If your limited company is being liquidated because of insolvency, access to funds are often in extremely short supply and so it can be welcome news to hear that you may be able to claim redundancy pay.
There can be a lack of awareness of this among directors as they may believe that redundancy pay is only available to an employee, rather than to those running the business and who have made the decision to close the firm. However, subject to eligibility, this facility is available to directors as well as employees of an insolvent business
How Can Directors Claim Redundancy Pay?
A redundancy payment can be claimed by directors who are in receipt of a regular salary via PAYE. The redundancy claim is made through the Redundancy Payments Office, which is part of the Insolvency Service, and requires a range of questions to be answered that will determine your eligibility.
Broadly, you also need to have been a worker for your company for at least two years and in continuous employment for a minimum of 16 hours a week. You also need to have an employment contract and may be required to show this, in addition to pay slips – GOV.UK “Redundancy pay rights” .
If approved, payments are made by the National Insurance Fund and in addition to redundancy pay, you may also be able to claim other statutory entitlements, such as unpaid wages, holiday pay and notice pay. However, payments are capped at £544 a week for a maximum of 30 weeks and for a total amount of £16,320.
You should also be aware that redundancy pay can only be claimed if the business is liquidated and not if you choose to dissolve the limited company instead. You also won’t be able to claim if you were only employed by the business in a non-executive or advisory role.
Could HMRC Take my Redundancy Pay?
Providing your claim is successful, then receiving a pay out can be of great assistance, since there can often be considerable financial distress at this time. But, there is an important point to remember – if you owe money to HMRC in terms of unpaid tax, then some or all of this could be clawed back from your redundancy pay and this is known as ‘right of set off’.
How Much Could HMRC Take From my Redundancy Pay?
This very much depends on the size of the HMRC debt. HMRC takes a rigorous approach to ensuring it recoups unpaid tax such as VAT and PAYE and it should be noted that it is responsible for winding up more companies than any other creditor.
HMRC can also use its right of set-off if the director’s loan account is overdue. This is where directors have taken money from the limited company outside of salary and dividend payments. HMRC will see unpaid loan accounts as an asset and require the director to repay this to cover the debt. If they are unable to do this, they may be forced to enter bankruptcy. This can be a common situation as directors have sought to keep their company afloat, however, they should always be aware that their company is a separate entity and that the interests of the creditor must be placed first.
Can I Avoid HMRC Using its Right of Set-off?
This is an area where an insolvency practitioner will be able to provide guidance and why there can be no substitute for expert and objective advice. They will also be able to explain matters around redundancy pay eligibility criteria. It could be that your company has assets that can be realised in order to meet tax liabilities. Or it could be that the director’s redundancy payment is used as the preferred way to settle up with HMRC and ensure that no further action is taken.
Much will also depend on whether there are personal guarantees and secured debts. You should aim to seek advice from a licensed insolvency practitioner on what your options are in dealing with liquidation and creditors as early as possible to ensure the best outcome
If HMRC petitions the court, directors can face a far more challenging situation such as investigation by the Insolvency Service into director conduct and personal liability may become more of an issue.
Where at all possible, a Creditors’ Voluntary Liquidation (CVL) is likely to be a far better solution for directors compared to compulsory liquidation, allowing them more control and providing the ability to select their own liquidator. Finally, and for this reason, some directors may also choose to use part of their redundancy pay to cover the cost of a CVL.
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- GOV.UK “Redundancy pay rights”