Close LTD company with taxes due

[VectraMan]

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.

Thing is, it's hard to see how a contractor company could fail legitimately because if there's no income our costs are mostly tiny (bank charges and accountancy probably). If there's a substantial debt it can only really come about from paying illegal dividends or the director simply helping himself to the company account. So in that sense we are a special case.

If the company is bankrupt the liquidators would try to reclaim as much as possible from its debtors (i.e. the director if the loan account is overdrawn) in order to pay the creditors. I don't think limited liability would help you much in that case.

IMO. It'd be interesting to know what happens.

FWIW my father spent years paying back a personal guarantee on a business loan the company he was a director of took out. The business failed perfectly legitimately with nothing bad said of the directors, but limited liability didn't help him one bit. He says with hindsight it probably would have been better to have declared himself bankrupt and lived with some negative consequences for a few years.

[Lance]

FWIW my father spent years paying back a personal guarantee on a business loan the company he was a director of took out. The business failed perfectly legitimately with nothing bad said of the directors, but limited liability didn't help him one bit. He says with hindsight it probably would have been better to have declared himself bankrupt and lived with some negative consequences for a few years.

You are quite right.
Limited liability is almost meaningless these days. Banks very rarely lend to businesses without some form of personal guarantee from the directors (why would they do otherwise).
before I was a contractor I was involved in various small businesses and in all cases the directors had significant personal liability in the event of failure as well as multiple regulations that if breached would remove the concept of unlimited very quickly.
Taking dividends that aren't profit is, at the basest level, theft from your company. Limited liability isn't much cop when you're caught robbing, even more so from the tax man.

[LondonManc]

Thing is, it's hard to see how a contractor company could fail legitimately because if there's no income our costs are mostly tiny (bank charges and accountancy probably). If there's a substantial debt it can only really come about from paying illegal dividends or the director simply helping himself to the company account. So in that sense we are a special case.

If the company is bankrupt the liquidators would try to reclaim as much as possible from its debtors (i.e. the director if the loan account is overdrawn) in order to pay the creditors. I don't think limited liability would help you much in that case.

IMO. It'd be interesting to know what happens.

FWIW my father spent years paying back a personal guarantee on a business loan the company he was a director of took out. The business failed perfectly legitimately with nothing bad said of the directors, but limited liability didn't help him one bit. He says with hindsight it probably would have been better to have declared himself bankrupt and lived with some negative consequences for a few years.

If you're paying a salary, there's still c£1k/month coming out, even if you're not bringing anything in. Throw in PLI/PI as appropriate, accountancy fees, etc and £1500/month with nothing coming in can quickly rack up. Even if you clear your quarterly VAT, that'll quickly eat into what you've set aside for CT if you've not got a warchest and you're benched for a while.

[northernladuk]

I expect the OP is going to have a wait on to get his first pay from his perm job as well so can't be pleasant at the moment.

[Hobosapien]

If you're paying a salary, there's still c£1k/month coming out, even if you're not bringing anything in. Throw in PLI/PI as appropriate, accountancy fees, etc and £1500/month with nothing coming in can quickly rack up. Even if you clear your quarterly VAT, that'll quickly eat into what you've set aside for CT if you've not got a warchest and you're benched for a while.

I wonder if that would result in a paper loss on the next set of company accounts, so in pure accounting terms HMRC wouldn't be out of pocket given enough time to file current year accounts where corp tax is due and following year where operating at a loss so can reclaim it all back!

So depending on how all this works as far as annual accounts and profit/loss (an accountant would know for sure) if you paid token payments to HMRC to keep them happy until the next set of accounts was submitted it may all clear itself up to some degree.

[VectraMan]

If you're paying a salary, there's still c£1k/month coming out, even if you're not bringing anything in. Throw in PLI/PI as appropriate, accountancy fees, etc and £1500/month with nothing coming in can quickly rack up. Even if you clear your quarterly VAT, that'll quickly eat into what you've set aside for CT if you've not got a warchest and you're benched for a while.

I'm not sure where you stand on paying yourself (the director). If you have staff then obviously you're committed to paying them and that's obviously a legitimate reason the company may not be able to cover its debts, but that may not apply to a director as you have control.

[MrMarkyMark]

I wonder if that would result in a paper loss on the next set of company accounts, so in pure accounting terms HMRC wouldn't be out of pocket given enough time to file current year accounts where corp tax is due and following year where operating at a loss so can reclaim it all back!

So depending on how all this works as far as annual accounts and profit/loss (an accountant would know for sure) if you paid token payments to HMRC to keep them happy until the next set of accounts was submitted it may all clear itself up to some degree.

That approach only works for the likes of Osborne and Little LTD.

HTH.

[ASB]

I'm not sure where you stand on paying yourself (the director). If you have staff then obviously you're committed to paying them and that's obviously a legitimate reason the company may not be able to cover its debts, but that may not apply to a director as you have control.

It is fine to pay yourself. Provided one is solvent. The question is when it becomes untenable. Then it has to stop, otherwise it is trading whilst insolvent.

A problem occurs with accrued liabilities as to what extent these should be taken into account.

Say at year end co had a tax debt of 10k falling due in 9 months and had 20k in the bank.

If the director were to pay himself a salary of 15k would that be insolvent ? Under sokme circumstances yes, under some no. If there is high confidence (and that is reasonable) of securing work which would fund the liabilities then there is a reasonable argument it is OK. If however that work doesn't happen the question is whether the expectation was reasonable or not in light of all circumstances.

[Hobosapien]

Operating while insolvent has got to be tricky for a typical contractor to weigh up accurately when looking at the months ahead. At any given time we expect to be in contract most of the year (if we choose to) but then realise there could be significant bench time between contracts that can by their nature be terminated with little or no notice.

So in a way this 'only doing what I thought was right at the time' argument may work better for contractors that can show they've got the risk of no income generation as part of the nature of the work.

[CloudWalker]

I'm looking to close my company down too as i've accepted a perm roll near home.
I just feel the market is slowing and with uncertainty in the UK economy I need job security.
My accountant said they can close my company for a fee of £770 = VAT!

This is what they said:

Closing the company
Closing the company is a relatively straightforward process, although it does take time. The first step is to ensure all money is collected/paid. Once this has been done we will prepare closure management accounts to determine the most tax efficient method to distribute the remaining profit in the company, which will be either by way of dividends or capital distribution. After we've advised you on the best way to distribute the remaining profits you can close the company bank accounts, transferring any money to a non-interest bearing personal account – this will later be used to pay any final corporation tax liability. The bank closure date will then be the final accounts date, and we will extend/shorten the next accounting period to then.

Final accounts are prepared, and the tax liability established. This tax will need to be paid straight away rather than waiting until the normal 9 months after period end. When we have confirmed that all tax has been paid, we will apply to Companies House for striking off – they will advertise in the London Gazette for 3 months before finally dissolving the company (assuming no objections from creditors).

Any money left within the company (that was transferred to the other bank account but not used to pay tax) will either be a final dividend or a capital distribution.

An individual currently has an annual exemption on capital gains of £11,100 with any amounts exceeding this figure likely to be taxed at only 10% following the application of Entrepreneurs Relief. From 1 March 2012 the amount that can be distributed in this way is limited to £25,000.

We will still be able to treat funds above £25,000 under the rules for capital gains tax. To do so, the company will require formal liquidation and we have links with an insolvency practitioner who will be able to guide you through the process.

If you decide to make the company dormant for the time being, it is important that it does not stay dormant for a period exceeding three years. Entrepreneurs Relief will no longer be available where a company has not traded in its final three years.

In addition, Entrepreneurs Relief is only available to individuals who have been an officer or employee of the company for the previous 12 months and hold at least 5% of the shareholding in the company.

There is a fair amount of extra work involved from our point of view here, so we make an additional charge of £750 plus VAT for the process. Your DD payment will obviously cease when the bank is closed.