Previously issued dividends and VAT-related insolvency

[OceanBreeze]

Hi everyone and thanks in advance for any advice you might be able to offer. The dilemma:

• During the last financial year the company briefly went over the VAT threshold. This was not formally raised to HMRC until 6 months after the breach.
• The company voluntarily contacted HMRC asking for an exemption.
• Meanwhile the company applied for a voluntary strike off on companies house, the bank account was closed and all debts were paid (corporation tax etc.).
• HMRC then rejected the exemption and has provisionally issued a VAT bill of 10K.
• The company has zero assets and is unable to pay (insolvent).

Now my question here is would the dividends previously paid out prior to the VAT bill being issued now be required to be returned to settle the VAT bill? Or are they "protected" as they were withdrawn prior to the bill being issued, noting that the assumption was that a VAT exemption would be granted?

Thanks in advance, I've looked online and can't seem to find a clear answer (naturally) so keen to hear your thoughts!

 

[Ziggy2024]

If you have evidence of sufficient reserves at the time of declaration then I don't see how the dividends could be reversed, however perhaps one of the IPs can reply.

In terms of the VAT, the bill will almost certainly not be the amount HMRC estimate. Have you worked out the amounts yourself?

 

[WaveJumper]

Hi everyone and thanks in advance for any advice you might be able to offer. The dilemma:

• During the last financial year the company briefly went over the VAT threshold. This was not formally raised to HMRC until 6 months after the breach.

If it was "brief" what was the actual figure

• The company voluntarily contacted HMRC asking for an exemption.
• Meanwhile the company applied for a voluntary strike off on companies house, the bank account was closed and all debts were paid (corporation tax etc.).

Clearly all debts were not paid as you were aware of the VAT owed.

• HMRC then rejected the exemption and has provisionally issued a VAT bill of 10K.
• The company has zero assets and is unable to pay (insolvent).

Now my question here is would the dividends previously paid out prior to the VAT bill being issued now be required to be returned to settle the VAT bill? Or are they "protected" as they were withdrawn prior to the bill being issued, noting that the assumption was that a VAT exemption would be granted?

Thanks in advance, I've looked online and can't seem to find a clear answer (naturally) so keen to hear your thoughts!

Hopefully the IPs who reside here will be able offer some advice

 

[OceanBreeze]

In terms of the VAT, the bill will almost certainly not be the amount HMRC estimate. Have you worked out the amounts yourself?

Hi thanks for replying. The estimate was calculated based on the total turnover since the VAT breach so if the exemption wasn't given or a deregistration then I believe it to be accurate.

 

[OceanBreeze]

If it was "brief" what was the actual figure

Clearly all debts were not paid as you were aware of the VAT owed.

Hopefully the IPs who reside here will be able offer some advice

Debts were paid as there was no outstanding bill and I was expecting an exemption at the time. To confirm the VAT bill has only been provisionally issued.

Actual breach was 6k over the threshold.

Thanks everyone for your help so far.

 

[DWS]

Debts were paid as there was no outstanding bill and I was expecting an exemption at the time. To confirm the VAT bill has only been provisionally issued.

Actual breach was 6k over the threshold.

Thanks everyone for your help so far.

Do you mean exemption or exception ?
2 completely different things for VAT

 

[OceanBreeze]

I believe I mean exemption in this case (expected my future turnover to be less than 85k).

 

[ChrisCallaghan]

Hi @OceanBreeze ,

The very short answer is that you need to go back to your accountant to check this. It is certainly possible that this may have affected how profitable the company was, and subsequently any dividend taken, however considering the figures you've mentioned, I doubt you'd be looking at any significant amount that couldn't be easily managed in a liquidation scenario. The defence would always be that the company had sufficient reserves to pay the dividends at the time they were issued. HMRC certainly couldn't just 'demand' that you repay the dividends to settle their VAT claim. This issue would only arise if the company entered into liquidation, either voluntarily instigated by yourself, or compulsory through the courts with HMRC as the petitioning creditor.

What is the status of your strike off application? Has HMRC objected to it based on their VAT claim?

 

[DWS]

I believe I mean exemption in this case (expected my future turnover to be less than 85k).

I believe you are incorrect and that you should have applied for an 'exception' and not an exemption.
If you owe £10k in VAT then you must have breached the threshold and then had income of £60k.
In order for an exception to be accepted you need to give reasons why you believe this to be just a one off and that your income will drop back below the threshold in the next 12 months, when applying for the exception did your accountant fill out all the forms correctly showing the previous income and giving the reasons HMRC ask for?
You can appeal if you disagree with the HMRC decision.
As far as the dividends are concerned, I would suggest it depends on the timing, if they were issued prior to the VAT threshold breach then I see no problems but if declared after then why was the VAT breach not picked up on at that time and dealt with, even if you thought the exception would be accepted the amount owed to HMRC would still be sitting on the Balance Sheet until it was.

 

[Lisa Thomas]

Speak to the accountants about the legality of the dividends. It's unlikely HMRC will liquidate the company for a £10k debt...

 

[ChrisCallaghan]

Speak to the accountants about the legality of the dividends. It's unlikely HMRC will liquidate the company for a £10k debt...

Agreed, I think they're unlikely to come forward with a winding up petition for that amount, but I think there's a fair chance that they may object to the strike off application based on how the debt has occurred.

 

[Elliot Green]

If you have evidence of sufficient reserves at the time of declaration then I don't see how the dividends could be reversed, however perhaps one of the IPs can reply.

In terms of the VAT, the bill will almost certainly not be the amount HMRC estimate. Have you worked out the amounts yourself?

It depends on when the dividend was declared. The issuance of the VAT bill is not necessarily the point at which a prospective liability sprouts.

HMRC doesn't issue a bill until it knows about something. Here it appears the VAT bill would be raised after the liability started due to delayed notification to HMRC.

 

[OceanBreeze]

Hi @OceanBreeze ,

The very short answer is that you need to go back to your accountant to check this. It is certainly possible that this may have affected how profitable the company was, and subsequently any dividend taken, however considering the figures you've mentioned, I doubt you'd be looking at any significant amount that couldn't be easily managed in a liquidation scenario. The defence would always be that the company had sufficient reserves to pay the dividends at the time they were issued. HMRC certainly couldn't just 'demand' that you repay the dividends to settle their VAT claim. This issue would only arise if the company entered into liquidation, either voluntarily instigated by yourself, or compulsory through the courts with HMRC as the petitioning creditor.

What is the status of your strike off application? Has HMRC objected to it based on their VAT claim?

So companies house states that the strike off has been suspended due to an objection by the registrar. I'm awaiting a reply/ formal notification by HMRC as I am waiting on a review of my claim after submitting additional information.

Provisionally if the VAT was paid and no dividends were taken the company would still turn a profit, however those dividends were withdrawn many months before the VAT issue was raised and those funds are no longer available.

I believe that the only option is liquidation at this stage as the company had ceased trading many months before the VAT issue was raised, and is unable to generate any income to settle the 10K VAT bill.

 

[OceanBreeze]

I believe you are incorrect and that you should have applied for an 'exception' and not an exemption.
If you owe £10k in VAT then you must have breached the threshold and then had income of £60k.
In order for an exception to be accepted you need to give reasons why you believe this to be just a one off and that your income will drop back below the threshold in the next 12 months, when applying for the exception did your accountant fill out all the forms correctly showing the previous income and giving the reasons HMRC ask for?
You can appeal if you disagree with the HMRC decision.
As far as the dividends are concerned, I would suggest it depends on the timing, if they were issued prior to the VAT threshold breach then I see no problems but if declared after then why was the VAT breach not picked up on at that time and dealt with, even if you thought the exception would be accepted the amount owed to HMRC would still be sitting on the Balance Sheet until it was.

Thanks DWS,

I'm still discussing the possibility of a VAT exception but HMRC's current position is that at the time of the breach I was "unable to demonstrate that I was monitoring my taxable turnover, and was unable to ensure my turnover was below the threshold within 12 months".

 

[OceanBreeze]

Thanks everyone who has taken the time to reply. This has been the most helpful forum interaction I've ever had

 

[ChrisCallaghan]

Thanks everyone who has taken the time to reply. This has been the most helpful forum interaction I've ever had

Happy to help

I believe that the only option is liquidation at this stage

If you feel you would benefit from having a chat about the liquidation process and obtaining a no obligation quotation, I'm happy to go through things with you on a phone call or a Zoom.

 

[Lisa Thomas]

I believe that the only option is liquidation at this stage as the company had ceased trading many months before the VAT issue was raised, and is unable to generate any income to settle the 10K VAT bill.

Not necessarily. Depends on the circumstances and whether the company can afford to liquidate, either via court, or out of court via a Creditors Voluntary Liquidation ("CVL")

 

[Ziggy2024]

Hi thanks for replying. The estimate was calculated based on the total turnover since the VAT breach so if the exemption wasn't given or a deregistration then I believe it to be accurate.

What about input VAT? The amount that HMRC estimate is always more than the actual!

 

[OceanBreeze]

Hi all!

Apologies for the late response but I've just heard back from HMRC and they have granted a full exemption for VAT! The second person reviewing the case took into account the situation I described and granted the exemption. I think it definitely helped that the business was already going through the dissolution process and had all other taxes already settled. I also stated that should they seek to reclaim the VAT owed then I would be request a winding up petition as the company had no assets or ability to pay any VAT owed.

Thanks again for your help and I hope this is useful for others.

 

[ChrisCallaghan]

Hi all!

Apologies for the late response but I've just heard back from HMRC and they have granted a full exemption for VAT! The second person reviewing the case took into account the situation I described and granted the exemption. I think it definitely helped that the business was already going through the dissolution process and had all other taxes already settled. I also stated that should they seek to reclaim the VAT owed then I would be request a winding up petition as the company had no assets or ability to pay any VAT owed.

Thanks again for your help and I hope this is useful for others.

That's fantastic news! Thank you for coming back to this thread to share the outcome.