Overdrawn Directors Loan Accounts and liquidation

Overdrawn Directors Loan Accounts and liquidation

Didn't find your answer?

I have been approached by a client with an interesting situation that he wants me to sort out. I think he is naïve rather than dishonest

He set up a company in 2011 via an accountant which traded for about 6 months and generated an income of over £100,000 (expenses were negligible so nearly all pure profit). Then he got a full time job.

He has withdrawn all the money from the limited company, closed down the bank account and he tried to wind up the company in late 2013. Companies House have suspended the winding up because of an objection (HMRC?)

He has submitted no accounts, no company tax return, paid no corporation tax and declared no dividends!

The only way I think I can prepare a set of accounts is to put the withdrawals to overdrawn Directors Loan Account on one side and Capital and Reserves on the other.Probably the simplest Balance Sheet ever!!

Does any one have any good ideas about how to unravel this apparent mess?

Replies (23)

Please login or register to join the discussion.

By johngroganjga
21st Mar 2014 16:28

Do as you say, but then of course provide for the corporation tax, and then when the shareholder has paid it credit his DLA with it and advise him to vote a dividend to clear the remaining DLA balance.

What about VAT?

And of course get your fees paid up front and credit his DLA with those as well.

Thanks (0)
avatar
By daveah
21st Mar 2014 16:58

Additional considerations
In addition to VAT, normal CT on profit, wouldn't the Company would also have to pay CT at 25% on overdrawn DLA and Class 1A on the BIK.

Thanks (0)
avatar
By merlyn
22nd Mar 2014 07:10

Spongebob

This is quite a common thing and on Awebs sisters site UKBF is known as the SpongeBob plan. http://www.ukbusinessforums.co.uk/threads/closing-a-limited-company-wth-...

As the company has no assets at the moment it has no way to pay for you to prepare the accounts and  HMRC have no way of knowing if the company owes them any CT, if it has any assets etc., so if they simply apply to have it struck off again in a few months either the HMRC can decide to get the OR involved to find out, or will stop objecting to the strike off and the company will disappear along with the overdrawn DLA.

 

Not saying I agree with this as personally I think the owner should be forced to pay back their DLA, but without having the company liquidated for which the company doesn't have the funds or the OR getting involved which is unlikely due to HMRC not even being aware they may be owed money, it's highly unlikely this will happen. 

Thanks (1)
avatar
By bernard michael
22nd Mar 2014 10:16

Could this in any way be called money laundering??

Thanks (1)
By johngroganjga
22nd Mar 2014 14:41

The so-called SpongeBob plan certainly is money laundering in my opinion and I would certainly be submitting an MLR report if I ever saw anyone attempt it.

Thanks (1)
By Steve Kesby
22nd Mar 2014 16:29

Surely...

... at the time that the money was taken from the company it would be necessary for the director/shareholder to have intended to defraud his creditors for there to be a crime that the money so extracted can be said to be the proceeds of?

As I understand it, there's no reason for making a money laundering report unless you suspect that a person is in the possession of the proceeds of a crime?

Thanks (0)
By ShirleyM
22nd Mar 2014 16:42

@Steve

Isn't it tax evasion if you do not declare taxable profits (and pay the tax)? Tax evasion is reportable.

If he submits accounts & CT600 then there is no tax evasion, but striking off the company without declaring the profits is tax evasion.

Thanks (1)
By Steve Kesby
22nd Mar 2014 17:30

Not necessarily

Tax evasion is a form of theft. It's theft when one person dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it.

It's tax evasion and theft to deliberately not notify chargeability to tax, knowing that you should do so, hoping that you'll get away with it and not have to pay tax on it.

It's tax evasion and theft to deliberately file a return that reports your taxable income to be £100 when you know it's £100,000 in the hope that you'll get away with it and have to pay the tax on it.

Having notified chargeability to tax, but finding yourself in the predicament of not having any money to pay any tax that might be due and simply failing to fulfil your obligation to file the return that would quantify the amount of tax that you can't now afford to pay for the sake of a quiet life falls short of theft and tax evasion in my view.

I'm not condoning such action, but it's not a crime unless there's dishonest intention.

Thanks (0)
avatar
By Brat
22nd Mar 2014 19:38

Service provider?
As long as the company is still active, the director will have inject some amount to cover relevant tax payables as well as accountancy fee. If expenses were negligible, I would also suggest to check if the arrangement triggers IR35 rules.

Thanks (0)
avatar
By soundadvice
23rd Mar 2014 12:23

Thank you for all the feedback on this question it is hugely appreciated

I am quite new into practice as a sole practitioner so most clients bring in something I haven't handled before.

He has another accountant for his personal tax and has just asked me to sort out his Limited Company.

This clients has paid me some fees up front so I am comfortable handling his case. He is quite open and up front about his situation so I don't think there are money laundering issues; I think he is just naïve and facing and a big tax problem.

His limited company year end is 30/9/12

Accounts were due 2/6/13 over 6m late so a £1500 fine

CT was due 2/6/13 so potential fine of up to 15% of tax due

CT Return due 30/9/13 Fines due of 100 + 99 + 300 (or 5% of CT due)

My inclination is to prepare him for bad news. Then prepare and file his accounts (which will be mainly an asset of Directors Loan Account with CT Liability, Capital and Reserves as the credit side) and CT return and try and get him to reopen the company bank account and repay some of the DLA and pay the CT liability

Could we then declare a final dividend to clear the balance on the DLA (I assume its not too late to do this).

Or would it be better to just close the company down after paying CT and get him to pay CGT (he is a higher rate taxpayer already) on the capital gain using 2 years CGT annual allowances

Or .... should he just lie low and hope HMRC go away and Companies House dissolve his company (I am not happy with latter this idea at all)

Many thanks again

Thanks (0)
avatar
By User deleted
23rd Mar 2014 12:38

Some interesting views

The company has a statutory obligation to file a tax return. If I suspect that the director is deliberately trying to dodge that obligation in order to obtain a pecuniary advantage, you can be pretty certain that I'd be notifying SOCA. Perhaps David W can give us his thoughts?

As for the fines - can the OP explain where he gets his figures from?

Thanks (0)
avatar
By soundadvice
23rd Mar 2014 14:23

Sorry the fines should have read £100 for late filing, a further £10 per day for 90 days (£900) if 3 months late and then a further £300 if 6m late (or 5% of tax due). Although looking at HMRC it now says £100 if late another £100 after 3m and then 10% of tax bill if more than 6m late; not sure which is correct

Re late payment of CT I picked up the 15% from my study notes but looking at HMRC it seems to suggest no fines for late payment just interest charges

I don't think my client is trying to be dishonest. He had a falling out with the accountant who set his limited company up but was still paying him a retainer well after the limited company stopped earing income. I think he was probably unaware (no defence I know) of his obligations and only came alive again when he got a demand and £100 fine from HMRC a couple of weeks ago to pay CT, at which point he contacted another accountant .. me!!

Thanks (0)
avatar
By airgeadagam
23rd Mar 2014 14:43

Makes One Wonder

What kind of job he got to give up a business that generated almost £ 100,000 profit in 6 months.

Thanks (0)
avatar
By daveah
23rd Mar 2014 16:49

CT on overdrawn DLA - apologies

I forgot to mention that the 25% CT charged on this will be refunded on clearance of the overdrawn DLA, but the associated interest and/or penalties won't.

It also appears that the VAT liability mentioned by John has not been included in your calculations, but simplistically if the income was VATable at standard rate, exceeded 73k and generated  prior to 31/3/12 then 27k was liable to VAT (possibility of billing the client VAT only invoice?) or if less than 73k at 31/3/12 then 23k liable to VAT - reasoning is that all the income was generated in 6 months (OP). This does not take into account any VAT on purchases.

Given that the Director is an officer of the company, I believe Class 1A NI comment still holds, but I will stand corrected if this is not the case. I have based this on him being either an employee and officer of the company, and that the loan is interest free as is the norm with a credit balance.

Thanks (0)
avatar
By soundadvice
23rd Mar 2014 17:15

The client was registered for VAT from the date of incorporation by the previous accountant. It remained registered until well after the income stream stopped. The VAT returns and payments seem to have been done correctly.

Thanks (0)
avatar
By trim
23rd Mar 2014 18:02

With respect I find it extremely hard to believe that someone who has a company that can earn £100k in six months would be naive enough to think he can earn that money with no liability to tax. This is a deliberate attempt at tax evasion, the fact that the VAT returns were all completed correctly is a red flag, they would have been done so he could reclaim VAT on purchases. As HMRC have objected to the winding up, they will not be about to let it go. 

Re IR35 I imagine HMRC will be fully aware what he does they do have access to his Tax Returns after all.

I also imagine the other accountant was not happy to go along with this charade.

 

 

Thanks (1)
avatar
By andyjdicker
24th Mar 2014 09:41

Personally...I wouldn't touch a client like this with a bargepole. In my opinion, if a director takes all the money out of the account, without any real intention to pay the corporation tax which is due upon the profit generated then he, as an officer of the company is committing various offenses which you should not be involved in any way shape or form. I cannot see any way in which he would not be aware of the need to provide for corporation tax on this, especially as he has had the services of another accountant in the past.

Thanks (0)
By johngroganjga
24th Mar 2014 09:59

But he has come to the OP to sort out all the compliance obligations for him!

Thanks (0)
avatar
By WhichTyler
24th Mar 2014 10:09

'Sort out'

The OP hasn't clarified whether 'sort out' means 'help me fulfill my loegal obligations, no matter what the cost' or 'make it all go away so I don't have to pay any money back'. I fear the latter...

Thanks (0)
By johngroganjga
24th Mar 2014 11:01

Maybe -  but we can't condemn

Maybe -  but we can't condemn him for being dishonest, or say that the OP shouldn't assist him,  until we know which it is!

Thanks (0)
avatar
By User deleted
24th Mar 2014 11:11

Agreed. John

There are a lot of cynics on this site :)

 

This is a deliberate attempt at tax evasion

I'm not sure how such a categorical statement of fact can be made. (It may be the case but, as you suggest, there is only one person that can possibly know with any certainty.)

Thanks (0)
avatar
By soundadvice
24th Mar 2014 15:02

The client has asked me to try to sort things out for him and he has paid me a reasonable sum up front

My intention is to try to get reasonable answers to questions I have raised about items going through the Companys Bank account which is not arduous as there aren't too many transactions.

I have outlined to the client the fines and penalties due at this stage and indicated approximate tax liabilities and S455 liability.

I have advised him he needs to submit Accounts, CT600 and pay Corporation Tax ASAP.

Based on his response I will be able to decide the best way to proceed

Thanks again to everyone. Really helps with the learning curve!!

 

Thanks (0)