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Director’s Failure to Pay Taxes Ends in Disqualification

Director’s Failure to Pay Taxes Ends in Disqualification

Director’s Failure to Pay Taxes Ends in Disqualification

Thompson Construction & Training Ltd managing director Robert Thompson was disqualified for 3 years and 6 months. The limited company was based in Blaydon on Tyne and Mr Thompson was the sole director when he undertook to not pay his PAYE/VAT. The company provided consultancy and training services, but did not provide adequate bookkeeping to ensure VAT was properly documented so not available for audit. To make matters worse, six months prior to the liquidation Mr Thompson took all the trading revenue which were substantial amounts of money; some of which should have destined for HMRC. These amounts were taken then entered on his P35 one month prior to the liquidation and subsequently creating a substantial PAYE deficit. Mr Thompson knew the PAYE debt could not be paid by the limited company, yet still paid himself the income just prior to the insolvent liquidation.

The company was eventually placed into an insolvent liquidation on the 12th June 2012 leaving company creditor debts of £160,965. Mr Thompson acknowledged that he had made no effort to audit, or file for VAT as was his statutory duty, and made no effort to pay HMRC. Of the £160,965 debt £160,315 was debts owing to HMRC.

The Insolvency Service’s Group Leader of Insolvent Investigations (North) Robert Clarke said of Mr Thompson: “The Insolvency Service will rigorously pursue traders who seek an unfair advantage over their competitors by not paying VAT, or PAYE to the Government.

“If you run a limited company, you have statutory protections as well as obligations. If you fail to comply with your obligations, The Insolvency Service will investigate you and you could lose the protection of limited liability.

Director’s Learning Points

There are a number of learning points for directors stemming from Mr Thompson’s case, and not least is that directors should not expect to be able to continue to trade with an unfair business advantage of not paying taxes. Most directors will agree that whilst the economic environment is improving there should be a level playing field for all.

Preferential Payment

It appears Mr Thompson deliberately sought to use HMRC’s taxes and use them for his own ends by paying himself in the six months leading up to the insolvent liquidation. When insolvent, a director must be extremely careful about deciding which creditor to pay when considering paying any of them. Technically, all creditors must be paid equally on what is called a pari-pasu basis; meaning fairly, so any payments should be proportionate to the size of the debts. The fact that Mr Thompson paid himself ahead of HMRC is a clear preferential payment.

By paying himself and not his creditors this was also a clear preference payment and the liquidator/official receiver could ask for this ‘payment’ to be returned to the company for distribution to the creditors. It has not been made clear whether Mr Thompson will be made personally liable for the increased liability to the limited company.

It is worth remembering that the inability to pay taxes in itself can lead to a disqualification and may be used as evidence for wrongful trading. Wrongful trading is best thought of as trading irresponsibly, which in this case is clearly visible. There are a number of warning flags that indicate the director is trading irresponsibly and leaving him/herself open to accusation of wrongful trading. The relevance of the wrongful trading in this case is that the director may at some point, in addition to the disqualification, be made personally liable for some, or all of the HMRC debts.

A director can be made personally liable for limitted company debts accrued in the period when the director knew, or should reasonably have known that the company would end in an insolvent liquidation. A limited company is defined as insolvent if it can no longer pay its bills when they are due, or the company’s liabilities and contingent liabilities outweigh the assets.

Section 121C Social Security Administration Act 1992

There is also another learning point where PAYE is concerned as HMRC can make Mr Thompson personally liable by way of presenting him with a Personal Liability Notice (PLN) for the PAYE/NI liability. Within the social security legislation the directors have a statutory obligation to hand over the PAYE/NI due to HMRC and a failure to do so can be a serious breach of the act.

In very simple terms, when a director fails to pay across PAYE/NI due the limited company has failed to comply with its responsibility and the officers of the company may be made personally liable for those debts. HMRC would have to prove that the director or officer of the company was wilfully and or criminally negligent. Interestingly the director in this case did pay themselves ahead of the PAYE but it is not clear whether other employees suffered as a result which would have aggravated the situation further.

An officer of the limited company is determined as: a director, manager, secretary, shadow director (someone without a director title, but say over the company’s direction/decisions); or any person acting as such. It is also worth noting that an employee acting for a disqualified director knowing that the director was subject to a disqualification notice, or bankruptcy order can also be made personally liable.

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Posted on Friday, July 4th, 2014 by Tony Smith and is filed under News. Read similar articles:

What is a CVA?

CVA, otherwise known as a company voluntary arrangement, allows you to protect your insolvent company against legal action such as a winding up threat, as with administration, but with the purpose of creating a legally binding payment plan with your company’s creditors. The cva is tailored around your company’s cash-flow so that your company’s debts can be repaid, either in part, or in full over a maximum of five years. A cva is initiated by you (the director), not the creditors or shareholders and must provide a better return for creditors than company liquidation.

When used correctly, a cva can provide a perfect tool to renegotiate troublesome trade agreements whilst allowing you to trade on through a financially challenging period. This solution should only be considered if you believe your company is viable, but needs some help to trade through.

What is a CVL?

A CVL is also known as a creditors voluntary liquidationIt is a solution that allows you to close your insolvent company with or without the permission of creditors and generally it allows the company to write off unsecured debts. This type of liquidation is initiated by you (the director), not the creditors as the name may lead you to believe. Choosing the right insolvency practitioner can be critical when considering liquidation. Insolvency practitioners will usually specialise in one area or another so lea that way when selecting a potential solution. There may be an alternative to a creditor voluntary liquidation. Ask to speak with previous clients as testament to their services before committing to any insolvency practitioner to carry out a creditors’ voluntary liquidation. It is also worth noting that you should be careful about what is said to a potential liquidator as they act for creditors not you, the director.

What is a Pre-Pack?

pre-pack can refer to pre-pack administration or pre-pack liquidation, either way, for the insolvent company the solution involves having a future buyer lined up to purchase the more profitable parts of the business, whilst leaving the debts behind. It is important to obtain specialist insolvency help immediately if you think this may be a viable solution for your company as strict procedures must be followed if you, as a director are a ‘connected person‘, are considering purchasing your company’s assets. Nevertheless, if your business is generating revenue producing contracts, has sizable assets or properties, but they are under threat from serious litigation, winding up, or angry creditors; a pre-pack administration can provide a very powerful legal solution for your company.

What is administration?

Administration is a very powerful legal tool that can be used to; first, stop legal action against your insolvent company and then:
Get a better return for the creditors than would be obtained via an immediate liquidation, or rescue your company from creditor threats of serious legal action (statutory demand) and or compulsory liquidation (winding up), or serious financial difficulty, as it provides you with more time allowing for a rescue strategy to be put in place for everyone’s benefit.

What is Insolvency?

There are two key tests/questions that apply to companies when defining whether it is insolvent or not and they are:

  1. The cash-flow test: Can the company pay its bills when they are due?

If the answer is NO, then your company is likely to be insolvent and you should seek advice.

  1. The balance sheet test: Do your company’s liabilities, contingent and otherwise, outweigh the company’s assets?

If the answer is YES, then your company is likely to be insolvent and you should seek advice.

Is this the end?

No. Insolvency does not have to spell the end for your business as there are a number of tools that we can use to secure both your future and/or your company’s future whilst protecting you fully and minimising any potential risks. It is critical to obtain insolvency advice as soon as you are aware your company is insolvent as you may be trading wrongfully. In addition the longer you continue to trade whilst insolvent your options are likely to reduce in number.

Directors Loan Advice?

Around 70% of directors have a problem with an overdrawn directors loan account at some stage and in the majority of cases we can help.  Most commonly, the director seeks advice from an accountant who tells him/her to take a minimum salary in order to keep national insurance and tax at the lowest levels and to then take dividends to supplement their income. This then causes an unpaid debt which is owed to the company. This is very acceptable tax advice until something goes wrong which could be a sharp, unexpected drop in revenues for whatever reason or a threat of a winding up petition from HMRC.The directors then become debtors (someone who owes money) to the company and any liquidator, has a duty to pursue the director to the point of bankruptcy, if the debt cannot be repaid.

Help With Tax Debts

Around 70% of our work involves HMRC in one way or another, including providing advice on assets being seized, distraint warrantswinding up petitions, negotiated settlements, time to pay arrangements, field officer visits, compliance team visits and more. HMRC are responsible for more winding up petitions than any other organisation so always act swiftly if threatened with a ‘statutory demand‘, ‘legal action’ or ‘winding up’.

 

What do you charge?

If your case involves administration, company voluntary arrangement (cva) or liquidation you will never pay any fees to us.  When an insolvency solution is required such as a cva, administration or liquidation – we get paid for all of these by completing the field work for the insolvency practitioners. This relationship benefits you in more than one way: As you may already know, once an insolvency practitioner is engaged by your company they are duty bound to work for the creditors. So once engaged, an insolvency practitioner cannot address any potential personal implications that may be directly caused by the insolvency process as it would be a direct conflict of interests for them to do so. Jameson Smith & Co puts your protection first, whilst working with the insolvency practitioners so you have full peace of mind.

Any insolvency procedure can be quite daunting even for the most confident director but we are with you every step of the way. Company insolvency is a very regulated area and it is very easy to make simple mistakes that can cost the director dear personally. It makes sense to have someone on your side throughout the process who has the experience to guide your hand.

The principle s exactly the same for administration and company voluntary arrangements – we do not charge for advice.

Personal Guarantee?

What is a personal guarantee?

A directors’ personal guarantee is essentially a promissory note to pay an organisation regardless of your company failing or going into liquidation. At some stage you may have signed an agreement with the bank or another trade creditor, making you personally liable for a specific debt. Once you realise that your company is heading towards insolvency you should seek advice on how to tackle this situation immediately if you are in any doubt about what to do.

A director cannot simply pay off personal guarantees if the company is insolvent and likely to end in insolvent liquidation. Should the company be forced into compulsory liquidation the official receiver, or indeed any liquidator will check to see if you have shown ‘preference’ and paid off personal guarantees. To do so could be wrongful trading.

Banks will often support personal guarantees with a charge on the family home and, or a debenture usually a fixed and, or floating on the company assets. Be aware by giving a charge on company assets affords the bank special ‘secured creditor’ rights which can mean the closure of the company on their terms and when they wish. Often terms and conditions not being met is the sole reason for often closing decent companies.

The best time to address a personal guarantee is before you close the company not afterwards so if you are thinking of closing your insolvent company seek help now.

We specialise in helping directors address their personal guarantees and providing solutions to allow the directors to exit the situation in the best financial shape possible.

Read our page on directors’ personal guarantees for more information on how we can help you.

Winding up Petition?

What is a winding up petition?

winding up petition is the application for a forced/compulsory liquidation of a limited company or partnership. This is usually initiated by a creditor (person/business that your company owes money to). Winding up petitions should never be ignored. There can be serious implications if communication with the relevant creditor or immediate action is neglected at this stage. It is critical for the director/s to act swiftly and even at this stage the business and or company may be saved.

The company being ‘wound up’ will be investigated by the Official Receiver (Except Scotland). The director’s actions or lack of action is specifically scrutinised by the Official Receiver and evidence of wrongful trading will be investigated.

The director of a company that is forced into company liquidation statistically is more likely to be subject to company director disqualification (CDD). The Official Receiver (Except Scotland) main aim though is to get the best return for the company creditors.

Be aware it is very rarely in the interests of the director to allow themselves to be wound up due to the lack of control and risks to director/s. You must seek professional insolvency help immediately. Your accountant is unlikely to be able to advise accurately and a wrong decision at this stage can be fatal for the insolvent company.

In the majority of cases provided we are contacted earlier enough before the hearing date we can usually rescue the company and or business. The solution may be a company voluntary arrangement, creditor voluntary liquidation, company administration or negotiations with the creditors.

Be aware HMRC are responsible for more winding up petitions than everyone else put together.

Written by: Mike Smith

 

Statutory Demand?

What is a statutory demand?

statutory demand is a documented written request, usually sent from a creditor for payment of a debt that is owed. You would have 18 days to negotiate a settlement or ask the court to set-aside (dismiss) the demand. If there is no settlement agreed or the debt is not contested within 18 days from receiving the statutory demand you are given a further 3 days to pay in full. This is a very serious documented demand and should not be ignored in any circumstances. After the 21 day period has lapsed and if there is no response to the document, the creditor can then petition to court for a winding up petition of the company for a debt as little as £750 though this is currently under review at the time of writing.

Technically the statutory demand process was created with an individual in mind and no actual different process is legally recognised for a company. The statutory demand must be served correctly and proof of service is essential for the statutory demand to be successful. Provided the statutory demand is served at the company’s registered office; by registered letter and signed for the demand should be accepted as being served correctly.

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