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CT Tax for a resigned Director

CT Tax for a resigned Director

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Hi,

I have looked online for an answer to my question but haven't found anything.......

I have a client that has a ltd Company that started off with 2 directors but after 5 months, one of them resigned. When I prepared the accounts, I found that there had been monies taken out by both directors on top of their £10K salary which was then voted a dividends. The CT bill worked out to approx. £5K and the existing director is asking the resigned director to contribute towards this bill just for the 5 months that he was a director. I understand that he legally doesn't have to pay anything towards it but is there advice that I can give the existing director to help with this situation? He doesn't think its fair that he pays all of the CT bill and I can see his point.

Any advice would be appreciated?

Thanks

Replies (23)

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By cheekychappy
11th Dec 2015 09:49

It's quite simple, directors don't pay corporation tax, companies do.

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Replying to SXGuy:
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By Raeshoes
11th Dec 2015 09:53

Thank you!!!

Yes I am aware of that, thank you.

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Replying to lionofludesch:
RLI
By lionofludesch
11th Dec 2015 10:15

QED

Raeshoes wrote:

Yes I am aware of that, thank you.

Then you have your answer.

If the existing director wanted the departing director to contribute, he should have said so at the time.  Nothing to be done now, I'm afraid.

The dividends were - or should have been - paid out of after-tax profits.  If they weren't, the existing director is just as culpable.

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Stepurhan
By stepurhan
11th Dec 2015 09:53

Directors don't pay CT

It is not the director that pays the CT bill. It is the company. This is an important distinction.

This is a legal question. The problem is that the remaining director has allowed the departing director to leave without making any checks. The salaries and dividends were presumably approved at the time they were paid. On the face of it the departed director has no obligation to pay anything. Only if the departing director had taken money they weren't entitled to would there be a case.

If the additional amounts taken out have been voted as dividends after the fact, you have a different problem.

Thanks (1)
By Paul D Utherone
11th Dec 2015 09:53

Do you mean that

the dividends were voted, but there were insufficient funds in the company to do so once the CT liability was taken into account?

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Hitch photo
By Kevin Kavanagh
11th Dec 2015 09:58

cheekychappy has summed it up - the CT bill is a liability of the company, based on its taxable profits. It's irrelevant who was or wasn't a director at any particular time.

It looks like dividends have been voted to clear any balances owed by the directors so I can't see how the ex director owes anything to the company.

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By Raeshoes
11th Dec 2015 10:23

Hi again,

Thank you for that. Im not sure I made my question very clear. I am aware that the CT tax is due from the company but as the company now only has one director, so he is having to pay it. He didn't know what the profits were at the point the other director resigned (he hadn't even got a bookkeeper then) so he didn't put anything in place. The resigning director only took monies out of the business before he resigned.

Thank you for your help. I will advise my client that there is nothing that he can do regarding this and he needs to just pay the bill and learn from this.

Thanks

 

 

 

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Replying to the_drookit_dug:
RLI
By lionofludesch
11th Dec 2015 10:28

Oh dear

Raeshoes wrote:

Hi again,

Thank you for that. Im not sure I made my question very clear. I am aware that the CT tax is due from the company but as the company now only has one director, so he is having to pay it. He didn't know what the profits were at the point the other director resigned (he hadn't even got a bookkeeper then) so he didn't put anything in place. The resigning director only took monies out of the business before he resigned.

Thank you for your help. I will advise my client that there is nothing that he can do regarding this and he needs to just pay the bill and learn from this.

Thanks

Again - he isn't having to pay it.  Though it may well reduce the funds available to him to draw dividends on.

Didn't know the tax liability ?  Then how could they declare the dividends ?

Educate the director.  Get him to move on.  There's nothing to be done here.

Thanks (1)
Replying to the_drookit_dug:
By Bungo
11th Dec 2015 10:47

You are still

Raeshoes wrote:

Hi again,

Thank you for that. Im not sure I made my question very clear. I am aware that the CT tax is due from the company but as the company now only has one director, so he is having to pay it. He didn't know what the profits were at the point the other director resigned (he hadn't even got a bookkeeper then) so he didn't put anything in place. The resigning director only took monies out of the business before he resigned.

Thank you for your help. I will advise my client that there is nothing that he can do regarding this and he needs to just pay the bill and learn from this.

Thanks

 

 

 

You are still not clearly making the distinction between company and director. You do not think the Board of Directors of HSBC are personally liable for the corporation tax on global profits do you? Of course not and this is just the same. The director is not paying the corporation tax, the corporation tax is due from the company.

Your client doesn't appear to understand the distinction, unfortunately he isn't going to learn from you when you are saying things like "so he is having to pay it" and "he needs to just pay the bill". You say you do understand that they are different legal entities, but you are not making it clear in your language.

Thanks (0)
Replying to the_drookit_dug:
Stepurhan
By stepurhan
11th Dec 2015 10:54

Contradictory sentence

Raeshoes wrote:
I am aware that the CT tax is due from the company but as the company now only has one director, so he is having to pay it.
This sentence is contradictory. The director does not have to pay the CT. Treating the director and the company as one and the same can cause a lot of problems. This is just one of them.

There might be less funds that he can draw on from the company in the future, but those funds are not currently his. He may need to put money into the company to cover the CT, but that is not paying CT, that is making a loan to the company so it can pay what it owes (which could also be VAT, suppliers, employees. etc)

Despite this you have reached the right answer. The director should have been more aware of the figures at the time (in fact, they are legally obliged to keep records allowing them to do so) and it is now too late to do anything. A lesson learned for the future.

 

Thanks (1)
By SteveHa
11th Dec 2015 10:32

How do you not get the distinction. CT is not the liability of the director(s), period. It is a liability of that separate legal entity, which has its' own bank account and assets, "the company".

CT is paid out of the profits of the company. It goes nowhere near the director.

Simples.

Thanks (2)
RLI
By lionofludesch
11th Dec 2015 11:06

Outcome

What do you want us to say here, raeshoes ?

"Yes - of course, the outgoing director should contribute" ?

Just not so, I'm afraid.  However much you "clarify" the question.

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paddle steamer
By DJKL
11th Dec 2015 12:26

Just to be clear, I assume the directors were also the shareholders?

What happened to the shares of the resigning director, does he still hold them or did he transfer them to the remaining director?

The equity of the situation (he legal position , per all the posts above, is pretty clear so no need to add anything re that) will really depend what the remaining director took over (assets/liabilities) when he acquired the shares , that is if he acquired the shares? If of course he did not obtain the  shares, assumed to be held by departing director,  then it is whole different ballgame going forward.

From the point of view of making your client feel better it might be worthwhile  you examining what the remaining director got out of the change in circumstances to see  if  there is a ray of sunshine regarding what has taken place to make him feel better (Stock, debtors,equipment / other assets etc matching/ exceeding the corporation tax liability)

 

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By Tim Vane
11th Dec 2015 12:39

It seems to me that the company would be well advised to appoint an accountant who understands how companies work, but that's by the by.

The remaining director should examine the records to see if a dividend was voted. If a dividend was not voted then the monies extracted by the resigned director are not dividends but loans that were made to him by the company, and the former director can be required to pay them back.

In that case the remaining director can write a letter (on behalf of the company) to the former director insisting on repayment of the loan amounts.

Of course, the company may then have an additional tax liability under s455.

Thanks (2)
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By Andp
11th Dec 2015 12:48

Great Friday thread.   As

Great Friday thread.   As others have stated , but also for your working papers file(s)-  please go and check past and present share certificates,  historic dividend vouchers, past and current director loan accounts. 

depending on your findings to the above, this will impact on the advice you give the company and the remaining director moving forward .

One must really cross the t's and dot the i's when dealing with multi director companies ,.

 

 

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By tonycourt
11th Dec 2015 13:12

I think:

the OP understands the position perfectly well and always did andthat while all the responses are correct they don't address the real issue that the OP is struggling to convey to the client - that is, the apparent inequity between the remaining and the departed directors.

​If the business were a partnership (and we all know it isn't so don't bleat about that!), subject to any partnership agreement the departing partner (director) would be taxed on his share of the profit. The OP's client seems to be likening the company to that situation.

What he's overlooking or just not understanding is is that:

the company's distributable profit is net of CT. Thus the money taken as dividends has been taxed it is just that the tax didn't have to be accounted for until the CT became due. And, of course, the former director is personally taxable on his share of the of the dividend (profit). 

Thanks (4)
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By Ian McTernan CTA
14th Dec 2015 12:13

The real question is whether the dividends were voted at the time, or whether the departed director took loans from the company.  That's the key as to whether any money could be recovered.

The director doesn't have anything to do with the CT bill and can't be asked to contribute towards it directly.

CT payable on the profits of the company- dividends then paid out of net profits.  If the company didn't have proper records, how could the directors determine the amount to pay as dividends?

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By johngroganjga
14th Dec 2015 12:17

We are told that the monies taken were "then voted as dividends". So that is the end of the matter surely.

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By JDBENJAMIN
14th Dec 2015 12:25

I have dealt with an identical situation.

We eventually sued the resigning director and recovered all the money owed plus costs. The basis for suing him was that the dividends the director-shareholders had taken before the split were in excess of after-tax accumulated profit, and therefore illegal. As directors, they had a duty not to pay illegal dividends. I did a profit calculation for up to the date of the split, and treated payments in excess of that as recoverable. The remaining director paid his balance back at once, but it took 18 months to get it all from the resigning one.

Thanks (2)
Replying to DJKL:
paddle steamer
By DJKL
15th Dec 2015 13:04

All well and good

JDBENJAMIN wrote:

We eventually sued the resigning director and recovered all the money owed plus costs. The basis for suing him was that the dividends the director-shareholders had taken before the split were in excess of after-tax accumulated profit, and therefore illegal. As directors, they had a duty not to pay illegal dividends. I did a profit calculation for up to the date of the split, and treated payments in excess of that as recoverable. The remaining director paid his balance back at once, but it took 18 months to get it all from the resigning one.

All well and good, but in this particular case  maybe knowing what has happened re the former director's shares might be helpful? If he still holds them then such a course of action is certainly not going to help negotiations if the remaining director has any plans to acquire the shareholding and of course if he has no such plans then any future dividends to be paid will also require paid to the former director.

In my opinion the OP really needs to establish what the remaining director's role with the company is going to be in the future, if he is to continue to run/operate the company the share ownership is crucial, if not then why pay in funds to cover the C Tax, why not walk.

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By chrisowen
14th Dec 2015 17:59

JDBENJAMIN has a point

The company must have made profits. My questions would be..

Were accounts prepared up to the 5 months ? Were the shareholdings equal ? How was capital introduced ? Were there directors loans and how were they dealt with ?  Was there a shareholders agreement ?

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By bduncan
14th Dec 2015 23:14

Dividend, loan or bonus

Subsequently voted as dividends. So they may not be illegal dividends (a term that does not actually exist), but may have been a loan or may have been additional salary. There was no paperwork at the time so no one knows what the payments were and it is one persons word against the other. The existing director needs to write it off as experience.

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By ringi
15th Dec 2015 12:49

Advanced corporation tax did have its benefits….

When you used to have to pay CT at the time of the dividend payment, it would have been a lot harder to hit this issue.

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