Reply to: Creditors Voluntary Liquidation

[northernladuk]

So what's the update?

[BrilloPad]

I do wonder though, if the OP can manage to repay the loan sufficiently for the company to meet its CT bill (and liquidators fee), willl HMRC (and the liquidator) go away happy and the personal taxation aspects become glossed over?

I certainly hope so. Thing is when HMRC get their teeth in they are like a Rottweiler.

ExMrsBp1 works for tax department. Once someone was due a £16 rebate. They vowed not to let them get it back until they had spent £500 in accountants fees.

[ASB]

You need to read and understand the link I posted above. CT/Other creditors money is not yours to speculate with, however confident you feel about it. HMRC might argue that even though the tax due date had not yet passed, you could and perhaps should have paid the tax up earlier.

In any event we are not talking about CT used for further investment, we are discussing a specific situation where dividends were declared and taken illegally.

I don't disagree with that.

I was merely pointing out that an inablity to pay CT does not mean that previous dividends were unauthorised and can be reclaimed (I accept that it is often the case they were paid improperly but it is not a given).

In this particular case it is completely unknown what - if any - reserves were available for distribution. Yes it is likely it was nil. But that is not a certainty. To know that needs sight of all the accounts for all the periods in question.

[tractor]

Actually no. It is if you don't have the distributable reserves.

Contingent liabilities need to be included in these but being unable to pay CT does not of itself make the dividends unauthorised.

(However it does amount to much the same thing).

Consider.

Year 1 I make a nice profit, pay a nice dividend (the CT is allowed for; not yet paid because it is not due).

Year 2 I decide to buy a load of widgets. So many that I spend the CT money. Unfortunately the widget market collapses and I go bust. The CT on the loss is of course calculated and offset. But there remains a shortfall.

Does this make the dividends "illegal". No.

It makes me a damn idiot, it might make me in breach of fiduciary duties as a director. (Arguable, if I can show reasonable expectation of selling the widgets etc I may be ok).

Certainly the extent by which the "divdends" the op took exceed the reserves will (should) be classed as a loan, but this may be a lower sum that the total.

You need to read and understand the link I posted above. CT/Other creditors money is not yours to speculate with, however confident you feel about it. HMRC might argue that even though the tax due date had not yet passed, you could and perhaps should have paid the tax up earlier.

In any event we are not talking about CT used for further investment, we are discussing a specific situation where dividends were declared and taken illegally.

[ASB]

But if you don't have teh CT to cover the dividends they will be declared illegal

Actually no. It is if you don't have the distributable reserves.

Contingent liabilities need to be included in these but being unable to pay CT does not of itself make the dividends unauthorised.

(However it does amount to much the same thing).

Consider.

Year 1 I make a nice profit, pay a nice dividend (the CT is allowed for; not yet paid because it is not due).

Year 2 I decide to buy a load of widgets. So many that I spend the CT money. Unfortunately the widget market collapses and I go bust. The CT on the loss is of course calculated and offset. But there remains a shortfall.

Does this make the dividends "illegal". No.

It makes me a damn idiot, it might make me in breach of fiduciary duties as a director. (Arguable, if I can show reasonable expectation of selling the widgets etc I may be ok).

Certainly the extent by which the "divdends" the op took exceed the reserves will (should) be classed as a loan, but this may be a lower sum that the total.

[Contreras]

I stand corrected.

It would be converted to a loan with BIK implications that would attract additional taxes that need to be paid by the individual instead.

Yes that is true too. I've lost track of the sums being talked about but there may have been high rate tax on the dividend which if re-assessed is no longer due, which could partially offset the tax charge on the loan.

I do wonder though, if the OP can manage to repay the loan sufficiently for the company to meet its CT bill (and liquidators fee), willl HMRC (and the liquidator) go away happy and the personal taxation aspects become glossed over?

[TheFaQQer]

The dividend was used to cancel a loan, so (unless I missed a crucial point buried in the thread somewhere) therefore no cash transfer and if re-assessed it could not be deemed salary.

I stand corrected.

It would be converted to a loan with BIK implications that would attract additional taxes that need to be paid by the individual instead.

[BrilloPad]

It seems there are enough gullible idiots around to make this a distinct possibility. You could start with all those who come here for advice and spend the next 12 pages arguing about it

Only 10 pages so far. Surely there can't be any more posts...

[MercladUK]

Step away from the keyboard.

I am afraid you are completely out of your depth here sunshine.

nice try

[tractor]

......

The dividend was used to cancel a loan, so (unless I missed a crucial point buried in the thread somewhere) therefore no cash transfer and if re-assessed it could not be deemed salary.



Agreed. If the dividend were reversed then technically the company is solvent again, albeit without the "cash at hand" needed to meet its tax bill.



Separate legal entities yes, but HMRC would be entitled to call in the director's loan directly anyway.

From the tax manual...

Where a dividend is paid and it is unlawful in whole or in part and the recipient knew or had reasonable grounds to believe that it was unlawful then that shareholder holds the dividend (or part) as constructive trustee in accordance with the principles stated by Dillon L J in Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] 1 Ch at page 457. Such a dividend (or part) is void for the purposes of both the IT charge on distributions under ITTOIA05/S383 and the long abolished ACT charge under ICTA88/S14. The company has not made a distribution as a matter of company law, and so the dividend does not form part of the recipient's income for tax purposes. The company has not parted with title to the sum that it purported to distribute, which as a consequence remains part of its assets under a constructive trust (see also Ridge Securities Ltd v CIR (1964) 44TC373). Where the company concerned is a close company, it is regarded as having made a loan to the shareholder by virtue of CTA10/S455(1), thereby triggering a charge under CTA10/S455(2). Relief would however be available under CTA10/S458 where the dividend is repaid to the company. That repayment might be by cash or cheque, or by a suitable entry in the loan account.

There you have it, chapter and verse. Emphasis is mine.

It is the Insolvency Practitioner's responsibility to reverse the dividend payment and convert it to a loan.

[Contreras]

If the dividends were illegal, then you'll need to get HMRC to re-open your self assessment so you can correct them. I'd guess that they would be reclassified as income, so you'll need to make sure the correct amount of NICs and PAYE is deducted.

The dividend was used to cancel a loan, so (unless I missed a crucial point buried in the thread somewhere) therefore no cash transfer and if re-assessed it could not be deemed salary.

The company is insolvent because dividends in excess of available reserves were taken. If these illegal dividends are reversed, then the directors owe the company money, and the liquidators can chase the directors to repay enough money to the company to repay the tax debt.

Agreed. If the dividend were reversed then technically the company is solvent again, albeit without the "cash at hand" needed to meet its tax bill.

I agree, that's why I said "repay money to the company", so the company can repay the CT. Separate legal entities.

Where the OP has gone wrong imo (apart from paying illegal dividends) is in getting a liquidator involved. Depending on how aggressive they are they may chase him, or they may drop it.

Separate legal entities yes, but HMRC would be entitled to call in the director's loan directly anyway.

[northernladuk]

CT is a company tax, not a personal tax.
Directors Loan and/or Illegal dividend payments are different.

You stated he will have to pay CT over 3 years, this is incorrect. The company pays CT and it is insolvent.

Step away from the keyboard.

[SimonMac]

Don't be such a spoilsport. I am going to market the scheme. These time next year I'll be a millionaire....

Don't be a big silly then

[tractor]

.....

Don't be such a spoilsport. I am going to market the scheme. These time next year I'll be a millionaire....

It seems there are enough gullible idiots around to make this a distinct possibility. You could start with all those who come here for advice and spend the next 12 pages arguing about it

[BrilloPad]

But if you don't have teh CT to cover the dividends they will be declared illegal

Don't be such a spoilsport. I am going to market the scheme. These time next year I'll be a millionaire....