Liquidating with ODLA caused by BBL

[Gyumri]

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;

Correct! The OP and his wife assumed that the monthly payments would be regarded as a salary - particularly as they were in fact drawing their money from the BBL loan, which can be used for salaries but not loans to directors.

The OP says that their accountant failed to set up a paye payroll.

I think HMRC will say that in that case let's have the paye please which you haven't paid on your salaries.

By accounting for the payments correctly and calculating the paye due and the penalty the OP would personally be in the clear both with the taxes and the BBL.

It might be a fraud to use a BBL loan for making loans to directors, which is what the OP wants to avoid.

The Bounce Back Loan must be used to ‘provide an economic benefit to the business’.

 

[NicoJ]

Correct! The OP and his wife assumed that the monthly payments would be regarded as a salary - particularly as they were in fact drawing their money from the BBL loan, which can be used for salaries but not loans to directors.

The OP quite clearly states that they KNEW that the payments were dividends.

The OP says that their accountant failed to set up a paye payroll.

I think HMRC will say that in that case let's have the paye please which you haven't paid on your salaries.

No, they won't. As I've already said they can't reclassify payments to be salary because that is not what they are.

Give it up.

 

[Daybooks]

`

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?

Ask your question as a separate thread and am sure you’ll get some useful replies.

 

[T'Mighty Tcake]

No need to start a separate thread. I was simply responding to that particular post regarding directors responsibilities and giving an example of bad advice given by a tax professional and not necessarily looking for replies

 

[japancool]

`

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?

The problem is that it's just too easy for people to start companies without understanding the implications.

You should have understood that you can only take out dividends if you're making a profit, and that a BBL is not profit.

You *could* use a BBL to pay yourself, but only if it was a salary through PAYE.

If your loan account is getting bigger and bigger, it means you're taking more money out than you can legally do so in dividends. Stop taking so much money out that way, and the loan won't get bigger. Know how much profit you've made, and know how much you can declare as a dividend, or set yourself up on PAYE and start paying the loan back.

 

[T'Mighty Tcake]

The problem is that it's just too easy for people to start companies without understanding the implications.

You should have understood that you can only take out dividends if you're making a profit, and that a BBL is not profit.

You *could* use a BBL to pay yourself, but only if it was a salary through PAYE.

If your loan account is getting bigger and bigger, it means you're taking more money out than you can legally do so in dividends. Stop taking so much money out that way, and the loan won't get bigger. Know how much profit you've made, and know how much you can declare as a dividend, or set yourself up on PAYE and start paying the loan back.

 

[Daybooks]

Correct! The OP and his wife assumed that the monthly payments would be regarded as a salary - particularly as they were in fact drawing their money from the BBL loan, which can be used for salaries but not loans to directors.

The OP says that their accountant failed to set up a paye payroll.

I think HMRC will say that in that case let's have the paye please which you haven't paid on your salaries.

By accounting for the payments correctly and calculating the paye due and the penalty the OP would personally be in the clear both with the taxes and the BBL.

It might be a fraud to use a BBL loan for making loans to directors, which is what the OP wants to avoid.

The Bounce Back Loan must be used to ‘provide an economic benefit to the business’.

There is no evidence that the OP intended for the payment to be a salary; unless you are in direct contact with them and have inside knowledge. We all know the saying about assumptions. It is not unlawful for a director to take out loans from the company.

If the company were able to successfully trade through would these “unreported salary” payments conveniently become advances and be settled by lawful dividends? Accounting for convenience!

The OP is currently silent upon the point of whether the accountant failed to set up the PAYE scheme despite an explicit request but nevertheless was happy to continue to withdraw funds, therefore with your interpretation, knowingly avoiding the due taxes upon them. Is there correspondence proving there was an intention of salaries and expressing the concern of non compliance and non payment to HMRC?

If I were HMRC I would want the funds to be treated in whichever way earned the most taxes collected. If I were the liquidator I would want them treated in a way that best represented the interests of the creditor(s). The two may be at loggerheads.

Often the reality is that drawings are made without due regard to their legal form. That comes with consequences which may not be desirable but is the price one pays.

If I were the OP I would establish the facts and have answers supported by evidence for the questions posed.

 

[T'Mighty Tcake]

japancool, Yes but my point was, that a times, as in my case, the professional advice was totally incorrect. I had many meetings with my accountant, at my request, to ask what could do about my situation. No one is born knowing about these things, and that’s why a person seeks professional advice when looking to start a business. Of course anyone would rely on that information - especially if they’re paying £200 per month for their services.

I was totally unaware of how bad my situation was. Of course I know all this now and have sorted itit, but actually I do blame my accountant for specifically telling me I could use it to pay dividends. I have the email conversation where I specifically say dividends!

 

[japancool]

I was totally unaware of how bad my situation was. Of course I know all this now and have sorted itit, but actually I do blame my accountant for specifically telling me I could use it to pay dividends. I have the email conversation where I specifically say dividends!

Then I would sue him for any costs incurred in relation to that. He should have explained to you that the BBL - or any loan - can't be used to pay a dividend, as it's not profit (with caveats).

 

[JEREMY HAWKE]

`

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?

As I have previously said it is your responsibility as a director to understand your obligations.
It is never wise to just accepted what an accountant tells you as I have seen some absolutely appalling advice from a couple.

 

[Newchodge]

I have been trying to work out how @Gyumri has got it so wrong. IF the person receiving the payment had not been a shareholder, there would have been no dividend payable. If that non shareholder person were not self-employed and undertook work for the company and was paid as a 'loan' then HMRC would have got involved and deemed the payments to have been salary. But that, patently, is not the case here.

 

[WaveJumper]

Then I would sue him for any costs incurred in relation to that. He should have explained to you that the BBL - or any loan - can't be used to pay a dividend, as it's not profit (with caveats).

Agree here with @japancool, sue your accountant if you believe you have a case. However I am pretty sure it was quite plainly stated how a BBL loan could or could not be used.

And referring to a previous comment I made on "profits" yes I understand the 6 month scenario for the want of a better description but this is where I have an issue with company directors who seem to have little or no handle on future turnover, projected growth and profit etc etc I actually wonder if many actually have a business plan at all.

I wonder how long the system of being able to start a ltd with out attending some sort of course (bit like your driving theory) will prevail before it becomes compulsory.

 

[ChrisCallaghan]

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.

Myself and every corporate insolvency advisor/practitioner have come across this problem more times than any of us can count. Without sounding dispassionate, the moment I hear that acompany was effectively a PSC and took a BBL, I know what conversation is coming.

All blamed bad accountancy advice, and I'm sure that may of been true for some. However for most I'm sure their accountants will have advised originally the difference between taking legal dividends vs illegal dividends and creating an overdrawn loan account.

You can't rewrite history as others have pointed out... or if you do, prepare to have that decision challenged.

 

[Daybooks]

Then I would sue him for any costs incurred in relation to that. He should have explained to you that the BBL - or any loan - can't be used to pay a dividend, as it's not profit (with caveats).

Fortunately was not directly involved with any BBL but I would find it difficult that it could exclude dividend payments.

If a dividend is lawful then at the time it is declared the company will have sufficient distributable reserves and thus the ability to pay it through its normal working capital, which may or may not include loans. The expectation would be that with all stock or other assets sold, debtors paying, and creditors settled there would be the funds to pay the dividend. Now it may be unwise to rely heavily on borrowings to meet the payment but that does not render the dividend as unlawful nor a misuse of the funds. A lot of public company dividends might be suspect if it were the case.

On the wider issue…
The issue is that the BBL were being used to pay a dividend where that dividend in itself was unlawful. It was unlawful because the company no longer had sufficient distributable reserves to do so. As above when it has sufficient reserves it will have the means to pay it even if there is a temporary cash flow issue. When it does not have sufficient reserves then it does not have the lawful means to pay it even if it were cash rich and able to do so.

The payment is therefore no longer a dividend and must be treated for what it is. That should be determined by the facts and not convenience.

When dividends are paid monthly I would state that the directors have not fully considered everything they should have including reviewing some form of management accounts to ascertain there are sufficient distributable reserves for each payment. I believe I would be right more times than wrong.

If directors make dividends without due care and attention then one must accept the consequences. Directors cannot delegate their responsibilities.

 

[Daybooks]

japancool, Yes but my point was, that a times, as in my case, the professional advice was totally incorrect. I had many meetings with my accountant, at my request, to ask what could do about my situation. No one is born knowing about these things, and that’s why a person seeks professional advice when looking to start a business. Of course anyone would rely on that information - especially if they’re paying £200 per month for their services.

I was totally unaware of how bad my situation was. Of course I know all this now and have sorted itit, but actually I do blame my accountant for specifically telling me I could use it to pay dividends. I have the email conversation where I specifically say dividends!

What exactly is your complaint? It sounds like you were not using the BBL to pay a dividend but rather using it to pay an unlawful dividend.

 

[Newchodge]

Fortunately was not directly involved with any BBL but I would find it difficult that it could exclude dividend payments.

From BBL FAQs
The business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes.

FAQs

See the FAQs about bounce back loans repayment terms. Learn more about the Bounce Back Loan Scheme, bounce back loan terms and bounce back loan repayment terms.

www.british-business-bank.co.uk

Payng a shareholder dividends is not providing an economic benefit to the business. There are arguments to be made that a one person limited company could not survice if the sole shareholder could not survive, but I haven't heard that argument advanced anywhere.

 

[japancool]

If a dividend is lawful then at the time it is declared the company will have sufficient distributable reserves and thus the ability to pay it through its normal working capital, which may or may not include loans. The expectation would be that with all stock or other assets sold, debtors paying, and creditors settled there would be the funds to pay the dividend. Now it may be unwise to rely heavily on borrowings to meet the payment but that does not render the dividend as unlawful nor a misuse of the funds. A lot of public company dividends might be suspect if it were the case.

On the wider issue…
The issue is that the BBL were being used to pay a dividend where that dividend in itself was unlawful. It was unlawful because the company no longer had sufficient distributable reserves to do so. As above when it has sufficient reserves it will have the means to pay it even if there is a temporary cash flow issue. When it does not have sufficient reserves then it does not have the lawful means to pay it even if it were cash rich and able to do so.

Sure, that's why I said "with caveats", the caveat being that the company has sufficient profit or retained profit.

The specific issue with BBLs was that they had to be used "for the economic benefit of the company". That's obviously open to interpretation, but using it to pay dividends to directors seems to have been considered as not meeting that criteria.

EDIT: Cyndy beat me to it.

 

[WaveJumper]

From BBL FAQs
The business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes.

FAQs

See the FAQs about bounce back loans repayment terms. Learn more about the Bounce Back Loan Scheme, bounce back loan terms and bounce back loan repayment terms.

www.british-business-bank.co.uk

Payng a shareholder dividends is not providing an economic benefit to the business. There are arguments to be made that a one person limited company could not survice if the sole shareholder could not survive, but I haven't heard that argument advanced anywhere.

Yes its interesting this thread also sent me off this morning revisiting details on BBL etc, which then led me off to reading the many case studies availble on the HMRC website. Last place I ended up was the Business Insolvency helpline not been there before, but very interesting, I just post one paragraph (as I really need to get out and take a walk) for interest, but a website well worth a visit.

Salary v Dividend​

A director typically receives dividends or salary/bonus payments. The BBLS will permit wage payments because they are considered “working capital” for tax purposes. Many directors, however, only withdraw the “optimum amount” for NIC reasons, which is £9,500 for 2021/22 or £12,570 where the Employment Allowance is available, and they will likely have done so before taking out the loan. Any additional payment will therefore be made in the form of a dividend.

However, a business can only distribute money (such a dividend) from profits that are available for that use, or from its accumulated, realised profits. If there were sufficient “distributable” or “retained profits” or reserves from prior years, it is feasible to pay a dividend during a loss-making period; however, if there were no such profits, the dividend would be considered “illegal” under the Companies Act of 2006.

If the money is not transferred back into the company’s bank account within nine months and one day following the company’s year-end, personal usage of the loan could result in a hefty tax bill for the business. If the loan funds have been taken, causing a directors’ loan account to be overdrawn, and a dividend cannot be paid (due to insufficient reserves), the loan must be repaid within nine months and one day, failing which the firm would be subject to a 32.5% tax penalty.

The tax will be reimbursed if the loan is paid off later (in cash, cleared by money credited to the director’s loan account, such as the credit of a salary or dividend payment, or written off).


Apparently she who should be obeyed has just said no walk ..........cut the grass if you won't some lunch

 

[T'Mighty Tcake]

What exactly is your complaint? It sounds like you were not using the BBL to pay a dividend but rather using it to pay an unlawful dividend.

err - well, I wasn't actually complaining. I was stating why someone might take dividends (unlawfully) when they were told by their accountant that it was ok to do so. So giving an example of my situation and why I took it on my accountant's advice.

May I ask, What your complaint is exactly? Perhaps I have misunderstood, so do forgive me if I'm wrong here, but it appears that you are being somewhat jugmental towards this situation. It may be black and white from a legal perspective, but when people are desperate and have no other alternative what are people to do?

I have never been in debt in my life. My business was doing well until I was forced to lock down with income being wiped out overnight and no help in terms of furlough or self-employed grants. What else was someone in that situation to do with absolutely no income whatsoever? I had to pay my bills and feed my family.

I took a loan of £15000 and only used approximately £5000 of that in dividends. It was the 32.5% interest that I couldn't manage, especially as business started to pick up and had to almost go back and start again from scratch.

I have since gone against my accountants advice and set up as a sole trader, leaving just enough in the limited company to pay off its debts. Once they are cleared I will never go back to being a director. I no longer have an accountant and I will do them myself and just have a self assessment tax return at the end of the year. I have learnt from my mistakes, but I made those mistakes blissfully unaware of what was to come, believing that I had made an informed decision and a correct one.

To the original poster. Might I suggest trying Business Debt Helpline? They are a debt charity that offers free, confidential, impartial and non jugmental advice.

 

[Daybooks]

Sure, that's why I said "with caveats", the caveat being that the company has sufficient profit or retained profit.

The specific issue with BBLs was that they had to be used "for the economic benefit of the company". That's obviously open to interpretation, but using it to pay dividends to directors seems to have been considered as not meeting that criteria.

EDIT: Cyndy beat me to it.

Thanks to @Newchodge for the information. This seems to confirm that it would be difficult to exclude a dividend payment. The rules stated:

What can I use the loan for?
The business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes.

The important principle is that the dividend is lawful. Therefore by definition the company has the economic means to pay the amount due. It has the means to pay the dividend with or without the BBL funds. This is in contrast to the situation where the dividend is unlawful.

Where a company is trading through its difficulties and beginning to make a profit then these rules would still not preclude it from making a dividend payment. The dividend payment would of course be out distributable reserves and thus it has the funds to do so. It may call upon the BBL funds as part of its normal working capital - explicitly allowed by the rules.

Is it used for an economic benefit? The proposed dividend is a legitimate liability of the company’s and thus no different to any other trade creditor for example. Not paying any creditor can bring economic harm. Nevertheless the company has the means to pay it by way of it being a lawful dividend.

A dividend is a distribution of profits to its shareholders. It is not a payment for personal purposes any more than a payment of salary could be classified that way!

Not to be confused with the situation where a deemed dividend payment is in fact unlawful and thus the company does not have the economic means to pay it and uses the BBL funds to do so. In that case the payment may be one for personal purposes; but then importantly that is not a dividend payment.

 

[Newchodge]

The important principle is that the dividend is lawful.

No, it isn't. The only principle is that the payment is of economic benefit to the company. IF and it is a big IF, the company has distributable profits with which to pay the dividend, the dividend can and should be paid. But then there would be no need to use the BBL to pay the dividend.

 

[japancool]

The best thing for the OP is to take @Chris Callaghan's advice in the first instance:

@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.

The caveat being that the insolvency practitioner is under no obligation to follow any advice they gave you prior to taking instruction for a CVL, particularly if other facts come to light that they weren't aware of.

 

[Daybooks]

No, it isn't. The only principle is that the payment is of economic benefit to the company. IF and it is a big IF, the company has distributable profits with which to pay the dividend, the dividend can and should be paid. But then there would be no need to use the BBL to pay the dividend.

The principle remains whether the dividend is lawful. Then your conclusion is spot on.
There are no if, buts or big ifs about it - when the dividend is lawful the company has the distributable reserves for it - with or without the BBL funds.

You agree I believe that the lawful dividend should be paid and does not require the BBL funds. I do see it as allowable to be paid from working capital funds assisted by the BBL but only because this is the general fluidity of cash and underlying this the company has the means to pay all its debts.

If the dividend is unlawful because there are not the distributable reserves then it is not a dividend. Call the unlawful dividend what you will but it is not a lawful dividend. As such it falls foul of the BBL requirements.

It may just be terminology. To me there are dividends and unlawful dividends. The latter cannot be the former and must be treated as anything other than a dividend.

 

[Daybooks]

err - well, I wasn't actually complaining. I was stating why someone might take dividends (unlawfully) when they were told by their accountant that it was ok to do so. So giving an example of my situation and why I took it on my accountant's advice.

May I ask, What your complaint is exactly? Perhaps I have misunderstood, so do forgive me if I'm wrong here, but it appears that you are being somewhat jugmental towards this situation. It may be black and white from a legal perspective, but when people are desperate and have no other alternative what are people to do?

I have never been in debt in my life. My business was doing well until I was forced to lock down with income being wiped out overnight and no help in terms of furlough or self-employed grants. What else was someone in that situation to do with absolutely no income whatsoever? I had to pay my bills and feed my family.

I took a loan of £15000 and only used approximately £5000 of that in dividends. It was the 32.5% interest that I couldn't manage, especially as business started to pick up and had to almost go back and start again from scratch.

I have since gone against my accountants advice and set up as a sole trader, leaving just enough in the limited company to pay off its debts. Once they are cleared I will never go back to being a director. I no longer have an accountant and I will do them myself and just have a self assessment tax return at the end of the year. I have learnt from my mistakes, but I made those mistakes blissfully unaware of what was to come, believing that I had made an informed decision and a correct one.

To the original poster. Might I suggest trying Business Debt Helpline? They are a debt charity that offers free, confidential, impartial and non jugmental advice.

I do not have a complaint. As stated a couple of times my comments are intended to ask the questions that may be put as challenges for actions taken.

The OP has an implied criticism of the accountant for not creating a PAYE scheme. I would question the circumstances given that evidently a benefit was gained previously from not having the scheme.

I believe you blame your accountant for poor advice or similar. Apologies if I misunderstood but your issue surrounds your accountant advising you could pay dividends out of the BBL funds.

My view as given elsewhere is that it may be correct in certain circumstances. The dividends must be lawful therefore by definition the company has sufficient means with which to pay them. I would not think that your accountant advised you to pay yourself an unlawful dividend. Who is to blame if you believe all dividends are lawful and your accountant presumes you know otherwise?

The intention is not to be judgemental or dispassionate but just asking the awkward questions.

Choose your legal entity, sole trader, limited company, etc., as suits you best going forward.

Take time a good month before the tax year end to assess your likely final position because it gives you time to address issues to your benefit - whereas you do not have such luxury after the year end.

 

[Elliot Green]

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.

Like the case of Bass v Buchanan [2021] EWHC 2740 (Ch) which had some similar comments; it highlighted principles about being unable to change the course of history. Salary and dividends usually require contemporaneous documentation and tax filings which make it harder to credibly later on say transactions are something else.

 

[Elliot Green]

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.

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.

Affordability looks a key issue here. It is certainly not unknown for Directors to strike a commercially justified deal on the level of repayment of an ODLA with an officeholder. However if there is a written off element, then once this is determined it probably would merit being discussed with an accountant to addresss any potential Section 415 Income Tax (Trading and Other Income) Act 2005 issue that may yet sprout.

 

[Trundle]

Looking at this from another angle the OP has said that they can't afford to re-pay this amount, but surely there must be assets that can be disposed of: watches, jewellery, cars, caravans, motorhomes, rental properties, second homes, or perhaps a slush fund somewhere: cash, stocks and shares, premium bonds etc.?

 

[japancool]

motorhomes

The OP isn't the leader of the SNP, you know.

 

[Trundle]

The OP isn't the leader of the SNP, you know.

Very good!

 

[Gyumri]

Affordability looks a key issue here.

Not in this case. The OP's company is not in liquidation.

Looking at this from another angle the OP has said that they can't afford to re-pay this amount,

They don't need to repay what they have already taken as an intended salary. The mistake was the accountant or the directors or both not deducting and paying the PAYE on the drawings which were intended to be salaries but was not paid because the accountant failed to set up a payroll.

The remedy is to now come clean and account for that paye. If the company goes into liquidation then it will be too late and the drawings will be treated by an IP as a loan.

So it is up to the OP what he wants to do while he can.

 

[Newchodge]

the dividend is lawful the company has the distributable reserves for it - with or without the BBL funds.

Perhaps the terms of the BBL mean it is not part of the distributable funds?

 

[Newchodge]

Looking at this from another angle the OP has said that they can't afford to re-pay this amount, but surely there must be assets that can be disposed of: watches, jewellery, cars, caravans, motorhomes, rental properties, second homes, or perhaps a slush fund somewhere: cash, stocks and shares, premium bonds etc.?

Why?

 

[Lisa Thomas]

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.

You can't retrospectively do that.

 

[Lisa Thomas]

OP When the Insolvency Practitioner quoted you £4k, I assume that was the pre liquidation fee. Did they explain what the post liquidation fees and costs would be?

This thread has gone off on a tangent... See @Chris Callaghan's useful initial reply early in the thread. He has summed everything up and I agree with his useful response.

Options are do nothing and run the small risk the Insolvency Services will investigate and pursue you down the line or a creditor may liquidate and the liquidator will then investigate and pursue the ODLA.

Alternatively liquidate the company yourself, eitther via court, or a CVL and do a deal to repay what you can afford of the DLA. For a CVL I suspect you can reach an agreement about that with the IP before you commit to the liquidation so you will know where you stand.

Good luck.

 

[Gyumri]

You can't retrospectively do that.

I would agree that if the "dividends" were lawful in the first place one cannot re-classify them as remuneration. ie., one cannot re-write history.

See: Jones v HMRC

https://www.casemine.com/judgement/uk/5b2897e02c94e06b9e19cc3d

However, the OP's position is that the drawings were meant to be remuneration and it was the fault of their accountant not to have set up a payroll. They were clearly drawing a regular monthly salary of £1500 without paying tax and were not and could not have been "dividends."

Converting this remuneration into a "loan" is not something that HMRC would agree to and if the company continues, HMRC would be entitled to make a determination as well as possibly open a fraud investigation.

If an IP is appointed then the payments will simply be regarded as a loan and the OP won't be able to dispute it.

 

[ChrisCallaghan]

if the company continues,

But is isn't going to. It is insolvent and has ceased to trade. We are not talking about the company continuing, reclassifying the way the director remunerated themselves as PAYE and then paying the PAYE (both the employees and employers).

However, the OP's position is that the drawings were meant to be remuneration and it was the fault of their accountant not to have set up a payroll.

Unless I am being incredibly dense, if a director instructs their accountant to classify their remuneration as PAYE salary, then it was the director's responsibility to ensure their instructions to their accountant were being carried out. Unless I am even further mistaken, I also think it was the directors responsibility as an employee to ensure that their employer (all be it practically one in the same) was deducting PAYE from their salary.

From here I'm going to bow out of this conversation, as OP hasn't commented since starting this thread.

@Castamere this thread has gone on a bit, but hopefully our discussions have given you some topics to consider and research.

 

[Daybooks]

Perhaps the terms of the BBL mean it is not part of the distributable fund

The twofold effect of the BBL is to increase the cash asset and to increase the liability (the provider). Thus under the good old accounting formula Assets = Capital + Liabilities would have no immediate effect on the reserves (being part of Capital). The cash will however oil the wheels of trade such that a profit may be made – the economic benefit – which of course increases the capital, which in turn belongs to the shareholders – and may be distributed via dividends. That reminds me of the Latin phrase used by my maths lecturer at the end of the workings: Quod erat demonstrandum.

As interesting as this thread is there does appear to be a silence....

 

[WaveJumper]

But is isn't going to. It is insolvent and has ceased to trade. We are not talking about the company continuing, reclassifying the way the director remunerated themselves as PAYE and then paying the PAYE (both the employees and employers).



Unless I am being incredibly dense, if a director instructs their accountant to classify their remuneration as PAYE salary, then it was the director's responsibility to ensure their instructions to their accountant were being carried out. Unless I am even further mistaken, I also think it was the directors responsibility as an employee to ensure that their employer (all be it practically one in the same) was deducting PAYE from their salary.

From here I'm going to bow out of this conversation, as OP hasn't commented since starting this thread.

@Castamere this thread has gone on a bit, but hopefully our discussions have given you some topics to consider and research.

OP has probably had a nervous breakdown taking this all in ......hopefully not of course

 

[Elliot Green]

Perhaps the terms of the BBL mean it is not part of the distributable funds?

It had to be deployed for the "economic benefit" of the company; not the economic benefit of the shareholder.

The economic benefit aspect is in all likelihood somewhat akin to Section 172 of the Companies Act 2006 ie. a core Director duty - to promote the prosperity of the company.

A key issue for BBL funds deployed to pay dividends was if a company within 2 years of the dividend went into insolvent liquidation the prospect of the dividend being considered a Section 239 Preference was a bit of a risk and if the conditions were met then the Preference(s) can be clawed back by the Liquidator.

 

[Richard Dastardly]

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.

This. I used to pay myself a monthly amount and my accountant said that if HMRC saw it they would say it was salary, not dividend, and make us pay PAYE on it. Fortunately it never happened. If you are paying yourself monthly then it's a salary because you do not know if there is any profit avaialbe to take as a dividend becuase you haven't finished the financial year.