New law to stop spongebob plan??

[Mr D]

I doubt many suppliers get cought with large losses in the first two years of a company unless they offer credit terms (not essential to do so) and have poor credit control if the do offer credit terms

Most seem to be failure to pay HMRC which should be a criminal act in all our interests and the banks which have PG anyway

Serial offenders with phenix companies seem to rely on in many cases conning people into paying prior to service with no real checks undertaken by the persons involved and by not paying upon set results but paying in full at the start

Nobody seems to read and small print prior to signing contracts

Hmmmm….. thinking about it, just under 2 years old as a business my old company could borrow a much as £2k or so. That was limit with suppliers and had been the same since effectively a year old.
Increased quite a bit once company was over 2 years old.

 

[Newchodge]

I doubt many suppliers get cought with large losses in the first two years of a company unless they offer credit terms (not essential to do so) and have poor credit control if the do offer credit terms

Most seem to be failure to pay HMRC which should be a criminal act in all our interests and the banks which have PG anyway

Serial offenders with phenix companies seem to rely on in many cases conning people into paying prior to service with no real checks undertaken by the persons involved and by not paying upon set results but paying in full at the start

Nobody seems to read and small print prior to signing contracts

While I agree in general, there is a bit of a contradiction here. A new company should not offer credit terms without very good credit control (or at all, in my view). BUT you are recommending that people do not pay prior to service. You can't really have it both ways!

 

[Ian J]

You any idea how to game that?
Keep business alive for 2 years and 1 day before shutting it owing whatever. Hey no personal responsibility.

Ok let's change it to making directors personally responsible for debts until such time as their second year's accounts have been published.

There are plenty of ways to tweak it if the will is there

 

[Mr D]

Ok let's change it to making directors personally responsible for debts until such time as their second year's accounts have been published.

There are plenty of ways to tweak it if the will is there

Why have time limit at all as its going to be very random? 2 years, 2 years 6 months, 3 years etc - purely arbitrary.

 

[UK Contractor Accountant]

Ok let's change it to making directors personally responsible for debts

thats what the tax Abuse & Insolvency Discussion document proposes

Possible approaches
3.5
A number of methods of tackling this type ofbehaviour already exist in discrete areas of the tax code. One way of addressing the abuses outlined above more efficiently would be to adopt these principles more widely. For example:
●
Transfer of liability: As outlined above, HMRC can already transfer liability of certain tax debts to company directors and officers in particular circumstances. This power could be extended to transfer liability to tax debts to the persons responsible for the avoidance, evasion or repeated non payment of taxes when there is a risk the funds will be lost in insolvency.
●
Joint and several liability: This principle would enable HMRC to hold the persons responsible for the avoidance, evasion or repeated non payment of taxes jointly and severally liable for tax debts in the event that the company could not meet the tax debts.

Both of the above principles could be extended to apply across all taxes in prescribed circumstances, which would avoid this behaviour being tackled unevenly on a tax by
tax basis.
–

 

[Chris Ashdown]

While I agree in general, there is a bit of a contradiction here. A new company should not offer credit terms without very good credit control (or at all, in my view). BUT you are recommending that people do not pay prior to service. You can't really have it both ways!

Yes badly worded by myself, i ment the suppliers seem to work on offering credit terms very easily and allow limits to be exceeded without effort, few suppliers actually need to offer credit terms in the modern times as its far easier for most companies to pay for goods with the company credit card on order, we found ourselves that when we stopped credit facilities to all but government type companies like prisons, schools and medical places, the other existing customers took it well and paid on order happy with the service

The other part was people ordering building work, new kitchens of even service contracts like recent post about debt collection have no need to pay up front just pay on results or individual cases

We had a contract to supply workwear to a very large aerospace company who told us there terms were payment in 90 days from end of invoice month, we declined and they paid by card with order

Not saying never but judge each case as it arrives but first inclination should be why should i give them credit, i am not a bank or money lender

 

[emufeet]

Part of the budget included a plan that directors would be personally liable to oay outstanding debts for PAYE, VAT and, possibly corporation tax. The budget has not yet been passed by Parliament.

I thought so too but I have scoured the latest finance bill and can find no mention of this. Do you know which paragraph it is in?

 

[UK Contractor Accountant]

Budget 2018: the chancellor has announced measures to ensure that taxes paid by customers and employees to companies going into insolvency are protected, by changing unsecured creditor priorities and making directors liable for company taxes in certain circumstances.

Following a Consultation on Tax abuse and Insolvency:

• From 6 April 2020 where a company becomes insolvent with unpaid tax liabilities which it holds in trust to pay to HMRC, such as VAT, PAYE Income Tax, employee National Insurance contributions and Construction Industry Scheme deductions, these liabilities will take priority over other unsecured or floating charge creditors.
  • Other company tax liabilities such as corporation tax and employers NIC will not be affected by the measure.
  • HMRC will remain below preferential creditors.
• Finance Bill 2019-20 will contain measures to allow HMRC to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.
  • This will have effect from Royal Assent of Finance Bill 2019-20.

 

[emufeet]

Thanks - I have seen these comments in many places too. However, I cannot find anything about it in the Finance Bill. Maybe it was left out for some reason? Or maybe I am searching for the wrong words in the Bill.

 

[UK Contractor Accountant]

Me thinks time to re-write the Spongebob plan with updated advice on the new rules around phoenixing

 

[emufeet]

Yes including how the new rules (if they do actually exist) will be applied.

 

[Blaby Loyal]

If the new law comes into force as drafted then my advice for directors facing possible company insolvency would be to ignore employees and the trade and expense creditors completely and pay HMRC.

The Spongebob Plan letter can easily be amended. It won't necessarily be a preference because the same rules are promoting HMRC's status in the creditor pecking order (from unsecured, non-preferential to unsecured (deferred) preferential).

The man in the street can simply get stuffed and if they don't like it then petition their MP.

 

[UK Contractor Accountant]

Yes including how the new rules (if they do actually exist) will be applied.

https://assets.publishing.service.g...ttachment_data/file/752136/Insolvency_web.pdf

 

[Mr D]

If the new law comes into force as drafted then my advice for directors facing possible company insolvency would be to ignore employees and the trade and expense creditors completely and pay HMRC.

The Spongebob Plan letter can easily be amended. It won't necessarily be a preference because the same rules are promoting HMRC's status in the creditor pecking order (from unsecured, non-preferential to unsecured (deferred) preferential).

The man in the street can simply get stuffed and if they don't like it then petition their MP.

Hmmm... you could be right there.
It benefits the director and benefits HMRC. Shafts all other 'lesser' creditors though.

 

[emufeet]

Me thinks time to re-write the Spongebob plan with updated advice on the new rules around phoenixing

This is referring to HMRC becoming preferential creditors in insolvency. It does not mention passing liability to directors which is what the OP asked about. As I said I can find nothing about that in the Finance Bill which is currently in the House of Lords.

 

[UK Contractor Accountant]

sorry yes wrong link - try this one

https://www.gov.uk/government/consultations/tax-abuse-and-insolvency

Detail of outcome
This response document confirms that the government will legislate in 2019 to 2020 to allow HMRC to make directors and other persons involved in company tax avoidance, evasion or phoenixism jointly and severally liable for tax liabilities that arise from those activities where the company becomes insolvent.

 

[emufeet]

So it looks like it is not in this year's Finance Bill and may go into next years, contrary to what was said before?

 

[Spongebob]

While they're talking about closing one door they've knocked through a new one and left it wide open!

All a director has to do now is fail to submit a Confirmation Statement. Ten weeks later the company will be dissolved.

No need to send letters out or to wait 6 months before submitting a DS01. Heck, you don't even have to cease trading unless insolvent!

There is now a system in place that makes it perfectly feasible for a rogue director to set up a new company, trade successfully for two years, and then have the company dissolved as described above without HMRC ever being aware that it has even traded, never mind built up a tax liability or overdrawn Directors Loan Account.

Said rogue director could do this every couple of years for the rest of his life and never pay a penny in tax. It is highly unlikely that HMRC would ever catch up with him as he is flying well under the radar. Even if they did catch up with him what has he done illegally? He hasn't lied or made any fraudulent declaration. All he's done is not send a form in!

If he spread the directorships of his various companies around friends and family no pattern would develop.

I do wonder sometimes whether the government are serious about tax evasion. They should give me a job!

 

[UKSBD]

Even if they did catch up with him what has he done illegally? He hasn't lied or made any fraudulent declaration. All he's done is not send a form in!

Not sending the form in is a criminal offence according to https://www.gov.uk/government/publications/late-filing-penalties/late-filing-penalties

 

[UK Contractor Accountant]

who really is going to do business with a rogue Director with a string of dissolved/failed companies every 2 years?

Plus HMRC will require Bonds in place before dishing out VAT/PAYE registrations.

As mentioned previously it is time for the Plan to be updated with new guidance on tax debts being transferred to Directors for serial phoenixers.

 

[Mr D]

who really is going to do business with a rogue Director with a string of dissolved/failed companies every 2 years?

Plus HMRC will require Bonds in place before dishing out VAT/PAYE registrations.

As mentioned previously it is time for the Plan to be updated with new guidance on tax debts being transferred to Directors for serial phoenixers.

To transfer tax debts to a director personally first there has to be a tax debt. Likely many other debts but not necessarily a tax debt in the first year or two. Can there be a tax debt without accounts? Can there be a tax debt if a loss is made?
Then there's the issue of tax debts that are a priority debt - so would get paid before most other creditors receive their money. If that tax debt is cleared then director cannot be held liable for tax debt?

 

[UK Contractor Accountant]

personally first there has to be a tax debt. Likely many other debts but not necessarily a tax debt in the first year or two. Can there be a tax debt without accounts?

PAYE, VAT, CIS Tax!!!

 

[Mr D]

PAYE, VAT, CIS Tax!!!

OK so some tax debts. And we can presume some startups won't have those in the first year or two?

 

[UK Contractor Accountant]

You are always going to get the cowboy trader/fraudsters who start limited companies with no intention of registering for any taxes or submitting accounts.

 

[Mr D]

You are always going to get the cowboy trader/fraudsters who start limited companies with no intention of registering for any taxes or submitting accounts.

Who won't be affected by this new policy.

Perhaps if government made it harder to do that …. no, no government is that stupid.

 

[Spongebob]

who really is going to do business with a rogue Director with a string of dissolved/failed companies every 2 years?

Customers of your friendly neighborhood plumber, landscape gardener, or dog-walker.

Anyone in fact, who provides a service to the general public and doesn't employ staff. Invariably they will not therefore be registered for VAT.

Also people such as IT contractors.

There are millions of such micro-businesses - most of whom are now encouraged by accountants to incorporate as limited companies for tax reasons.

These business make up a sizeable proportion of those seeking advice on following The Spongebob Plan. Usually because of an accumulated Corporation Tax liability over several years together with a large overdrawn Directors Loan Account. And few if any assets.

Being able to have their company dissolved without entering any insolvency process is manna from heaven in such a situation. The system is crazy for making it all so simple and seemingly without any real danger of comebacks.

I didn't suggest that many would actually churn their company every couple of years - just that the system theoretically made it possible.

 

[UK Contractor Accountant]

Also people such as IT contractors.

must of those were vat registered as on £300-£450 a day.

So we are agreed that for ongoing VAT, Payroll & Corporation tax registered companies that the law is going to change 2020 time to stop the serial defaulters (phoenixers) from walking away from the company's tax debts by making them personally liable?

 

[Newchodge]

must of those were vat registered as on £300-£450 a day.

So we are agreed that for ongoing VAT, Payroll & Corporation tax registered companies that the law is going to change 2020 time to stop the serial defaulters (phoenixers) from walking away from the company's tax debts by making them personally liable?

I don't think so, there is apparently no legislation yet, just a report on consultation. So anything, or nothing, could happen

 

[UK Contractor Accountant]

The consultation has ended - its changing

 

[Blaby Loyal]

If anything the new legislation is very likely to result in an increase in Spongebob Plan type arrangements.

What director of a company with assets of say £10,000 and £8,000 owed to HMRC in their right mind is going to pay for a formal liquidation only for the liquidator to spuff the £10,000 in 'fees' and leave the director exposed to personal liability. (I have had a case referred to me recently where costs were £19,000 and assets realised were £8,000 so the insolvency practitioner called on a guarantee given by the instructing director.)

They are going to realise the assets themselves and pay off HMRC - simples.

It is right for the national benefit that the government wins and the trade creditors lose: it is approved legislation after all and reflects the will of the people.

 

[The Byre]

the government wins and the trade creditors lose:

This!

My very first thought, when I heard about this bad idea. HMRC gets its money and staff and some poor one-man contractors get stuffed!

I can site case after case of major companies with plenty of assets, esp. private assets of the owners/directors that have been liquidated to avoid debts that they could have easily paid - only to be phoenixed the very next day!

 

[Blaby Loyal]

* cite

 

[The Byre]

The system is crazy for making it all so simple and seemingly without any real danger of comebacks.

We have had many, many cases on this very forum of conmen opening Ltd companies, running up debts and taking deposits on projects and then closing after just a few months, only to start up again the next day with a new Ltd.

I refer you to my earlier posting on the previous page about the rules in Germany. If a court declares a company bankrupt, the directors are banned from doing business, either directly or by proxy for three years. Repeat offenders are banned for longer periods and may even go to prison.
OK, the system there is far from perfect, as proof is always difficult, but at least the threat of that court order winding up is an excellent deterrent.

 

[The Byre]

* cite

To quote Bill Kerr (speaking to Sid James in Handcock's Half Hour) "Why don't you intellectuals leave us simple folk alone!"

 

[Blaby Loyal]

Blimey, what next - Round the Horne!

 

[UK Contractor Accountant]

What director of a company with assets of say £10,000 and £8,000 owed to HMRC in their right mind is going to pay for a formal liquidation only for the liquidator to spuff the £10,000 in 'fees' and leave the director exposed to personal liability.

My understanding, might be wrong, HMRC are just going to issue Personal Liability Notices (PLN's) to Directors who have abused the system and walk away from tax debts and set up again regardless of whether liquidator is involved so they catch all the serial dissolvers/ strike off merchants.

We have PLN's at the moment for PAYE but not wildly used - one option was to extend these to include VAT & CT.

 

[Mr D]

It is right for the national benefit that the government wins and the trade creditors lose: it is approved legislation after all and reflects the will of the people.

Its not the will of the people. Its the will of parliament.
The people usually don't get involved in what legislation is done and whether its approved. MPs have for centuries been approving legislation without my input that affects me or other people.

 

[Newchodge]

t is approved legislation after all and reflects the will of the people.

That's my point. There is no legislation yet, there may never be.

 

[Blaby Loyal]

There is bound to be an upsurge in DIY liquidations where a company's assets are sold (probably to the same crew only on a different ship) and the proceeds are used solely to pay off HMRC and/or a lender where personal guarantees are in place.

I know it goes on now but it will only increase.

The trade creditors can then moan all they like over the rotting carcass of the old company and there won't be a damned thing they can do about it.

HMRC will get more money to spuff away on inept IT projects, ferry companies with no ships, etc. so all will be good with the world.

Does anyone think that legislation would really be passed to help 'the man in the street' when they can line their pockets using procedures that are only available to them. Who else can change their status from an unsecured creditor to a preferential creditor?

 

[Adam93]

I agree with the changes.

If you cannot manage to pay VAT which you collect from customers and PAYE/CIS you deduct from employees/subcontractors you should not be allowed a second chance of running a limited company. Second time around, they should be made to operate as a sole trader or as contractor accountant says, pay a substantial bond to HMRC up front.

It was only a matter of time this happened. The 'Spongebob' method has been abused for years, so the government will prevent it sooner or later like they have with the flat rate VAT scheme, IR35, the loan charge, the list goes on, it's a common theme.

The individuals that have abused the 'Spongebob' method have ruined it for those genuine insolvency cases.