Spongebob Plan with corporation tax and director's loan account

[heidthebaw]

I am the sole director of a limited company based in Scotland and I owe around £70k in corporation tax. In addition to this, my director's loan account is sitting at £30k and I owe around £60k in personal income tax.

I have spoken with Business Debtline who have essentially given me the same advice as the infamous Spongebob Plan from this forum. I have to cease trading, write to my creditors (in this case it's just HMRC) and after 3 months fill out the DS01 to have the company struck off. They are of the opinion that there is a chance the DLA will potentially "disappear" with the company once the company is dissolved, and have said HMRC may not object to the strike off request.

However, I would be very surprised if this turned out to be correct, since everything I've read says that HMRC automatically objects to strike off requests where there is a tax debt, as the system is entirely digital now. I have filed all of the requisite documentation throughout my time, so they are aware of the DLA, but I haven't paid them any money. I assume that they will object, appoint a liquidator and pursue me for the debt to the company. At this point it seems likely I will need to enter personal sequestration (Scottish bankruptcy) since I cannot afford the £100k.

I am writing this post to check with more knowledgable people if my instincts are correct. Do HMRC always object? If they do, am I able to file another strike off request 3 months after the objection? Is it inevitable that they will pursue me for the balance of the DLA?

 

[Lee Green]

My view is that you should not be applying to do a strike off since you know the company has assets and liabilities. A strike off is not intended for companies in this position.

Your duty as a director is to act in the interest of creditors. Striking the company off hoping you avoid the DLA is not in the interest of creditors.

You may not be able to afford £30k, but if you could fund a Liquidation (£5k say) then at least the case will be properly reviewed and ultimately you know that you have dealt with it properly. The Liquidator will be required to assess your ability to repay. If they conclude no further action should be taken then that is on them.

 

[heidthebaw]

My view is that you should not be applying to do a strike off since you know the company has assets and liabilities. A strike off is not intended for companies in this position.

Your duty as a director is to act in the interest of creditors. Striking the company off hoping you avoid the DLA is not in the interest of creditors.

You may not be able to afford £30k, but if you could fund a Liquidation (£5k say) then at least the case will be properly reviewed and ultimately you know that you have dealt with it properly. The Liquidator will be required to assess your ability to repay. If they conclude no further action should be taken then that is on them.

Many thanks for your reply. I note that you are an insolvency practitioner, so you know exactly you’re talking about. Having said that, I would assume someone in your profession would always recommend a voluntary liquidation?

What do you mean when you say “dealt” with properly? Unfortunately the physical assets of the company total less than £1k, and the money left in the business is less than £1k. In addition to this, I am not in a position to fund it personally.

 

[UK Contractor Accountant]

If the company gets struck off its your responsibility to declare on your tax return the £30K as either income or a distribution to you on winding up (capital gain).

 

[MikeJ]

I am the sole director of a limited company based in Scotland and I owe around £70k in corporation tax. In addition to this, my director's loan account is sitting at £30k and I owe around £60k in personal income tax.

Since you've used "I" for both the corporation tax and the personal income tax, could you clarify if the company owes you the director's loan, or you owe the company?

 

[heidthebaw]

Since you've used "I" for both the corporation tax and the personal income tax, could you clarify if the company owes you the director's loan, or you owe the company?

I owe the company £30k in director’s loans.

 

[UK Contractor Accountant]

I suspect your DLA is more than £30K if the company owes £70K in ctax.

Where has that £70K gone that should been left in the company to pay the tax? if paid out as dividends to you then these are illegal dividends that any liquidator would seek to recover.

 

[heidthebaw]

I suspect your DLA is more than £30K if the company owes £70K in ctax.

Where has that £70K gone that should been left in the company to pay the tax? if paid out as dividends to you then these are illegal dividends that any liquidator would seek to recover.

The numbers I have quoted are entirely accurate; your suspicions are incorrect.

 

[DWS]

The numbers I have quoted are entirely accurate; your suspicions are incorrect.

So what happened to the £70k that should have been set aside for C/Tax?
If this was spent on the Company then the Co may well have a loss that could be offset against what is owed?

 

[Lisa Thomas]

Many thanks for your reply. I note that you are an insolvency practitioner, so you know exactly you’re talking about. Having said that, I would assume someone in your profession would always recommend a voluntary liquidation?

What do you mean when you say “dealt” with properly? Unfortunately the physical assets of the company total less than £1k, and the money left in the business is less than £1k. In addition to this, I am not in a position to fund it personally.

Happy to chat to you about this.

Do you have any other personal debts and do you own any physical assets of material worth? i.e property with equity in it?

This is something any liquidator appointed would need to consider when doing any potential deal as regards repayment of some/all of the overdrawn DLA.

 

[Elliot Green]

If the company gets struck off its your responsibility to declare on your tax return the £30K as either income or a distribution to you on winding up (capital gain).

Why would it automatically go on his tax return if there was no distribution and the debt is still owed to the company?

 

[UK Contractor Accountant]

Why would it automatically go on his tax return if there was no distribution and the debt is still owed to the company?

why wouldn't it?

Liquidators should inform HMRC when they don't collect in all the DLA owing and write the balance off.

It needs to go down as income or cgain at some stage and IMO when Strike Off happens the debt has effectively been written off.

Yes you can argue that the company be restored and the debt chased again but realistically does that ever happen in practice except in extreme public interest cases.

 

[Elliot Green]

why wouldn't it?

Liquidators should inform HMRC when they don't collect in all the DLA owing and write the balance off.

It needs to go down as income or cgain at some stage and IMO when Strike Off happens the debt has effectively been written off.

Yes you can argue that the company be restored and the debt chased again but realistically does that ever happen in practice except in extreme public interest cases.

The act of strike-off does not appear to have the legal effect of write-off. That appears supported inter alia by Sections 1028(1) and 1032(1) of the Companies Act 2006.

You also have the case of Quillan v HMRC, which appears at odds with the suggestion that strike off triggers write off.

Why would a distribution go on a director's personal tax return if a distribution had not been made?

If HMRC is a creditor of the company, then it is notified through either the Progress Reports or Final account (along with all creditors) of a DLA that is not fully recovered.

 

[UK Contractor Accountant]

You also have the case of Quillan v HMRC, which appears at odds with the suggestion that strike off triggers write off.

Cambridge English Dictionary suggested that to write off a debt requires one ‘to accept … a debt will not be paid’. In the Quillan case, the liquidator’s actions fell sufficiently short of such an acceptance. hoping that the Director would receive some windfall down the line and they could re-open the company and get their hands on it.

In reaching its conclusion, the tribunal has effectively disagreed with HMRC’s published guidance, which suggests that any decision not to pursue a debt amounts to a write off of that debt. That approach might be appropriate in many cases but it is not an invariable rule, as this case demonstrates. Each case must be considered on its own merits.

Would HMRC not argue in this case, if strike off happens, that there is no intention of the Director to repay the loan and as such the company has effectively accepted that the loan has been written off/cancelled.

 

[Elliot Green]

Cambridge English Dictionary suggested that to write off a debt requires one ‘to accept … a debt will not be paid’. In the Quillan case, the liquidator’s actions fell sufficiently short of such an acceptance. hoping that the Director would receive some windfall down the line and they could re-open the company and get their hands on it.

In reaching its conclusion, the tribunal has effectively disagreed with HMRC’s published guidance, which suggests that any decision not to pursue a debt amounts to a write off of that debt. That approach might be appropriate in many cases but it is not an invariable rule, as this case demonstrates. Each case must be considered on its own merits.

Would HMRC not argue in this case, if strike off happens, that there is no intention of the Director to repay the loan and as such the company has effectively accepted that the loan has been written off/cancelled.

It seems to me if the company has not taken steps to write it off, then it is not written off and that appears key in Quillan.