So I advised an IT client who had operated under an IR35-friendly contract that accounts and tax return must be submitted regardless of his company having ceased trading. Not VAT registered, and no furlough pay involved - he'd already taken a job as an employee pre-lockdown - and the company's only creditors are HMRC and DLA.
His second company, a trading concern, also ceased trading but couldn't afford accounts and return. That second company is now being struck-off, evidently without HMRC objection.
The client is now questioning the wisdom of my advice related to the former company. In his eyes, all that achieved was to create a large CT liability for a company that he believes would have been struck-off anyway, in similar fashion to his second company. To compound matters, HMRC's collectors have him in their sights already.
Put like that, I can see his point. What strike-off advice would other practitioners have given him?
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The submission of the return didn't realise the profit and tax, the activity of the company did. I think you did the right thing
Whether something is possible because of lax regulatory rules/procedures doesn't make it legal.
If a director fails to file the forms necessary under the Companies Act so that the company is struck off, it's a criminal offence. Unfortunately, even when I have contacted Companies House to remind them of this and point out that a director is allowing a company to "go" despite knowingly owing tax etc, they have taken no action.
If the director files a DS01 but doesn't circulate it amongst known creditors (of which HMRC would be one if a return is due to be prepared), then that too is an offence and HMRC have the power to restore the company to the register, appoint a liquidator and go after the director(s). Unfortunately they often don't.
What you've got is a scenario where really, in my view a report needs to be made under the Money Laundering regs because of the second company knowingly not submitting returns/accounts to disguise a liability. Your advice to the client was correct and morally sound, so stand your ground.
Thanks, that's reassuring.
I hadn't given too much thought to money laundering issues, because the (second) company had a small accumulated loss to set-off against any final period profits. Maybe that's why HMRC aren't interested in its strike-off.
Whereas the I.T. company - the subject of my post - had a £6k C.T. liability crystallise from its accounts.
How can it be incorrect to advise that the law should be complied with?
Suggest that he takes the matter up with his MP
What exactly has he lost? If the company did not pay you, would he have paid himself in priority to HMRC?
Do not think this has any legs
Clearly you know there's a CT liability regardless of whether he could have the company struck off before any tax charge.
Were there distributable funds that may have otherwise paid that liability? Not sure.
But in any event I always advise to prepare final accounts pay anything outstanding.
CT liability circa £6k, which the Revenue would have expected.
Some distributable funds on paper, but bank account already emptied.
You don't say where you filed the accounts - that's the only bit I'm unsure as to whether you have done the right thing or not. The good news is it almost certainly doesn't matter though.
My process is first off to determine if there is any tax to pay. If t/o for the year is less than allowable losses, then letter to HMRC pointing this out and asking them pretty please not to object.
If there will be tax but we don't know how much, then unfortunately some form of accounts are required. There may be a small amount of wiggle room in very rare circumstances but normally that will require the usual accounts prep process.
I don't, however, typically file the accs with CoHo - just with HMRC.
I think you've hit the nail on the head. Historically, we have:
I.T contractor company with substantial anticipated tax yield; versus
Trading company with sub £20k t/o and relatively small profits.
The company's profits were dwindling even before lockdown, which I suppose could lead the Revenue to suppose that there may be little or no taxable profit during the final years(s).
I filed (the I.T. company's) accounts at both Cos House and HMRC at the end of December, as both were due simultaneously. I hear what you say about not filing at Cos House, but with a £6k corp tax bill and the client broke I elected, rightly or wrongly, to avoid any further fines.
I don't think it was 'wrong' to file - as there's little/no harm done really (assuming you didn't crystallise a CoHo filing penalty in the process which it sounds like you didn't).
It may or may not have been unnecessary, but as it involved minimal additional work I suspect it didn't increase your fee (or more to the point you wouldn't have reduced the fee for simply not filing at CoHo).
It sounds like the trading co got away with not paying the tax it should and the director is whinging that they could have 'gotten away with it' on the main IT contracting co too, possibly by doing a spongebob. I do hope this aresehole didn't get (and even better, is unhappy at NOT getting) any Covid support.
Fortunately, missing out on furlough pay was entirely his own doing. I wouldn't want that matter laid at my door!
The incentives here are of course all wrong, which is why SBP still works fine.
However, soon there will be legislation that makes directors personally liable for company's (evaded) CT.
That's interesting.
I wonder to what extent such legislation is effectively in place already for an I.T. contractor's company; given that if there is insufficient cash left in the pot to pay C.T. and if that is because the client has drawn-down the cash for himself, then surely that raises preferential creditor issues?
We all know that HMRC will not bother enforcing the existing legislation to put people like this in jail. I guess it's just not worth their time/hassle for sub £20k amounts.
As others have said, you cannot risk breaking the law, but your client can with impunity effectively (unless perhaps SBP is followed - he's arguable then not a law breaker if no mens rea and HMRC are just a typical unpaid creditor of a bust company).
You can't ethically give any other advice than what you gave. What's he going to do, sue you for not advising him to cheat the system? If a client took that attitude with me, I would give him short shrift, and say he either does the right thing with my help, or the wrong thing on his own and takes any consequences.
I have had a few clients where they ceased trading and it was necessary to consider whether final accounts are required. This involved reviewing the records up to cessation and roughly reviewing if there was CT liability or losses that could be carried back to claim a decent tax refund. If none of the above applied or the CT liability was small, then a letter to HMRC to seek clearance that they do not object to striking the company off without the need to file accounts with them.
In your case, the CT liability was not small. If you advised him that he could strike off the company and avoid the tax, then that's tax evasion in my eyes. Therefore you were 100% correct to file accounts and your client is just miffed that if he had had this knowledge beforehand, he could have dispensed of your services sooner and attempted to evade tax by filing the DS01 and he may have got away with it. You can now sleep with a clear conscience.
DS01 cases can cause all sorts of challenges. I've had clients submit them without asking me and in some cases I have disengaged, in another HMRC objected but CH later struck off the company anyway. In these examples I had not prepared accounts so I had not formally prepared a CT computation. But in your case I think you did the right thing, and assuming you didn't act for his other company its affairs are not your concern.
Thanks Arthur, that's reassuring. And although I also acted for the second company that's rather a different kettle of fish ie dwindling t/o and probably break-even final accounts at best; with, belt and braces, b/f losses as a safety net.
Cos House instigated that second company's strike-off, without HMRC interference and with no input or advice from yours truly.
Drawing all the money out and not paying any corp tax etc might also mean overdrawn loan accounts, dividends issues or capital gain issues on shareholders etc.
Yes, it occurred to me that there's something of a £6k black hole in the company's accounts. After all, if the company's income is allocated to let's say 19% tax / 6% overhead / 75% DLA then the 19% C.T. should still be sat in the bank account.
Which it was a year ago, at the accounts date. It's dwindled since, and I agree that's an awful lot of phone bill and virtual office rental. Maybe he has drawn down too much after-date.
At the risk of hi-jacking my own thread, here's another for the mix:
One man band limited company, latest accounts filed made up to March 2017. Cos House, inevitably, moved during 2019 for a first strike-off; to which HMRC objected, presumably because payroll returns continued to be submitted.
So here we are, a couple of years down the line, stuck with that impasse. Client isn't about to abandon his crease - and, let's face it, he's batting on rather a friendly wicket. No accounts submitted since those of March 2017, no corp tax paid since, and client continues his merry director existence drawing minimum wage and a full-whack of personal top-up benefits. And no sign of any further strike-off actions from Cos House.
My suspicions are that the company has since breached the VAT t/o threshold; but how on earth does one set about unclogging the matter? Particularly so, as all this amounts to one horse which stubbornly refuses to be led to water; let alone drink.
Again, it's basically HMRC's fault. They could pierce the corporate veil for such tax fraudsters, but they don't bother (it's too much hassle for them unless the tax fraud is >£100k I expect) and that sends a message to such people that all is fine and people like RM get very annoyed.
That said, there will be new (long overdue) legislation soon to effectively pierce the corporate veil for such people with less difficulty (personal liability for directors for certain company tax debts) .
I'm grateful to my learned friend for mentioning such up and a-comin' legislation, not once but twice. I shall take notice.
Here at the rough end of the market, the miscreant I'd referred to has, since my post, received a friendly HMRC missive informing him not to trouble himself to bother submitting any further SA tax returns.
There's something fundamentally flawed in all that; not least because our protagonist has already figured out how to trip the system. Put simply, other limited companies pay their corporation taxes; and, if they can't stump up, it's end of company and (potentially) goodbye director's personal wealth. But this (latest?) case of mine appears to have opened the doors, to all intents and purposes, for wise-guys on how to carry on regardless for x number of years without troubling to submit accounts to either HMRC or Cos House;; and, more importantly, with a licence to continue forever on that same tack. That's because each and every time Cos House move to strike-off, HMRC object (and thereby shoot themselves in the foot).
