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Can we strike off a company if it was trading?

Client has no funds due to ill health and wants to close company without submitting final accounts

Hi all

We are in the process of completing our client’s limited company accounts. He is the sole director and shareholder. The director had been suffering from cancer and has just recovered. However, he is unfortunately too unwell now to carry on trading through his limited company. Based on the draft accounts for the final year, the client has a corporation tax liability and an overdrawn director’s current account. However, our client does not have any funds in the company to pay off the liability nor does he have enough monies personally to be able to pay back the monies into the Co to clear off his overdrawn account. We are fortunate in as much as the fact that our fee has been covered by Standing order.  He has meagre savings that will help him but he says he needs this to live on.

Client does not want us to submit the accounts to HMRC and let companies house strike off the company. We have advised him we cannot do that on the grounds that tax office may stop strike off action & come back to the director and ask for accounts? I am at my wits end what to do. I sympathise with him due to his poor health but I am also aware of his obligation. Any advice will be appreciated.

Thank you in advance for your help.

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19th Oct 2017 10:39

If the company hasn't traded for more than three months, you can apply for strike off.

You're right - HMRC may object. If they do, you'll have to explain the circumstances and hope they'll go away.

Chances are they will.

They don't expect you to prepare accounts without a fee so make sure you tell them there are no funds to pay for accounts.

Some numbers would have enabled us to assess the scale of the problem. Is HMRC the only creditor ? How much are they owed ? How much does the director owe the company ? Are there any other assets ?

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19th Oct 2017 10:41

£30,000 DR Compensation for loss of office/Redundancies
£30,000 CR DLA
or lower amount to clear overdrawn balance.

This itself would reduce profits for the year or generate loss (even better) which then could be used as losses carried back and clear/reduce CT600 liability.

Worth taking a chance!

Statutory redundancy can be paid to any employee who has been in two or more years' continuous employment with an employer. The calculation is made according to a formula, based on age, length of service and weekly pay which is capped at £330 per week. The payment is based on 1.5 weeks' pay for each full year of service where age during year is 41 or more

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to pollypetee
19th Oct 2017 11:10

Quote:

£30,000 DR Compensation for loss of office/Redundancies
£30,000 CR DLA
or lower amount to clear overdrawn balance.

This itself would reduce profits for the year or generate loss (even better) which then could be used as losses carried back and clear/reduce CT600 liability.

Worth taking a chance!

Not if he doesn't have a contract of employment it isn't. On the facts given I'd guess not, but who knows?

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By Patss
to Accountant A
19th Oct 2017 15:26

Thank you for your reply.

The director has been on the company payroll for 2 years. We had run a standard salary up to the client's personal allowance and shown £5,000 tax free dividends. The account as it stands shows a corporation tax liability of £6,700 and the directors current account is overdrawn by £20,956 which means he would have a section 455 charge of £6,810.

Can he only receive the statutory redundancy pay or can he receive a higher amount than this?

How is the compensation for loss of office calculated? Could HMRC query how the figures were calculated and dispute it?

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to Patss
19th Oct 2017 16:02

The fact that Director was 'on the payroll' only for 2yrs complicates the issue. Generally speaking amounts are up £30K are 'tax free' however certain conditions must be met. Debit of £30K would reduce the CT600 to more manageable £700 but it must be stressed to client that this can be challenged and disallowed in case of enquiry. For me - It's about balance between our own integrity of being honest in our profession but also interest of the client. I personally would not go ahead with this as it's against my ethics but some of the partners i work(ed) for, do that kind of thing constantly (unfortunately)...

I found this on Taxation.co.uk - might be of interest to you:
A compensation payment made on account of the employee’s injury or disability (a disability payment) is potentially exempt from income tax (see ITEPA 2003, s 406(b)) in its entirety.

Hasted v Horner 67 TC 439 held that two conditions must be satisfied for the exemption to apply:

there must be an identified medical condition that disables or prevents the employee from carrying out the duties of the employment at the time the employment terminates; and
the disability payment must be made only on account of that disability. Accordingly, depending on the circumstances, the employer may also need to make a separate payment, eg to settle claims.
HMRC consider that the term disability “… covers not only a condition resulting from a sudden affliction but also continuing incapacity to perform the duties of an office or employment arising out of the culmination of a process of deterioration of physical or mental health caused by chronic illness …”

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By Matrix
to Patss
19th Oct 2017 18:11

There must be some reserves then to book a dividend to at least offset some of the Director loan account? Then the amount outstanding should roughly equal the tax.

When a company ceases to trade and is not preparing accounts then I prepare a P&L and BS and attach to CT600. Then at least you have advised HMRC of the liability (and the debtor in the DLA and probably s455 tax too). Then disengage. If he chooses to close the company then HMRC can object. If he just wants to close the company without doing this then disengage and submit SAR per other advice.

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By Patss
to Matrix
20th Oct 2017 10:43

The problem we have is that if we submit the CT600 and accounts to HMRC, there will be a section 455 charge. Therefore, when we submit the client's personal accounts we will need to show the benefit and hence the client will have a higher tax liability. As previously mentioned, he does not have the savings/funds to pay for this tax.

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19th Oct 2017 11:09

I would disengage from the client - whilst I have sympathy for his situation what he wants you to do is dishonest. I think you also would need to make a SAR as well.

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By mabzden
19th Oct 2017 11:14

It sounds like there should be a formal liquidation of this company as there are creditors involved. But, if your comments are correct, the company doesn't have any funds to pay the liquidator fees.

So I would first submit the accounts and CT600 to meet the director's/company's responsibilities and cover your own back.

Then write to HMRC to say the company has ceased trading and explain the situation to them. Hopefully this will mean they won't object when you try to close the company.

If they (or another creditor) objects then the company will just have to sit on the register in a state of limbo. Eventually HMRC will relent, but it may take several years.

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