Redundancy in an OMB

Redundancy in an OMB

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Hi,

A little input into this potential plan would be greatly appreciated!

Micro OMB Company, Director-only working for them. Director has now found a rather handsomely paid job and has given up his dreams of being an entrepeneur.

There are cash reserves in the Company, it has paid C/T in the past. My proposal is to suggest an ex gratia redundancy payment.

Here's some relevant facts:

  • Extracts profits as min. salary high dividends
  • No contract in play
  • No other employees

So my questions are:

  1. Can the Company receive a C/T Deduction?
  2. If 1 is yes, can up to £30k be issued? This would clearly be self-gratifying in order to receive a C/T Rebate. However, is it legally & technically correct?

If you have anything else I should consider please let me know!

Thanks for reading,

Chris

Replies (18)

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By frustratedwithhmrc
19th Oct 2011 15:54

In theory, yes. In practice no.

Since a director is an office holder of the company as well as an employee (assuming a contract of employment exists), then of course he / she can be made redundant and therefore would be subject to redundancy terms in the same way as any other employee.

If we were discussing a single director being made redundant by another director who would take over a consolidated role than it wouldn't necessarily be a problem.

Where problems arise is when the directors are effectively making themselves redundant with no-one taking over their roles. In this circumstance I would argue that the directors are creating a potentially artificial 'redundancy' situation in order to recieve preferential creditor status. This would seem to be the case regardless of the terms of the 'redundancy' payments made (statutory or enhanced).

I've had this raised previously in relation to owner managed businesses and the tax treatment around PILON payments.

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By User deleted
19th Oct 2011 15:57

Preference over whom?

There didn't appear to be any other creditors!

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Replying to User deleted:
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By cparker87
19th Oct 2011 16:00

.

Old Greying Accountant wrote:

There didn't appear to be any other creditors!

 

There are no others, not even an overdraft, and the Company will be marginally solvent (before entering any redundancy amount). It currently owes the Director £7k (per the DLA).

Seems encouraging thus far. The plan is to later strike off using form DS01.

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Replying to User deleted:
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By frustratedwithhmrc
19th Oct 2011 16:03

My apologies - reposting

Old Greying Accountant wrote:

There didn't appear to be any other creditors!

Sorry - raising this as a whole concept rather than just the specific circumstances.

Fundamentally, I would argue that it is an artificial arrangement to avoid tax.

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By gerawson
19th Oct 2011 16:06

Re redundancy in omb

Agree with frustrated's remarks.Can't see an argument for redundancy.

Usual way to close is by dividend, but have you considered applying for ESC 19 ?, May be a cheaper for director rather than a dividend, especially if he is higher rate taxpayer

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By User deleted
19th Oct 2011 16:11

But ...

... if company defuct as no contracts, director IS actually redundant and it is not an artificial arrangement per se, just a tax efficient one!

Personally though I would favour ESC C16 (which I think gerawson meant) whilst it is still available.

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By Steve Holloway
19th Oct 2011 16:16

Won't work ..

For a redundancy to be valid it .....

must be an act of the employer done without the consent of the employee. So if an employee resigns, retires, or has a choice as to whether or not to be terminated then that would not be a dismissal. However, an employee who indicates that they would be interested in their position becoming redundant can still be dismissed, so long as the final decision is with the employer.

In your case the employer an employee are the same person and therefore it cant be without their consent. This was from a case I cut and paste the details of for a client letter but I'm afraid I don't have the case reference any more.
 

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Replying to Flying Scotsman:
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By cparker87
19th Oct 2011 16:25

.

Steve Holloway wrote:

For a redundancy to be valid it .....

must be an act of the employer done without the consent of the employee. So if an employee resigns, retires, or has a choice as to whether or not to be terminated then that would not be a dismissal. However, an employee who indicates that they would be interested in their position becoming redundant can still be dismissed, so long as the final decision is with the employer.

In your case the employer an employee are the same person and therefore it cant be without their consent. This was from a case I cut and paste the details of for a client letter but I'm afraid I don't have the case reference any more.
 

 

The trade has dried up and so the office is indeed redundant. This is a product of the Director's choice to pursue other career interests.

Reading your exerpt would suggest that in a similar situation where a single OMB business trade had to cease for some reason (even being at the Director's choice), and redundancy was offered to staff generally, the Director could not be offered a package on similar terms? That would seem inequitable to me.

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By cparker87
19th Oct 2011 16:19

.

What can be cheaper than a 0% tax rate (<£30k ex-gratia payment exemption) and 20% Corporation Tax saving (carry back) on the resulting loss?

ESC C16 and Dividends are the easy way out!

I agree it is artificial, but avoidance is legal. 

It does raise ethical problems, but, by the letter of the law is this possible? Is it avoidance rather than evasion?

 

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By gerawson
19th Oct 2011 16:32

whoops

yes I did mean ESC C16 it's been a long week and only just over halfway through!

I'm still with Frustrated and Steve Holloway, I don't think ESC C16 or dividends are the easy way out, just the appropiate tools for the situation you have described

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By gerawson
19th Oct 2011 16:58

Just another thought

Not entirely up on redundancy so may be wrong, but in your 1st post you said director takes min salary and divs, if that is the case how do you justify £30K redundancy?. Wouldn't expect the revenue to roll over and accept it

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Replying to Flying Scotsman:
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By cparker87
19th Oct 2011 17:03

.

gerawson wrote:

Not entirely up on redundancy so may be wrong, but in your 1st post you said director takes min salary and divs, if that is the case how do you justify £30K redundancy?. Wouldn't expect the revenue to roll over and accept it

I agree. That is one of my main concerns. However, the nature of the payment would be discretionary. I'm not up to speed either, but my thinking here is that they can pick whatever figure they like!

My worry here is I think there is some sort of 4x stat. redundancy limiting factor to the C/T Deductions? Is that correct?

I think that the other limiting factor in the arrangement is how much cash reserves are present; they are below £30k. If the arrangement goes ahead, how can redundancy be declared & offered when the Company does not have the cash reserves?

They can challenge it all they like. However, if it's legal, there's not much they can do about it.

 

 

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By Steve Holloway
19th Oct 2011 17:06

The choice element is key ....

if the business had failed and all staff had been laid off then arguably it is not a choice for the director also to be included in the pot. However, why would he be entitled to anything other than statutory redundancy (or whatever the other staff received)? Also CT deduction is where the payment is wholly for the purposes of the trade ... this is clearly for the benefit of the director!!

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By ireallyshouldknowthisbut
19th Oct 2011 17:35

.

Had a client go bust (business dried up overnight), and the liquidators gave both directors the £30k stat redundancy. This cleared up the (badly OD) directors loan accounts and gave losses to carry back for CT purposes.

None of this was my decision of course, but it was interesting to see what they did. Both directors then went on to form a new co. doing something completely different.

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Replying to Jennifer Adams:
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By cparker87
20th Oct 2011 00:14

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ireallyshouldknowthisbut wrote:

Had a client go bust (business dried up overnight), and the liquidators gave both directors the £30k stat redundancy. This cleared up the (badly OD) directors loan accounts and gave losses to carry back for CT purposes.

None of this was my decision of course, but it was interesting to see what they did. Both directors then went on to form a new co. doing something completely different.

 

Thanks all for input thus far.

 

@ireallyshouldknowthisbut - Can you clarify a few points please?

if there were other employees involved in this?If so, what was their redundancy position?What cash reserves were in the Company at the time?Were contracts in place for each Director?How did the Directors (assuming shareholders also) extract profits?

 

Re the Stat Redundancy; his statutory entitlement would be low due to profit extraction methods low salary. In any case the maximum Statutory Redundancy award is £12,000 (for 61+ year old w/ 20+year service in Company). We all know redundancy payments often exceed this value and often target the £30k ITEPA exemption limit with extra discretionary payments, as described above.

 

p.s. Handy table I found http://www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@employ/documents/digitalasset/dg_177260.pdf

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By nautical
20th Oct 2011 05:40

An artificial avoidance procedure has been acceptable in the public sector for years and therefore acceptable to HMRC.  The standard practice in the military when there is a redundancy programme is to call for volunteers for redundancy.  Once you have volunteered, if selected,  you are then made compulsorily redundant which then brings with it all the benefits of the compulsory bit.  Do not see the problem in principle with a OMB doing the same if de facto it is winding up.

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By ireallyshouldknowthisbut
20th Oct 2011 09:07

Q  if there were other

Q  if there were other employees involved in this?

A There had been in the past but laid of gradually. By the end only two directors. 

If so, what was their redundancy position?

Q What cash reserves were in the Company at the time?

A Negligible, with large OD directors loans

Q Were contracts in place for each Director?

A Unlikely

Q How did the Directors (assuming shareholders also) extract profits?

A Usual PA as salary/dividends, but they did have a large salary in the final period, again to sort out the directors loan position as no profits to draw from. PAYE was never paid due to liquidation. This is obviously quite different to your position. The business itself has only run for 4 or 5 years at this point.

 

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