Reply to: Close LTD company with taxes due

[Fortis]

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.

Just ascertain the full costs of the procedure.

The £750 + VAT from the accountant will be to finalise everything. As an Insolvency practice ourselves, I can advise you that there will be a fee for the successful wind down of your company payable to the Insolvency Practitioner directly. It is likely that as a solvent business it will be dealt with via an MVL. Therefore, you need to establish what the I.Ps fee will be for the MVL also.

Happy to look at that too if you require.

[Hobosapien]

Doesn't sound too bad if that fee includes preparing the final set of accounts.

If final accounts are already paid for somehow then it does seem a bit steep considering most of the info you need has already been provided in that statement.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.