc and she took monthly drawings to the same tune as previously. It was my understanding that the BBL wasn't guaranteed and therefore with the best will in the world, if the company didn't bounce back and she couldn't repay the loan, she could walk away safe in the knowledge that all had been above board. However, we took some advice and with the ODLA being around £20k, we've been told she may have to pay all of it or some of it back which we simply cannot afford. Is this correct? There is only one company creditor and that's the Bounce Back Loan of around 22k with around 20k showing as an ODLA on her recent accounts.

Any advice will be welcome - either here or DM. Thank you.

 

[brucegreig]

Alas, I see this situation come to mediation from time to time. The insolvency practitioner (IP) will likely try and recover that £20k ODLA from the director, on the basis that you can only take a dividend out of available profits. If there were no profits, then it wasn't a lawful dividend, it is a director's loan which the company can ask the director to pay back. I guess your advisor has now talked you through this problem.

You might be able to negotiate, with the insolvency practitioner, a settlement for less than the £20k on the basis that you can't afford all of it and if they won't get all of it if they chase for the full amount. That's the situation which I see at mediation: a negotiation over how much the director can pay now, vs the risk the IP faces from trying to go to court for the full amount. There are specialist firms who will buy the debt from the IP and fund court proceedings in return for a percentage of the amount recovered, these situations can get very expensive and messy.

Maybe you can claim against the accountant for bad advice ... if you are a member of the FSB or something like that, you might be able to get legal advice from them on that.

 

[WaveJumper]

Difficult situation however not sure we can always blame the accountant in these situations, as a Director of a limited company you need to beware of the responsibilities this includes how one might pay themselves and when to or not take dividends especially if the the company is not making a profit.
A very stressful time I am sure, do you actually have 4k in the company to pay for the CVL. It may be well worth speaking to one of the IP's on the forum who I am sure will be along to offer some advice on the best way forward. Are there any assets they could possible go after

 

[JEREMY HAWKE]

I wish the OP luck but we should all be aware the directors responsibilities
I consider 20K drawn gradually from the operating capital a lot of money and in turn a neglect of that responsibility

I will also again draw to the attention of everybody here the posts and comments made by the usual suspects of this forum when the covid loans were announced 3 years ago
They predicted all these BBL/CORONAVIRUS loan defaults and they were 100% right on all financial predictions

They deserve some credit

 

[Gyumri]

board. However, we took some advice and with the ODLA being around £20k, we've been told she may have to pay all of it or some of it back which we simply cannot afford. Is this correct?

I would submit amended accounts to correctly show the £20k as a salary rather than as a loan. It cannot be a dividend for the reasons stated above and it looks like the "loan" was really disguised remuneration on which PAYE should have been declared.

This will at least clear the supposed "loan" and leave the company owing PAYE.

How you wish to deal with that matter depends on how generous you can make yourself feel towards HMRC.

The bounce back loan can simply be left to bounce back to HM Government but do remember to send them a thank you note.

 

[bovine]

This is the crazy situation where if the OP had taken the same out of the company as salary, they would be in the clear. But because they didnt and followed the age old advice of salary dividend they are in a bit of bother. There really should be compulsory courses for all new directors on this. Its not like there is a huge benefit nowadays and when the government was throwing money around without too much thought, it massively worked against owner-directors. SEISS went almost the opposite way.

You cant go back and declare the dividends as salary. Doesnt work like that now. You could try that and argue it out with the practitioners when they ask, but dont think that would be successful.

But, I would suggest writing to all creditors inviting them to start insolvency proceedings. No point spending your own money. And then negotiate when they come calling for the money owed. It may be the bank/hmrc dont instigate proceedings in which case the debt eventually dies. But I would hope that is unlikely nowadays.

And do notify the bank - the common thread on prosecution for abuse of bbl is not notifying the bank and trying to close the company. There seems to be a pattern, some might say low hanging fruit...

 

[Michael Loveridge]

It seems to me that entering into a CVL would be the worst possible option. Not only are you paying £4k which you can ill afford, but you are actually appointing your own executioner!

Obviously, the liquidator - who you are paying - is bound to act in the interests of the company's creditors and come after the dodgy dividend. However, if there's no liquidator there's nobody to pursue you for it.

I would have thought it would be far better just to do nothing. For £22k it's extremely unlikely the bank would bother with a compulsory liquidation, especially as (1) they won't know about the dividend; and (2) they can claim the loss from the Government anyway.

Eventually the company will just get struck off and that will be the end off it.

 

[ChrisCallaghan]

Hi all,

A couple of quick comments from me just to clear some things up. If a director is personally covering the cost of a liquidators fee, this will go towards repaying the overdrawn loan account. So £4,000 + VAT would reduce the total balance from £20,000 to around £14,000.

@Castamere the best advice I can give is for your wife to speak the insolvency practice you've been dealing with to see if the give you a more concrete answer on how this loan account will be treated in CVL, based on her current personal financial position (her disposable income, personal property position etc.

For my clients in this scenario, I like to be as clear as I can possibly be prior to taking instruction for CVL. Happy to advise if you need a second opinion.

Eventually the company will just get struck off and that will be the end off it.

Honestly @Michael Loveridge I don't know if this true anymore with outstanding BBLs. For the longest time I believed the bank would cease objecting to a strike off eventually, and I've seen some go through, but recently some of my clients are describing how the bank have stopped objecting, but now it is the Department of Business and Trade who are objecting (due to the outstanding BBL). It is no longer clear that any strike off with an outstanding BBL will ever go through, and they may elect to wind companies on mass. The most honest answer any of us can give now, is that we just don't know.

Besides, if the company was dissolved, the Insolvency Service now have the power to investigate the actions of directors of dissolved companies, and they are using those powers. Financially recovery is unclear, but they can pursue compensation orders for miss spent BBLs and, I suspect, overdrawn director loan accounts.

Ultimately CVL vs attempting DIS/waiting for WUP is down to director preference. Personally I think it makes more sense and gives greater peace of mind to get it over and done with via CVL, but obviously I may be a bit biased! ?

 

[Frank Wessely]

This is the crazy situation where if the OP had taken the same out of the company as salary, they would be in the clear. But because they didnt and followed the age old advice of salary dividend they are in a bit of bother. There really should be compulsory courses for all new directors on this. Its not like there is a huge benefit nowadays and when the government was throwing money around without too much thought, it massively worked against owner-directors. SEISS went almost the opposite way.

You cant go back and declare the dividends as salary. Doesnt work like that now. You could try that and argue it out with the practitioners when they ask, but dont think that would be successful.

But, I would suggest writing to all creditors inviting them to start insolvency proceedings. No point spending your own money. And then negotiate when they come calling for the money owed. It may be the bank/hmrc dont instigate proceedings in which case the debt eventually dies. But I would hope that is unlikely nowadays.

And do notify the bank - the common thread on prosecution for abuse of bbl is not notifying the bank and trying to close the company. There seems to be a pattern, some might say low hanging fruit...

Correct. You cannot just reclassify DLA drawings as salary

Here is a useful law report regarding a High Court case before Mr Justice Snowdon, Jones v The Sky Wheels Group Ltd (2020), which examined whether monthly drawings, initially taken as a DLA (with a view that a dividend would be declared) could later be reclassified as remuneration.

The Court held that DLAs could not simply be re-characterised as remuneration without admitting to HMRC that the information provided to them was incorrect. And then one opens the door to a wide range of problems! Which would then compounded if the company is subsequently liquidated.

Thanks.

 

[Gyumri]

Here is a useful law report regarding a High Court case before Mr Justice Snowdon, Jones v The Sky Wheels Group Ltd (2020), which examined whether monthly drawings, initially taken as a DLA (with a view that a dividend would be declared) could later be reclassified as remuneration.

The Court held that DLAs could not simply be re-characterised as remuneration without admitting to HMRC that the information provided to them was incorrect.

It is an interesting case but it is fact specific: Mr Jones was not prepared to argue that the money he had received should be re-classed as a salary, as the other director Mr Schofield who has also received regular monthly payments towards the anticipated end of year dividend would not have accepted that suggestion.

The OP's position is different - both he and his wife have clearly been drawing money as a salary but not paying PAYE on it. Filing amended accounts will rectify that position and at the same time reduce the corporation tax position when filing an amended CT100.

The company will be hit with a PAYE bill and a penalty but the OP's wife will no longer be indebted to the company.

 

[NicoJ]

It is an interesting case but it is fact specific: Mr Jones was not prepared to argue that the money he had received should be re-classed as a salary, as the other director Mr Schofield who has also received regular monthly payments towards the anticipated end of year dividend would not have accepted that suggestion.

The OP's position is different - both he and his wife have clearly been drawing money as a salary but not paying PAYE on it. Filing amended accounts will rectify that position and at the same time reduce the corporation tax position when filing an amended CT100.

The company will be hit with a PAYE bill and a penalty but the OP's wife will no longer be indebted to the company.

Try Richard & Julie Jones vs HMRC. They were in a similar position to the one noted above where payments had been taken as dividend (albeit they were correctly declared). They wanted to reclassify these payments to salary to avoid a liquidator deeming the dividends unlawful.

The court ruled that you can't rewrite history, even if it corrects a mistake or misunderstanding.

Its interesting to note here that although it was the client (or more specifically the accountant) who reclassified the amounts HMRC didn't object and in fact attempted to pursue the client for PAYE & NIC. The judgement denied them the opportunity to do that.

 

[DWS]

It is an interesting case but it is fact specific: Mr Jones was not prepared to argue that the money he had received should be re-classed as a salary, as the other director Mr Schofield who has also received regular monthly payments towards the anticipated end of year dividend would not have accepted that suggestion.

The OP's position is different - both he and his wife have clearly been drawing money as a salary but not paying PAYE on it. Filing amended accounts will rectify that position and at the same time reduce the corporation tax position when filing an amended CT100.

The company will be hit with a PAYE bill and a penalty but the OP's wife will no longer be indebted to the company.

The OP clearly states that the money received was dividends and so I would imagine they have also been accounted as such, so you are suggesting that they go back, re-write history and now lie about these transactions because it would suit their needs better?
Maybe there was a reason the accountant never set up payroll?

 

[nelioneil]

I would say this:

1) If PAYE was not run on the payments (FPS etc) then it cannot be a salary.
2) If dividends was not declared in the correct manner (vouchers not produced, checking if sufficient accumulated profits etc) then it cannot be a divided.

Then the default position is the payments are offset against the directors loan account. History should not be rewritten.

 

[Gyumri]

The court ruled that you can't rewrite history, even if it corrects a mistake or misunderstanding.

That's obviously not what the court decided. If there is a mistake or unlawful dividends have been drawn instead of payments being treated correctly as remuneration then HMRC have a right to insist that PAYE is paid on such payments.

There is no such thing as a "default position" to permit the drawings to be treated as a loan otherwise HMRC wouldn't be collecting much in the way of PAYE.

Read this:

https://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03874.html

The OP has been drawing unlawful dividends on a monthly basis which should have been declared as a salary.

By contrast In the above case the drawings were correctly described and treated as a salary but the tax payer wanted them to be re-classed as dividends which HMRC rightly refused.

The purpose of amended accounts and returns is precisely to "re-write" history and reflect the true picture.

It would be quite wrong for the OP and his wife to have been paying themselves a monthly sum of £1,500 while not paying PAYE tax on that money on the argument that it was a loan (made also while the company was not doing well even with a BBL).

A BBL can be used to pay salaries but I haven't heard that they could be used to extend loans to company directors.

 

[WaveJumper]

Bottom line always employ a good accountant, make sure you fully understand your obligations as a company director, and as we know the forum is full of threads like the above where people just dig themselves a very big hole, and sometimes it can be very painful process trying to climb out

 

[japancool]

Maybe you can claim against the accountant for bad advice ... if you are a member of the FSB or something like that, you might be able to get legal advice from them on that.

I'm not convinced the OP was "badly" advised. What it sounds like is that they were advised it was more tax efficient to take monies out as dividends rather than salary. Which is true if the company is making profit.

But the company stopped making any profit during Covid, it got a BBL, and the wife continued to take the same amount of money out, not understanding that a loan is not profit - hence "ODL caused by BBL".

It's happened a lot of times on this forum.

 

[Newchodge]

That's obviously not what the court decided. If there is a mistake or unlawful dividends have been drawn instead of payments being treated correctly as remuneration then HMRC have a right to insist that PAYE is paid on such payments.

There is no such thing as a "default position" to permit the drawings to be treated as a loan otherwise HMRC wouldn't be collecting much in the way of PAYE.

Read this:

https://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03874.html

The OP has been drawing unlawful dividends on a monthly basis which should have been declared as a salary.

By contrast In the above case the drawings were correctly described and treated as a salary but the tax payer wanted them to be re-classed as dividends which HMRC rightly refused.

The purpose of amended accounts and returns is precisely to "re-write" history and reflect the true picture.

It would be quite wrong for the OP and his wife to have been paying themselves a monthly sum of £1,500 while not paying PAYE tax on that money on the argument that it was a loan (made also while the company was not doing well even with a BBL).

A BBL can be used to pay salaries but I haven't heard that they could be used to extend loans to company directors.

All payments in your case had been declared as salary, for years. HMRC refused, and the court agreed with HMRC, to allow them to re-write history and declare some of the payments as dividends. I cannot see that has the slightest bearing on the current case. History cannot be rewritten uness there is clear unambiguous advice that the payments were made in error.

 

[japancool]

It would be quite wrong for the OP and his wife to have been paying themselves a monthly sum of £1,500 while not paying PAYE tax on that money on the argument that it was a loan (made also while the company was not doing well even with a BBL).

It wasn't a loan when they took the money out. Read the OP. She was taking the money out as dividends, which only became a loan when, presumably, it was found that the company wasn't making enough profit to lawfully declare a dividend.

 

[Gyumri]

History cannot be rewritten uness there is clear unambiguous advice that the payments were made in error.

In the OP's case the monthly payments they took had to be monthly salaries. If I were a tax inspector that is what I would be telling the OP and his wife - that the company had to be treated as PAYE.

To suggest otherwise would be providing a blank cheque to tax payers to dodge PAYE.

And in this case the "dividends" drawn by the OP were actually illegal, as the company had no profit to show.

 

[Gyumri]

She was taking the money out as dividends, which only became a loan when, presumably, it was found that the company wasn't making enough profit to lawfully declare a dividend.

This is a common ruse which directors use try to avoid a company paying PAYE- the way to correct that is to amend the accounts and employer tax returns and pay the correct tax due.

Calling the payments a "loan" when they are really disguised remuneration is not the way to rectify the matter and HMRC would be entitled to make a Determination to recover the PAYE and the penalty.

 

[Newchodge]

This is a common ruse which directors use try to avoid a company paying PAYE- the way to correct that is to amend the accounts and employer tax returns and pay the correct tax due.

Calling the payments a "loan" when they are really disguised remuneration is not the way to rectify the matter.

Why not? The loan has to be repaid to the comnpany and tax paid on the BIK. What's the problem?

 

[NicoJ]

That's obviously not what the court decided. If there is a mistake or unlawful dividends have been drawn instead of payments being treated correctly as remuneration then HMRC have a right to insist that PAYE is paid on such payments.

There is no such thing as a "default position" to permit the drawings to be treated as a loan otherwise HMRC wouldn't be collecting much in the way of PAYE.

Read this:

https://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03874.html

The OP has been drawing unlawful dividends on a monthly basis which should have been declared as a salary.

By contrast In the above case the drawings were correctly described and treated as a salary but the tax payer wanted them to be re-classed as dividends which HMRC rightly refused.

The purpose of amended accounts and returns is precisely to "re-write" history and reflect the true picture.

It would be quite wrong for the OP and his wife to have been paying themselves a monthly sum of £1,500 while not paying PAYE tax on that money on the argument that it was a loan (made also while the company was not doing well even with a BBL).

A BBL can be used to pay salaries but I haven't heard that they could be used to extend loans to company directors.

The court did decide that. The last point in the ruling is that irrespective of whether the dividends were lawful or not the payments still wouldn't be salary.

Here you have payments clearly intended to be dividends. They are unlawful because they weren't declared correctly. Had they been declared correctly they would still be dividends regardless of the current insolvent position.

At no point did the OP intend to take salary, therefore to say they did would be incorrect.

 

[Newchodge]

At no point did the OP intend to take salary, therefore to say they did would be incorrect.

And, I would suggest, fraud!

 

[NicoJ]

This is a common ruse which directors use try to avoid a company paying PAYE- the way to correct that is to amend the accounts and employer tax returns and pay the correct tax due.

Calling the payments a "loan" when they are really disguised remuneration is not the way to rectify the matter and HMRC would be entitled to make a Determination to recover the PAYE and the penalty.

You also say there is no default position. PAYE and dividends require positive action, RTI or a correct declaration. In the absence of either it is a loan, HMRC have no right to call it anything else (neither does the individual).

 

[Gyumri]

The loan has to be repaid to the comnpany and tax paid on the BIK. What's the problem?

Plenty. Avoidance of PAYE. Use of a BBL to make loans to company directors.

At no point did the OP intend to take salary, therefore to say they did would be incorrect.

The intention of the taxpayer is irrelevant. If a director pays himself income on a monthly basis which is what the OP or his wife were doing then such payments have to be declared as remuneration subject to PAYE. That is the legal effect of the transactions especially when there is no basis for declaring a dividend.

Any other view would be to endorse avoidance of the PAYE scheme which I don't think any accountant would want to encourage.

Pay as you earn is exactly what it means.

 

[Newchodge]

Plenty. Avoidance of PAYE. Use of a BBL to make loans to company directors.

The intention of the taxpayer is irrelevant. If a director pays himself income on a monthly basis which is what the OP or his wife were doing then such payments have to be declared as remuneration subject to PAYE. That is the legal effect of the transactions especially when there is no basis for declaring a dividend.

Any other view would be to endorse avoidance of the PAYE scheme.

You don't half talk some rubbish.

 

[NicoJ]

Plenty. Avoidance of PAYE. Use of a BBL to make loans to company directors.

The intention of the taxpayer is irrelevant. If a director pays himself income on a monthly basis which is what the OP or his wife were doing then such payments have to be declared as remuneration subject to PAYE. That is the legal effect of the transactions especially when there is no basis for declaring a dividend.

Any other view would be to endorse avoidance of the PAYE scheme.

100% incorrect. Transferring a monthly sum does not automatically mean it is salary. The intention of the payment is paramount!

Its also worth pointing out that the OP could get a PAYE job and introduce monies to pay the BBL personally. This would solve both the OD DLA and the BBL with no requirement for a liquidator.

 

[WaveJumper]

100% incorrect. Transferring a monthly sum does not automatically mean it is salary. The intention of the payment is paramount!

Its also worth pointing out that the OP could get a PAYE job and introduce monies to pay the BBL personally. This would solve both the OD DLA and the BBL with no requirement for a liquidator.

And make some of us taxers payers picking up the bill a little less critical. Re dividends though if you have a "full time" accountant should they not be suddenly raising the red flags if they see (excessive) dividends being drawn and potentially no profit to speak of, as I mentioned before seems a "Problem" many coming to the forum for advice seem to find themselves in.

Ok I know why people do it, but at the end of the day in my book you've not made a "guaranteed" profit until you can see your whole years accounts, you may well have an astounding first six months, take some divi's, lease that new car only for the business to crash and burn over the next six months, a very risky strategy in my book, but then I like to sleep soundly at night

 

[Gyumri]

You don't half talk some rubbish.

I've not drafted the tax laws!

Have a read before posting:

General earnings include:

1. •
   earnings under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and
2. •
   amounts treated as earnings under ITEPA 2003, s 7(5)

The OP's query has been answered and it is up to him how he wishes to proceed.

He's not right in law to treat his monthly drawings as a loan and thus avoid paying PAYE.

HMRC are entitled to treat monthly drawings of £1,500 as a salary and not as an accumulated "loan".

Calling such payments a "loan" is why many people have been prosecuted for tax avoidance

 

[Gyumri]

The problem is she was badly advised by her accountant at the time who never set her up on payroll and money she was taking out each month to live on (nothing excessive, same as pre-covid around £1,500 a month) was taken out as dividends

100% incorrect. Transferring a monthly sum does not automatically mean it is salary. The intention of the payment is paramount!

And you can see what the intention of the OP was if you read his original posting as quoted above.

The mistake was not treating the drawings correctly as a salary which is why the correct way to remedy that is to account for the paye by submitting amended accounts and returns.

Calling such payments a "loan" as a supposed solution would simply be digging a deeper hole for the OP.

 

[DWS]

And you can see what the intention of the OP was if you read his original posting as quoted above.

The mistake was not treating the drawings correctly as a salary which is why the correct way to remedy that is to account for the paye by submitting amended accounts and returns.

Calling such payments a "loan" as a supposed solution would simply be digging a deeper hole for the OP.

I agree with what Cyndy said upthread “you don’t half talk some rubbish”

 

[Gyumri]

I agree with what Cyndy said upthread “you don’t half talk some rubbish”

Then you both need to take that up with HMRC.

The OP's accountant should have set up a payroll as the OP himself recognises, but there is a way to correct that error.

To say it was all meant to be a loan when it was supposed to be a salary is talking rubbish.

 

[Frank Wessely]

You don't half talk some rubbish.

Lol.

 

[NicoJ]

And make some of us taxers payers picking up the bill a little less critical. Re dividends though if you have a "full time" accountant should they not be suddenly raising the red flags if they see (excessive) dividends being drawn and potentially no profit to speak of, as I mentioned before seems a "Problem" many coming to the forum for advice seem to find themselves in.

Ok I know why people do it, but at the end of the day in my book you've not made a "guaranteed" profit until you can see your whole years accounts, you may well have an astounding first six months, take some divi's, lease that new car only for the business to crash and burn over the next six months, a very risky strategy in my book, but then I like to sleep soundly at night

If you have an outstanding 6 months and declare a dividend correctly based on that profit then that is a dividend regardless of what the next 6 months bring. Morals are largely irrelevant in the facts of the situation.

Then you both need to take that up with HMRC.

The OP's accountant should have set up a payroll as the OP himself recognises, but there is a way to correct that error.

To say it was all meant to be a loan when it was supposed to be a salary is talking rubbish.

Maybe the accountant should have set up a payroll, but they didn't. You can't now say there was a payroll when there clearly wasn't. That's the bit you've misunderstood.

Your comment about monthly payments is way off. I can confirm that there are many, many company directors who withdraw a monthly amount. It is not and cannot be deemed to be salary just because you think it should be.

 

[Daybooks]

Establish the facts.

OP says

“The problem is she was badly advised by her accountant at the time who never set her up on payroll and money she was taking out each month to live on (nothing excessive, same as pre-Covid around £1,500 a month) was taken out as dividends and subsequently built up a big overdrawn directors' loan account.”

Was the payroll scheme not set up despite being requested – although the responsibility is ultimately the director’s responsibility – or wasn’t set up because it was intended to take as a dividend and evidently prior to Covid-19 was a satisfactory beneficial arrangement? A net salary of £1,500 per month would have triggered the requirement for PAYE and reporting under Real Time Information and to be making payments to HMRC for any tax and national insurance contributions. The dynamics of salary and dividend arrangements may have changed with the introduction of the Bounce Back Loan. Was this dynamic discussed with the accountant with a view to what changes if any should be made to the withdrawal or a hindsight criticism and of whom?

The dividend payments of £1,500 each month would not have created the overdrawn loan account unless they were unlawful; which presumably is the issue. The overdrawn balance is therefore comprising any unlawful dividends and or other withdrawals. You would need to be clear as to what is what. All things being equal unlawful dividends of £1,500 per month would take over thirteen months to generate the stated £20k liability; thirteen months without checking the financial state of the company doesn’t read well.

OP Says

“There is only one company creditor and that's the Bounce Back Loan of around 22k with around 20k showing as an ODLA on her recent accounts.”

We cannot tell whether these recent accounts have been filed yet.

If the £1,500 monthly dividend was a successful beneficial arrangement in the past then to suggest now (as is being done in some quarters) that retrospectively it was a salary is somewhat disingenuous; not a position I would like to defend.

The above are just some of the points I would seek clarity in respect of the numbers; for the legalities I nominate my learned friends.

 

[Gyumri]

The problem is she was badly advised by her accountant at the time who never set her up on payroll and money she was taking out each month to live on (nothing excessive, same as pre-covid around £1,500 a month) was taken out as dividends

If the £1,500 monthly dividend

The point to grasp is that the directors were NOT drawing a dividend - they may have regarded the drawings as "dividends" but that is irrelevant.

What they were drawing in law was a salary and not a dividend however much they think the money was a dividend and thus the company was not paying PAYE.

If HMRC had come along at the right time it would have insisted that the monthly payments be treated as remuneration and not dressed up as dividends.

It might have been different if the company was making a profit so that the directors could then legitimately declare interim dividends, but that is not the case here.

So the OP should rectify the position and declare the payments as a salary and the company should account for the paye - particularly as that was what the payments were meant to be.

There isn't such a nice arrangement in the UK where a director can take money out in a regular monthly basis without paying tax and without making a profit and then turn around to the tax man and say "not to worry I'll take the money as a loan."

A loan will normally and potentially trigger a s455 charge but this is not a case of a director taking a loan, but rather a disguised remuneration on which PAYE has not been declared.

 

[NicoJ]

The point to grasp is that the directors were NOT drawing a dividend - they may have regarded the drawings as "dividends" but that is irrelevant.

What they were drawing in law was a salary and not a dividend however much they think the money was a dividend and thus the company was not paying PAYE.

If HMRC had come along at the right time it would have insisted that the monthly payments be treated as remuneration and not dressed up as dividends.

It might have been different if the company was making a profit so that the directors could then legitimately declare interim dividends, but that is not the case here.

So the OP should rectify the position and declare the payments as a salary and the company should account for the paye - particularly as that was what the payments were meant to be.

There isn't such a nice arrangement in the UK where a director can take money out in a regular monthly basis without paying tax and without making a profit and then turn around to the tax man and say "not to worry I'll take the money as a loan."

A loan will normally and potentially trigger a s455 charge but this is not a case of a director taking a loan, but rather a disguised remuneration on which PAYE has not been declared.

I'll make this my last post, you are not correct in your statements. I can't be any more blunt than that.

No salary was declared, whether that was right or wrong is not relevant. It is a fact. By law the withdrawal was simply a transfer of company money to a personal account, it is NOT salary. To try and change this retrospectively because it suits would be fraudulent. There is nothing to rectify here, the facts are what they are.

To say there is no "nice arrangement" is also not correct. If a participator takes a loan from a company that is, again a fact. It can't (by HMRC or by the individual) be treated as salary. It will be taxed if it is not repaid hence why the liquidator is trying to recoup the money here.

It is 100% NOT disguised remuneration, not even close.

 

[NicoJ]

This thread has gone off on a tangent so I apologise to the OP.

 

[Daybooks]

The point to grasp is that the directors were NOT drawing a dividend - they may have regarded the drawings as "dividends" but that is irrelevant.

What they were drawing in law was a salary and not a dividend however much they think the money was a dividend and thus the company was not paying PAYE.

If HMRC had come along at the right time it would have insisted that the monthly payments be treated as remuneration and not dressed up as dividends.

It might have been different if the company was making a profit so that the directors could then legitimately declare interim dividends, but that is not the case here.

So the OP should rectify the position and declare the payments as a salary and the company should account for the paye - particularly as that was what the payments were meant to be.

There isn't such a nice arrangement in the UK where a director can take money out in a regular monthly basis without paying tax and without making a profit and then turn around to the tax man and say "not to worry I'll take the money as a loan."

A loan will normally and potentially trigger a s455 charge but this is not a case of a director taking a loan, but rather a disguised remuneration on which PAYE has not been declared.

It is not a requirement of HMRC to come along and determine “what is what” for a company in a timely manner. That is the responsibilities of the directors.

I do not presuppose the payments were salary as I do not know their intentions nor have your insights for grasping that they are factually salaries without any evidence. Taking money out of a company is not by law a salary. Similarly I do not presuppose they were dividends. However if they properly considered the requirements for declaring dividends, documentary evidence and they were lawful in terms of distributable reserves then I would call it a dividend; thus it is very relevant.

What I do read into the OP’s text is that pre-Covid payments were taken out and classified as dividends and this was a beneficial arrangement and fully accepted. I presume statutory accounts were filed to this effect.

Due to Covid and the Bounce Back Loan these arrangements continued but the consequences of these arrangements are unwelcome and would be better served if those “payments” were salaries.

This I believe is the contentious issue. Notwithstanding the intention of the directors at the time for whatever reasons it has been convenient to take these payments previously (classed however you will) but not account for the due PAYE taxes and national insurances upon them; despite if applicable they were salaries.

If there are contemporaneous accounting entries or minutes supporting the fact that these were salaried payments despite the mandatory operation of a PAYE scheme then I would agree that the accounts should be drawn up on that basis; a can of worms for prior years’ too. I am not drawing any conclusions but as stated these are some of the issues I would want addressing.

PS A great topic for @Ozzy to include as a template and guidance note.

 

[T'Mighty Tcake]

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Difficult situation however not sure we can always blame the accountant in these situations, as a Director of a limited company you need to beware of the responsibilities this includes how one might pay themselves and when to or not take dividends especially if the the company is not making a profit.
A very stressful time I am sure, do you actually have 4k in the company to pay for the CVL. It may be well worth speaking to one of the IP's on the forum who I am sure will be along to offer some advice on the best way forward. Are there any assets they could possible go after

Hmm I’m not so sure. The OP is in a very similar situation to myself. I specifically asked my accountant how to pay myself In the lockdown and if it was ok to use the bounce back loan. He said Yes. I have it in writing. Now I’m in this situation with an overdrawn director’s loan account and being told repeatedly to just ‘trade my way out of it’ while each year the loan is getting bigger and bigger.
how do we ensure we are aware of the responsibilities when we pay for tax professionals to advise us on those responsibilities and rely on the information given to us?