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Is there any way back for this client?

Background - I've very recently taken on a new client who is in a mess.  I don't really want to get into arguments over whether I should have taken them on - maybe I'll start a separate thread for that.  The client is a care business - i.e.: they provide carers to go to old/ill/disabled peoples' homes to administer care, medication, etc, etc.  In short, they are a long way behind with the PAYE.  Again, I don't want this thread to turn into a series of comments that the PAYE is not their money and there's no excuse for paying it over, etc.  The situation is what it is.  They got behind in 2010/11 and had a time to pay arrangement.  They kept to this but fell behind with 2011/12.  They are now a long way behind - far more than is affordable in the short term.

This client has been taking on additional business recently and has had a nod and a wink from the local authority that when the tri-annual contracts are up for renewal in December, because they now have certain accreditations they didn't have previously, they will be awarded substantial amounts of work.

We've done some forecasts this week and proposed a time to pay arrangement with HMRC and they have rejected it although I am waiting on a call from a director there next week.  My hopes that they will show leniency are low.

So, the question is, what is the best way out of this mess?  HMRC told me today that if we can't come up with a 6 month time to pay arrangement they will move to liquidate.  There are no assets to speak of other than the DLA (I know - the PAYE should have been paid rather than funds drawn out to pay household bills but it's happened).

Firstly, if HMRC move to liquidate I assume they'll want the DLA repaid.  If the sole director has no cash to pay this can they move to sell assets (e.g.: the family home) to recover the amount owed by the director?

Secondly, how quickly would they move?  Could they simply order the company to cease trading immediately?  Given the nature of the business an immediate cessation could, quite literally, be a matter of life and death.

We are meeting an IP on Monday morning.  Is pheonixing possible (notwithstanding whether the local authority would transfer work to the newco)?  My main worry with pheonixing is that HMRC might demand a security bond against future PAYE.  The director couldn't come up with this so if required pheonixing is a non starter.  However I assume we wouldn't find out that a bond was required until AFTER the newco was set up - how do we get around that?

If we assume that paying the debt in 6 months or a pheonix are not possible, are HMRC likely to give us a short time to try to find investment and/or a buyer for the business?  They make a healthy gross margin.  The issues have arisen from naivety and poor financial management, not because the underlying business cannot work.  I have no idea whether we could find investment or a buyer or not, but would HMRC grant a short timeframe to look?

Finally is there a possibility, due to the nature of the business, that HMRC might show a little more leniancy with regard to the time to pay?  I have no doubt that with better financial controls (i.e.: actually getting monthly accounts for a start) and understanding of the finances, coupled with the new contract and existing organic growth, that this business can succeed and pay down the HMRC debt and, ultimately, clear the DLA with dividends and/or bonus.

So, after all that, is there any hope?

Thanks in advance


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By Tosie
06th Jul 2012 18:42

Depends on Local Authority

The simple thing is to liquidate but from my experience local authorities are not keen on giving work to companies with bad financial management.I am surprised that they have gained more accreditations.

I would form a new company and put all new contracts into that and build up financial credibility I know it stinks from an ethical point of view but our job is to advise clients how to get out of a mess and make some money so that they can pay their taxes.

To answer your question hmrc are unpredictable on timing for winding up but remember they can only apply for a winding up order your client can attend court and plead his case.

In recent years hmrc have not been to vigilant on DLA's but a liquidator is bound by law to call it in.Depending on how long the company has been trading and salary levels it maybe possible to reduce the dla by a redundancy payment if the company is bust.

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06th Jul 2012 22:05

Why no amounts?

It's very difficult to give useful advice without any numbers.

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06th Jul 2012 23:19

I am struggling

to imagine the scale of this mess, how much must a care home owe in PAYE to not be able to pay it back in 6 months, the mind boggles.  I would suggest they are either too inefficient on costs, or the pricing is lean (too lean), directors take 6 figures right?

Where are your numbers fill in the blanks and you might get somewhere.

Anyway GL.



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07th Jul 2012 05:53

Not a care home

They are not a care home - they provide carers.

It would appear that they pay carers net pay and then spend the rest of the fees they receive on personal living costs rather than paying the PAYE & NIC to HMRC.

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07th Jul 2012 07:53

Already had one second chance

They got behind in 2010/11 and had a time to pay arrangement.  They kept to this but fell behind with 2011/12.  They are now a long way behind - far more than is affordable in the short term

If they were fortunate enough to be given a third chance would they stick to it? It doesn't look very good from the creditors point of view.

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By twj4789
07th Jul 2012 09:10

Alot of info
There is alot of info there with no figures. I would suggest that the company does 2 things straight away:
1) keep upto date with all current PAYE and NI payments
2) make additional weekly payments to start to reduce the outstanding balance
The best way to try to get leniency is to show willing!

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A bit more info. The business majesty £7-£8k gross margin a month on sales of £24-£27k. Overhead is around £7k although I think this could be reduced. Margin is predicted to grow by around £500 per month this year. This looks thin but I'm told it's tough to raise prices (due to the local authority not being prepared to pay more) and care staff being paid not much more than minimum wage anyway.

With the new contract next year margin will increase by between 50% and 100%.

PAYE owed is £40k. The DLA is £18k (amassed over 4 years). The director's salary is £620 pm.

Does this extra info help?

Personally I agree hmrc are unlikely to give any more chances. The question is whether we can prevent the wind up long enough to explore options, or whether a phoenix is possible (ie if a paye security bond would be required)

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By Tosie
07th Jul 2012 10:21

Oh dear sympathy goes out of window.

All those staff are going to have hassle if and when they apply for pensions, sick pay JSA.etc

Make sure you get paid up front.


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By rossmcv
13th Jul 2012 13:08

staff tax NI etc

@Tosie - As the company is getting chased for the debt we can assume the annual P35 was submitted for both years so the staff have no worries when it comes to claiming JSA, pensions etc as there account will be credited with the NI & Tax deducted regardless of whether or not the employer paid it

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07th Jul 2012 10:34

Break even

The company seems to be operating at close to break even. There seems to be no chance of paying the PAYE & NIC from profits. There will be s455 tax to pay.

The director should look into remortgaging or getting a secured loan but that may not be easy. If they could pay £20k into the company that would clear the DLA and mean a repayment of s455 tax. HMRC would be more flexible then.

This would enable the directors to have less stress and concentrate on the business.

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07th Jul 2012 10:43

Nio doubt the IP will look at

No doubt the IP will look at a CVA but I doubt HMRC will go along with it.

Is the gross margin calculated after deducting gross wages? I assume so. In which case apart from the Directors salary of  £620 per month- why are the overheads so large? I have a client doing similar work with T/O of £280K pa. and they are showing a 64% GP.and overheads of £54K per annum before director's salary

You have to query whether it is worth while taking on the local authority contract if it only generates an extra £500 per month GP. Unless there is a built in inflation clause how will they cope with wage inflation. What is the net profit of this extra work?

Is the business model worth saving. It appears as if there are serious inherent costing problems. If these cannot be fixed - the client should liquidate it and walk away.

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@bernard the extra £500 a month this year is not related to the LA contract. They are in talks with cancer charities, etc. The LA contract that should kick in next year will generate anything from £4k to £8k margin with very little extra overhead.

Without this I'm inclined to agree its best to shut the doors

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08th Jul 2012 11:01

The problem you face is now not next year when the LA contract is awarded (if it is). I still come back to ask why are the o/heads so large for a relatively small turnover. The costing for a small office & 1 admin staff member should not be at the level you quoted. If  these can be reduced ASAP you have a chance - If not it isn't sustainable.

I assume HMRC are sufficiently aware of the situation to have their collection dept involved, in which case  approx 3 months from them visiting will see them having gone through the Court procedures and the  company wound up.

Does the director have other liabilities in the company eg guarantees against overdrafts/loans/cars/leases etc ? 

You stated at the beginning that money was drawn out to pay living expenses. I assume that the DLA is being increased by these amounts.

How does he live on a salary of £620 per month. - are there also dividends involved.I hope not as the company is obviously insolvent

Last question. Does he claim Working Tax Credits. It seems that he should subject to the answer to the question above

Good luck with the IP tomorrow



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@Bernard Michael Thanks for your comments.  I actually totally agree with your comments about the overhead - I think it could be reduced significantly as, frankly, most of the cost is back office staff and I can't work out what it is they actually do.

I'm not aware of any director's guarantees which is one ray of sunshine in this whole mess.  She has, however, been drawing 'dividends'.  Fortunately the previous accountant has moved these to the DLA.  This seems to be, from viewing the abbreviated accounts, about all they have got right.  One big worry is telling the director there is no CT to pay when clearly there should be s455 (or is it s419 - can never remember which is correct these days) tax to pay.

If it wasn't for the potential PAYE security bond and/or the risk the LA wouldn't work with a newco due to the history I would have no hesitation in recommending a pheonix (personally I don't like the idea of them, but my personal views have no relevance in this) and starting again and doing things very differently.

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08th Jul 2012 13:08

Read above

"One big worry is telling the director there is no CT to pay when clearly there should be s455 (or is it s419 - can never remember which is correct these days) tax to pay."

If you saw my comment above you would know.

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10th Jul 2012 08:57

Whta did the IP suggest?

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@ bernard - we're going to try to arrange a time to pay with HMRC (if they ever get back to us).  If they won't go for that then the IP suggested moving for a CVA.  There are no other creditors to speak of (everything is paid by monthly DD) and if we can offer 100p in the £ over 4 years or so based on forecasts he was optimistic they'd go for it.

This would be a little annoying as a CVA is, in effect, little different to a time to pay except that the IP carves a fee as well.  However, if this needs to happen it needs to happen.

I'm also going to be giving the client monthly accounts so they actually know where they're up to as well

Time will tell......

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10th Jul 2012 11:02

I've very surprised that the IP suggested a CVA. HMRC are currently playing hard ball (rejecting CVAs) with companies where they represent  more than 30% of the creditor base.

I agree with you - the purpose of a CVA is to protect the company by reducing the amount creditors receive not give them 100%

Are you dealing with a proper IP or a debt management company who will always suggest a CVA

 Also what is the IP doing about the overdrawn DLA which should a part of the CVA proposal?

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By John R
10th Jul 2012 11:15

Extra salary

What was in the mind of the director at the time the "dividends" and personal expenses were paid? Perhaps they should not have been debited to the DLA but were in reality net directors' remuneration that should have been grossed up for PAYE purposes. £620pm is, after all, not sufficient for someone who presumably works long hours as a company director. Surely the settlement of pecuniary liabilities should have had PAYE operated at the time of payment. The fact that the "dividends" were illegal does not automatically mean that they were loans, it is more likely that they were in fact salary payments in the eyes of the director and in other circumstances the Revenue would argue for this treatment. This may mean that there is no DLA but obviously there will be an additional PAYE liability and the need to submit amended P35s.

Alternatively, if the director is that naive, perhaps she thought that the DLA would eventually be covered by a bonus, which could be voted now and credited to the DLA.

I am not suggesting any form of backdating of minutes or changing what has already been agreed. I am simply pointing out that the intentions of the director at the time the payments were made needs to be established (whether or not contemporaneous minutes were prepared) - the previous accountant may well not have established this and simply "corrected" the entries on the basis of what he thought would be the most advantageous for tax without properly making enquiries of the client.

If there is scope for correcting this as above then the additional PAYE liabilities and potential penalties could result in the company being unable to pay its debts (if it is not already) and force it to cease trading and the almost inevitable liquidation would follow, but at least it is unlikely that there would be a comeback by the liquidator or HMRC. Having said that, I seem to recall that in certain circumstances, the Revenue can seek redress from the directors, but the IP will presumably be able to advise on this.

If NewCo can take on the LA contracts, all well and good, but if not, the above would still seem to produce a reasonable outcome for the director.

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By E Scott
13th Jul 2012 19:02

Good luck!

From my experience HMRC are pretty strict on not granting further time to pay agreements where some have been broken and there is no saying how quickly or otherwise they will take action to recover the debt, and I guess potentially appointing their own liquidator - which of course will be a better option than paying your own liquidator if there is no hope of saving the company anyway!

I have managed to successfully rescue 2 companies in the past year in similar situations however both did require the directors to obtain personal finance against their own homes.  As with previous comments this would not normally be my course of advise however in these cases the directors felt the knock on effect of liquidation for the type of business they were involved in would have a critical effect on future business (perhaps like your council contracts?) and in both cases there were overdrawn directors DLAs which may well have had to be repaid in a liquidation situation anyway. I was also, like you, very confident that both businesses were wholly viable and lucrative with the right systems and controls in place. Because of cash flow issues with the companies there were knock issues of obtaining the finance, one had missed a couple of months personal credit card payments and one had income issues due to only being able to show minimum salary through their SA302s so remortgages were not available. I used a great finance broker to help out, they really grasped the situation and had access to mortgages, secured loans and bridging products, and I made commission on the deals into the bargain!! (recommend  Similarly in one case I was able to demonstrate to HMRC that the director had done everything he could to obtain the money needed and by paying a sizeable lump sum to them from raising this finance they then agreed to a new time to pay arrangment.  I guess the fact that the director had shown a personal committment to the company and we had demonstrated that there were no more funds available to the director then HMRC felt it was their best option to go along with our proposals. Both were new clients who came to me in a mess - very rewarding as an advisor I have to say and I have 2 happy and loyal clients who can now sleep at night!  I can understand why you want to get involved.  Good luck!

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