Trouble brewing....

[Bankonthis]

Hi All,

great site and community, very glad to have found you lots of valuable information.

I have a business with my partner, we operate like many under a ltd co status for tax efficiency. Things have and are going well we usually gross 10-12.5k month. We are currently doing some building work on our home financed by income held in the company and released as dividends and the bills have jumped considerably, at the same time it looks as though we will have a co tax liability that's higher than what we'd expected (22k).

As a result we're starting to feel a bit squeezed. Tax is due at the end of June, and though we can comfortably pay, the tax and the costs of the build will reduce our tax saving for the current year (yr end 30/09/2015) not due until next June.

Originally we thought we'd have around 25k in the bank after the build+tax + whatever we make in July and August. Though now it's looking like 7-10k + July + aug income. I'm expecting the next tax bill to be around 30k, and I'm a bit concerned that we'll have to find this between now and Sept, our year end. Normally I would feel this is achievable but for the recent news that my partner and I are expecting our third child.

Her work involves travel and it's quite physically demanding and as we're neither of us spring chickens she will need to take it easy in the 1st trimester and not take risks, long haul flights etc so it will most likely mean a drop in company income.

If I could stop the build I would but we're fully committed work is already under way. We don't have any debts in the company, and have a healthy balance. Unfortunately we can't seem to get a remortgage which would really solve our problems, as the company is only 2 yrs old we take most of our salary in dividends, my partner is an EU national with a fairly new tax history in this country and I have an old CCJ skeleton in the closet.

I haven't talked to my accountant yet but I'm assuming that we have to show the income in the company for the period of the tax year, if so am I right in thinking we could potentially become insolvent if by the 30/09/15 we can't show a profit?

I'm estimating that we could be around 15k short on the CT could this cause HMRC to bring a misfeasance charge against the directors(my partner and I)

Should I take her name off as a director just incase so that one of us can escape without a having a debt assigned to us?

Maybe I'm being too pessimistic, but if it looks as though we're going to be insolvent should I refrain from filing accounts and go the spongebob route?

I've experienced money problems in the past and buried my head hoping things would just magically iron out.I learned the hard way that you need to face this stuff head on and deal with it.

Many thanks for your advice. It's hugely appreciated.

 

[Scalloway]

I think it is pretty unlikely that HMRC will take any legal action against the directors for £15,000. I would discuss this with your accountant and speak to an insolvency practitioner about your options.

 

[john1989]

Insolvent or short-term cash flow problem?

 

[Chris Ashdown]

Were the dividends paid out when you could prove the company was in profit including tax liabilities

Can you expect to trade out of the situation or maybe get a loan to cover the shortfall

 

[UK Contractor Accountant]

You are talking about a CT debt that will not become due until 1 July 16.

Stop worrying about it about now - anything can happen in the intervening period of 14 months.

You wil be able to negotiate a payment plan when the time comes or alternavitely sort out some funding for the business.

 

[Bankonthis]

I know it seems a long way off but from my calculations I will have about 10k left in 3 months having paid off the tax. I will also be the sole earner with about 4-6K/month coming into the business. Am I right in thinking that I will need to show the tax owed in the bank account on the year end filing? If i don't when we file the company tax return will this show as an overdrawn directors loan?

On the face of it this seems like cashflow but the worry is that we're slipping a bit, this year we'll be ok but next year by the end of June I will need to have tax savings of at least 30k but in order to be on top of my tax for 2016 more like 50K(the arrears + the current year) This is quite a lot with a new born and only one of us bringing home the bacon. It is possible that i can scale up in that time but as they say past performance is no indication of future success.

In terms of additional borrowing for the company i'm not sure who will finance us, I have a CCJ and my partner has a short credit history, though it's squeaky clean. I know it goes on the company but we were refused a bank account by HSBC because of me....

If I have a bad month which does happen from time to time or I don't get paid for something for a few months, my partner usually kicks in with some job or other. Though this will be less likely over the coming months so although it seems like i'm flapping for nothing it's a distinct possibility that we'll have some cashflow issues in the coming months.

so if it does get on top what should i be thinking about bearing in mind that i wont be able to fund the business from borrowing. Spongebob? In which case do you not file the year end accounts?

 

[Scalloway]

I repeat speak to your accountant
Speak to HMRC and pay them what you can. They are less likely to take drastic action if you communicate with them and set up a payment plan.
See if you can cut expenses if you can't borrow or get in more income

Keep going and you will see light at the end of the tunnel.

 

[Chris Ashdown]

You don't say what the jobs are, but could your wife undertake some work without traveling i.e. from home

As its your sole income would getting a better job that paid more be easy to get without moving house

Is there anyway you could increase sales or get more stable sales

Its relatively easy to call it a day but you need to be able to earn straight away afterwords.

 

[Lisa Thomas]

Hi - without going in to too much detail you shouldn't be taking dividends if there are insufficient profits to do so. I's not a problem if you can trade out of it but if you can't it will come back to bite you. I echo Scalloway's advice to speak to your accountant - it may be best to treat the drawings in a different way. Taking your partner off as a Director will not mitigate her for the dividends issue. Speak to your accountant and possibly a licensed IP for more detailed advice. Your accountant will probably be able to recommend an IP. Most good ones will give you a free initial meeting.

 

[Walkol]

You don't have to have the money in the bank to pay the corporation tax until it is due.

It sounds like you may have taken more in dividends than the profit allows. Speak to your accountant asap to get a full and clear picture where you stand regarding dividends taken, potential tax liabilities and such forth. If the business is making profit (which it seems it is) then talk of insolvency is most likely not needed.

 

[Bankonthis]

Hi since my last post a lot has happened personally, illness has been a major setback unfortunately preventing my partner from working and adversely affecting our finances. She's now back to full health but it's going to take a while before she is able to see some income.

I've been making enough for us to live on though still have been unable to make a dent on the tax liability which is now due. I've spoken to HMRC and i'm making payments but they're not close to what we will need to pay to clear the debt by the end of the financial year. I'm wondering whether it's time to appoint a liquidator and what will happen in that scenario. We currently have a tax liability of 27k, 9k of this could be put onto the tax year end 2016 if we transfer some of the drawdowns into income for this year. We have some computers with a fairly low value and but very little in the way of company assets. Any help or advice would be much appreciated.

 

[UK Contractor Accountant]

Do you own your house? If so is there any equity in it.

Your overdrawn DLA was declared at £34K at Sept 15 and is likely to go higher once the end of this month signifies another year end for the company.

Any liquidator appointed will seek repayment/partial repayment of your DLA.

 

[Bankonthis]

Yes we own our house and there's a lot of equity in it. Would we end up with a charge or could we be forced to sell it?

 

[Bankonthis]

We also have about 12k in outstanding invoices due to be paid this month

 

[Gavin Bates]

If as uk accountant has mention you have an overdrawn loan accountant position then in a liquidator will be required to see if you have assets to recover this sum. Even if you haven't then HMRC may look at this as drawings instead of a DLA and then tax you accordingly. As it would appear that this was in your previous then HMRC will be aware of this. Most insolvency practitioners will offer you a free initial meeting to discuss the whole position but I think you need to understand the current DLA position.

 

[Gavin Bates]

I have just read your recent post re assets. In these circumstances if you liquidate the insolvency practitioner would be looking for full repayment.

 

[UK Contractor Accountant]

Speak to a 'friendly' liquidator for your options. PM me if you need any recommendations.

 

[Bankonthis]

So would they be looking at our personal assets? Could they force a sale of our house for example or would we have a charge applied in this instance. As it is we have no savings due the our circumstances with the loss of income new baby it's been pretty much impossible to save and would be very difficult to make repayments until my partner gets a job. She does make a lot when she does, theyre short contracts and can be very lucrative.

 

[Gavin Bates]

Technically as the DLA is a personal debt the liquidator can look at your personal assets. In terms of the house the liquidator could do either of the options you have mentioned but generally would prefer to come to arrangement, monthly payments etc.

I guess the main point is it better you paying by instalments to HMRC through company or liquidate the company and then have to with the DLA?

 

[UK Contractor Accountant]

So you have £39K debts at the moment plus another say £10K for CT tax for the Sept 16 year end making total debts of around £50K mark with no fixed assets to realise.

Yes as you state it is time to call it today wirh the company as you are trading whilst insolvent and have been for some time.

 

[Lisa Thomas]

Hi - sorry to hear things have not been going well. You really do need to speak to an IP. Yes worst case scenario the Liquidator can pursue you for the DLA/illegal dividends so best to get in touch with someone who will reach a sensible agreement with you.

Repossession is extreme but dependent on the circumstances, could happy in a worst case scenario.

I've recently allowed a Director 2 years to pay back her overdrawn DLA as the alternative would have meant Bankruptcy and no recovery so we reached an amicable solution instead as she wanted to avoid Bankruptcy.

Happy to chat to you and talk through your options.