Client wants to wind company up with HMRC debts

Client wants to wind company up with HMRC debts

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Morning everyone,

I have a client who has run a pretty unsuccessful business for a few years and (this is very long story made much shorter) wants to wind it up with only HMRC debts outstanding, namely fines on non-filing of CIS and VAT too.

My question is: the client wants to just let HMRC wind the company up and he's happy for that to happen, or am I better to get him to an insolvency practitioner for advice - or somewhere in the middle?

Any advice would be appreciated.

Replies (29)

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By johngroganjga
10th May 2013 08:59

If his company has other creditors as well as HMRC (including you perhaps?) he won't be able to liquidate it with only HMRC debts outstanding, at least not without giving undue preference to his other creditors, which the liquidator will simply reverse.  He certainly needs advice from an insolvency practitioner, if only so that he is aware of all the consequences that might follow from HMRC winding the company up.

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By merlyn
10th May 2013 08:52

Using an IP

If the company has no assets, then they won't be able to pay for an IP.

This is an often asked question on AW's sister site UKBF and the spongebob plan is often suggested for companies in this situation -

http://www.ukbusinessforums.co.uk/forums/showthread.php?t=268551

It basically works that the company writes to all creditors stating the company has no assets to pay for an IP or liquidation and then applies for the company to be struck off.

Not saying I endorse this course of action, but it seems to have worked for others.

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By User deleted
10th May 2013 09:05

The risk is ...

... that, depending on the circumstances, the directors may be pursued.

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By merlyn
10th May 2013 09:19

DLA

Only really if they have an overdrawn DLA which would be considered an asset of the business.

If they appointed an IP this would have to be repaid anyway and as some of it would go towards paying the IP's fees the HMRC would end up with less.

As I said don't endorse the spongebob plan, but if the company doesn't have the money to look at liquidation it seems like the only sensible option.

 

Whatever the client does tell them not to agree to pay for any IP's fees personally/

 

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By User deleted
10th May 2013 09:35

Not just overdrawn DLAs

Illegal dividends as well (though the effect is usually to reclassify them as loans, so there's a degree of hair-splitting :)

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By merlyn
10th May 2013 11:07

All for splitting hairs

Sorry yes  if illegal dividends are taken these are usually converted to an overdrawn DLA.

Can't see any increased risk, as if there is an overdrawn DLA and the director appoints an IP (or the OR gets involved) then they will have to pay it back, if they go down the striking off route then worst case they will have to pay it back.  Best case the application to strike off isn't opposed and the company dies along with any DLA.

 

 

 

 

 

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By cbp99
10th May 2013 12:27

What happens if

the director's loan, say about £20k, is cleared by way of bonus, (which obviously increases the HMRC debt)?

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By cparker87
10th May 2013 13:11

Roll on the integration and automation of HMRC

to prevent such practices as "The Spongebob Plan".

I cannot see that they are legal. They simply take advantage of a lack of resource to tackle a problem. No doubt Directors involved in phoenixing companies like this haven't really 'lost their livelihoods' and are more likely pulling a fast one.

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Replying to cparker87:
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By legerman
28th Jun 2017 15:37

cparker87 wrote:

Roll on the integration and automation of HMRC

to prevent such practices as "The Spongebob Plan".

I cannot see that they are legal.

Done properly of course it's legal, and absolutely the right thing to do if there are insufficient assets to cover the liquidation fees. As already said, if there's an overdrawn DLA or other assets that cover the liquidation fees then the Spongebob plan is the wrong action, and the Directors become personally liable for the debts of the company.

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By merlyn
10th May 2013 13:36

No Funds

It's not a phoenix as no new company is being created, if there was then there would be something being paid to the old co for the assets to pay off debts.

 

As I've said before I don't endorse the spongebob plan, but assuming a limited company has debt but has no assets (no stock, cash or overdrawn DLA) so can't afford to appoint an IP, then I can't really see any other option available to them, even if one of their creditors paid for an IP (or the OR got involved) then as the company has no assets to pay it's debts the only person who would get any money would be the IP.

 

 

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Replying to Kelly1234:
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By cparker87
10th May 2013 13:50

.

merlyn wrote:

It's not a phoenix as no new company is being created, if there was then there would be something being paid to the old co for the assets to pay off debts.

 

As I've said before I don't endorse the spongebob plan, but assuming a limited company has debt but has no assets (no stock, cash or overdrawn DLA) so can't afford to appoint an IP, then I can't really see any other option available to them, even if one of their creditors paid for an IP (or the OR got involved) then as the company has no assets to pay it's debts the only person who would get any money would be the IP.

The cynic in me can't believe that those assets which are encouraged not to be reported under the Spongebob Plan are then simply sold or not used. After all, who knows about them? I don't know many business people who when they have had a failed business decide to go back into employment, they generally try again. In all likelihood it's a phoenix jobby is my bet.

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By merlyn
10th May 2013 15:29

Just the facts, ma'am

Without a lot more detail it's impossible to tell, there is huge scope for people to take assets away from the company prior to it's striking off but as you say as no one knows about them how will we ever know?

 

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By brianheg
13th May 2013 11:22

At the risk of stating the obvious

What you're supposed to do is take insolvency advice from a licensed insolvency practitioner 

Breaching directors' duties when a company is insolvent may lead to disqualification from acting as a director and personal liability for some or all of the company's debts. It's important to seek proper advice. Most won't charge for an initial consultation, as they want to encourage referrals from accounting firms. If there are no assets to pay an IP, he or she will likely recommend that you petition for winding up with the Court. The Official Receiver will then become liquidator and will investigate the circumstances leading to the winding up.

The above risks also apply to shadow directors, which can in certain circumstances include a professional adviser such as an accountant.

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By bilbob
13th May 2013 11:38

Experience on this

I became involved in a situation where a sole director/shareholder had paid a dividend, yet the company owed HMRC £6.5k for CT and had no funds to pay it because the company had lost its contract and the director was basically unemployed. The director said that the reason for lack of funds was that his previous accountant calculated the tax incorrectly, which was supported by paaperwork I saw but I never acted for the company.He owned a rental property and a house in which he lived. The director applied to have the company struck off, HMRC objected  but never did much and I periodically asked the director what was happening- he said he just told HMRC that the company did not have the money. I recently saw that the company had been dissolved and as far as I am aware the CT was never paid. Annoying I know for everyone who pays their tax but it seems hmrc must have some sort of de minimis, unless it was just luck. Ho hum!

 

 

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Replying to leshoward:
By jon_griffey
13th May 2013 12:06

CT written off

bilbob wrote:

 I recently saw that the company had been dissolved and as far as I am aware the CT was never paid. Annoying I know for everyone who pays their tax but it seems hmrc must have some sort of de minimis, unless it was just luck. Ho hum!

HMRC do seem to be very relaxed in this area.  It seems like for the smaller company - even those owing tens of thousands in CT, VAT etc, that if the company is dissolved, whether under the DS01 or non compliance route then the outstanding tax is written off.  Its almost like the file gets closed immediately a company is dissolved.  Similarly it seems that there are individuals out there who go one step further - they form companies and commence trading, never file any returns or prepare any accounts and after a couple of years strike it off and repeat the process.  I would go as far as to say this practice is widespread.

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Replying to [email protected]:
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By The Black Knight
13th May 2013 12:35

HMRC are particulary usless in this area!

jon_griffey wrote:

bilbob wrote:

 I recently saw that the company had been dissolved and as far as I am aware the CT was never paid. Annoying I know for everyone who pays their tax but it seems hmrc must have some sort of de minimis, unless it was just luck. Ho hum!

HMRC do seem to be very relaxed in this area.  It seems like for the smaller company - even those owing tens of thousands in CT, VAT etc, that if the company is dissolved, whether under the DS01 or non compliance route then the outstanding tax is written off.  Its almost like the file gets closed immediately a company is dissolved.  Similarly it seems that there are individuals out there who go one step further - they form companies and commence trading, never file any returns or prepare any accounts and after a couple of years strike it off and repeat the process.  I would go as far as to say this practice is widespread.

Can agree with that. HMRC openly endorse this type of tax evasion by not taking any action. Billions have been lost by their lack of ability and action.

Just don't file the information at companies house, they will assist you then and don't answer any correspondence from HMRC and the problem will go away.

The correct answers are above but that's not real life!

directors loan account! Pa they can't even spot these when the company is alive.

 

Self assessment - who didn't see this happening 15 years ago - on the latest disclosure scheme you can even self assess your own behaviour and penalties, If you don't tell them they will never see!

 

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Replying to [email protected]:
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By Homeworker
14th May 2013 10:14

Slightly off topic..

Slightly off topic but seeing jon-griffey's reply reminded me that I was introduced by a client to a friend of hers who wanted to set up a new company.  I met him, helped set up the company and advised about record keeping etc.

Several months down the line, I have found a website for the new company which suggests it has started trading, although I was told it had not.  I have a feeling that this may turn into one of the ghost companies that never declares its income.  What, if anything, should I do?  I sent an engagement letter when the company was set up but it was never returned.

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Replying to andy.partridge:
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By The Black Knight
14th May 2013 10:28

many a time

Homeworker wrote:

Slightly off topic but seeing jon-griffey's reply reminded me that I was introduced by a client to a friend of hers who wanted to set up a new company.  I met him, helped set up the company and advised about record keeping etc.

Several months down the line, I have found a website for the new company which suggests it has started trading, although I was told it had not.  I have a feeling that this may turn into one of the ghost companies that never declares its income.  What, if anything, should I do?  I sent an engagement letter when the company was set up but it was never returned.

Happens quite a lot.

I would say you have a suspicion that tax evasion is in progress, depending on whether you think the client realised there might be tax to pay on profits or whether they have done this innocently not realising that accounts and tax returns were needed and it was a criminal offence not to do so.

However in reality.....If you file a report nothing will happen. In civil service land you may even provide the confirmation not to do anything from the awkward squad.

If you don't file a report no one will know any different, provided you did not write this down and or put in the shredder.

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By jiatbanus
13th May 2013 13:45

Insolvent company.

HMRC does it - enjoy the company of the OR. He starts from the premise of guilty till you prove you're innocent.

Striking off with just HMRC outstanding! If HMRC has been chasing anyway, expect to get the Striking Off blocked, especially if accounts overdue.

There are too many questions. Spend one hour with an IP and decide then.

 

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By jiatbanus
14th May 2013 10:29

Homeworker (Ghost company)

Just helping to set up someone's company doesn't give you responsibilities. Why should you assume that it is a "ghost" company (if there was such a thing). If it is trading, the law and rules are clear. It's not for you to try to find out if they are breaking the law. Typicall, when the Carousel scams were rife, G Brown spent zillions getting it stopped (if it has) involving almost every agency of government. Personally, I have enough bother policing the normal day to day rules.

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By Chris Smail
14th May 2013 10:52

Maybe they forgot to tell you

Are they obliged to tell you they have started trading?

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Replying to lionofludesch:
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By Homeworker
14th May 2013 11:43

Maybe they forgot??

The key is in the wording "I was told they were not trading", not "I was not told they were trading".  My understanding was that we would act as accountants for the company, which is why an engagement letter was sent originally.

The client who introduced me was appointed company secretary and has now asked to be removed and for me to deal direct with the director.  I think she has her own suspicions, though she has not voiced them.

My concern is that we may unwittingly have assisted someone to engage in a business that will not be declared.  Should we resign as accountants (on the grounds of lack of communcation perhaps), even though the engagement was never formally confirmed?

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By johngroganjga
14th May 2013 11:33

Why do you "have a feeling"

Why do you "have a feeling" that this company will never declare its income.  It doesn't sound to me that that comes anywhere near the level of reasonable suspicion that triggers the need to make a MLR report.

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By The Black Knight
14th May 2013 11:52

let it run

I would let it run and see if your gut instinct is confirmed? The crime only occurs when accounts are due and not prepared and filed. So technically no crime has taken place yet.

To avoid doing a report or longer file explanation - do not look at again?

It is common practice and no one is concerned anyway.

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By johngroganjga
14th May 2013 11:52

If your terms of engagement were never accepted there is nothing for you to resign from.

Surely  the thing to do is ring up the company - "not heard from you for a while, was wondering how it was going, will you still be wanting me to act as your accountant, was wondering as engagement letter I sent you a while back has not been returned etc etc". 

That should either put your mind at rest or turn your uneasy feelings into a suspicion that you should report.

They may just be waiting to come back to you after their first year end when they need you to prepare their accounts. 

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By The Black Knight
14th May 2013 12:01

you could risk assess

You could re assess as high risk and ask for a copy of a telephone bill...which will solve everything!

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By John FP
28th Jun 2017 13:43

ok having read through this and also been pointed at this post by several others I have a quick question about a similar case I am dealing with.

The company was in fact a sole self employed IT consultant and as such the only employee was the director.

The company ceased to trade 10 mths previous as the individual was taken on full time at his last role.

his personal circumstances meant he buried his head in the sands as he could not afford the accountants fees to wind the company up.

So no assets, no cash in the bank and currently setting up a debt management plan so no ability to fund any payments himself.

The only outstanding debts are oustanding corperation tax from previous year and anything from the final 3 mths trading in this year.

Would he only need to write to companies hse or would he need to write to HMRC as well

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By The Black Knight
28th Jun 2017 14:05

HMRC are starting to go for winding up orders. but seem only to pick the cases where there is no chance of recovery.
I guess that's HMRC logic for you.
Just write to hmrc and other creditors that Co has ceased to trade and there are no funds available for formal insolvency or to pay creditors and that company will apply to be struck off in due course.
I wonder why HMRC don't go for IR 35 and assess the directors PAYE personally surely that would be easier than a winding up order.

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By legerman
28th Jun 2017 15:43

The simple answer is for HMRC to demand personal guarantees of all Directors. Why they don't actually do this is beyond me. To make things fairer allow a review so that if a Company does go bust for reasons beyond the control of the Directors, then an appeal process can look at the Company and waive the personal guarantee under the right circumstances.

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