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?
Replies (23)
Please login or register to join the discussion.
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.
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
And of course you need to consider whether you should act.
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.
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 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.
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.
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.
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.
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) .