Close LTD company with taxes due

[SimonMac]

Suppose the question is, what happened to the money, did you blow it or was it spent on day to day operations

[blackeye]

I disagree with the advice being given here. I'm not an accountant, and I suggest you speak to one instead of talking to a bunch of IT consultants.

If you're working through a limited company, you shouldn't be taking up personal debt to pay off the LTD liabilities. The point of a limited company is that you shouldn't personally be liable for things when they go wrong. Businesses fail everyday.. yours isn't a special one because you're a contractor.

Taking dividends where there aren't any retained earnings is another matter. However as we all only see this at the end of the year and take regular dividends, it could be argued that the company earnings were below expectations.

Nothing is black and white in these situations.. and if your a first time director you probably could get away with it the first time (but not without some pushback) and create a new company and start again.
Its unlikely that you would have to pay back the illegal dividends unless it can be shown you were being particularly reckless. As I said, its not black and white.

[chopper]

I disagree with the advice being given here. I'm not an accountant, and I suggest you speak to one instead of talking to a bunch of IT consultants.

If you're working through a limited company, you shouldn't be taking up personal debt to pay off the LTD liabilities.

From HMRC manual CTM20090

Frequently the dividend is found to have been paid unlawfully. If that is the case, the company’s advisors will be able to rectify the situation by reducing or extinguishing the amount of the dividends and drawing up approved accounts showing only such amount of dividends as can be supported by distributable profits. Corresponding adjustments will be made to directors’ loan accounts, if the dividends have been credited to such accounts in the company’s books, or in draft accounts.

And of course if there are things in the director's loan account, then the tax liability will increase further if not repaid (e.g. the 25% payable with Corp Tax, Benefit in Kind on loans, and if the director's loan is unsettled then it has to be treated as income on the director's self assessment return, possibly at a higher rate than the corp tax rate.

So repaying the unlawful dividend may well ultimately be the 'cheaper' option.

[blackeye]

From HMRC manual CTM20090


And of course if there are things in the director's loan account, then the tax liability will increase further if not repaid (e.g. the 25% payable with Corp Tax, Benefit in Kind on loans, and if the director's loan is unsettled then it has to be treated as income on the director's self assessment return, possibly at a higher rate than the corp tax rate.

So repaying the unlawful dividend may well ultimately be the 'cheaper' option.

Unless the director has a significant amount of personal assets, HMRC wouldn't pursue the above. If you've been reckless when you have mucho deniro you will be bent over by her majesties revenue and customs. If it's a newbie at business with no money that has perhaps misjudged things, it won't be as bad.

All I'm saying to the OP, and people reading this in the future, is that you need to seek professional advice before taking out a personal liabilities to pay of taxes for the legal entity you're in charge of running. Your company isn't you, it's a ring fenced entity.

[northernladuk]

Interesting viewpoint. I did think there were legal obligations to protect the shareholders and not use company money to prop up directors personal lives. I though there would be many rules/laws around this so making it very uncomfortable for the OP. That said you could be right and would be interesting to hear what the OP is going to do. I doubt we'll find out though.

[blackeye]

I did think there were legal obligations to protect the shareholders and not use company money to prop up directors personal lives. I though there would be many rules/laws around this so making it very uncomfortable for the OP.

I understand what you're very patronisingly saying. However if you look at the bigger picture of the type of ltd directors that the HMRC deals with, from the 18 year old setting up a business on eBay selling socks, to the multinational companies with £Xm turnover, we are closer to the former.

Again, take professional advise, what anyone posts here is meaningless and just opinion.

[northernladuk]

I understand what you're very patronisingly saying. However if you look at the bigger picture of the type of ltd directors that the HMRC deals with, from the 18 year old setting up a business on eBay selling socks, to the multinational companies with £Xm turnover, we are closer to the former.

Again, take professional advise, what anyone posts here is meaningless and just opinion.

I didn't think it was patronising at all and wasn't meant to be. Well a contractors turnover can be upwards of 100k so not insignificant but I see what you are saying.

[chopper]

I understand what you're very patronisingly saying. However if you look at the bigger picture of the type of ltd directors that the HMRC deals with, from the 18 year old setting up a business on eBay selling socks, to the multinational companies with £Xm turnover, we are closer to the former.

Or to flip it around, small businesses with high dividends/low salaries are very low hanging fruit for HMRC. If this wasn't the case, then IR35 wouldn't be a concern.

To investigate (and win) against 10 contractors will be far easier for HMRC and be a bigger publicity 'win' than one super rich guy who will end up with an army of accountants and lawyers to defend him (or her, of course), resulting in a poxy settlement (see Vodafone, Google et al) which isn't good for publicity at all.

If I were the OP, I certainly wouldn't be assuming there was more likelihood of HMRC letting it go and sleeping easily on that basis. HMRC already know there is a liability, so when they see the winding up order in the London Gazette they'll take action.

[northernladuk]

There is a very long thread from someone in a similar situation here and it looks extremely stressful dealing with the situation and they were still talking repayment methods and so on before I gave up reading.

dissolving ltd company with debts owed to HMRC | UK Business Forums

On just a scan it looks like somehow financing the company and shutting it down gracefully seems to be a much less stressful option. That said getting the money to do that could cause just as much stress.

[Hobosapien]

All I'm saying to the OP, and people reading this in the future, is that you need to seek professional advice before taking out a personal liabilities to pay of taxes for the legal entity you're in charge of running. Your company isn't you, it's a ring fenced entity.

Indeed. But for a debt of around 10k as per the OP where mismanagement of said company has already been fessed up to HMRC, if any 'professional advice' is to get into a long drawn out battle with HMRC and potentially open doors to other harsher penalties or investigations (remember IR35 is commonly triggered as a follow up to other more routine enquiries/investigations by HMRC), rather than attempt to settle the debt quickly and with as little stress as possible then said advice is from a muppet.

Of course personal debt should be the last resort if a simpler quick resolution cannot be found within the rules of running a ltd. In which case we're all ears for how this turns out as a learning tool if nothing else.

Though the more people that get into long drawn out investigations with HMRC the better for the rest of us, so crack on and we'll applaud you from the sidelines for keeping them busy.