Unfortunately, many individuals become company directors without any clear idea of the ways to manage their business cash flow effectively, or their financial responsibilities to HMRC.
Over the years, we’ve encountered numerous directors who have been brilliant at the practical aspects of their job, and able to generate significant revenue but have ended up insolvent due to a basic lack of business management knowledge. This article will outline some of the most common ways in which directors end up in hot water.
Using PAYE to Support cash flow
Pay as you earn, also known as PAYE, is a legal requirement whereby employers have to set up a payroll scheme that captures specific information on employee payments, such as salary and wages. It’s essentially HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment. Since the advent of HMRC’s Real Time Information System (RTI) details of each payment are due monthly, (assuming the average total payment exceeds £1500) which means that whoever is handling payroll needs to keep a close eye on cash flow to ensure the correct amounts are being diverted for HMRC. Where a business is incurring cash flow difficulties it may be all too tempting to dip into this fund but, as many directors have found, this is a slippery slope which leads to penalties and, if they aren’t met, threatening letters and worse.
HMRC have more powers at their disposal than any other creditor in the land, so ensure you’re abreast of all your tax compliance requirements to them.
Adding Your Personal Cash into a Failing Company
Although running a limited company is more complicated than remaining a sole-trader, it does offer directors a ‘limited liability’ against their company debts. This means that (assuming no wrongful or fraudulent trading has occurred) a director can effectively walk away from his insolvent company because there is a clear legal separation between the company and himself. However, if your company starts going downhill and you decide to shore things up with some of your personal money, you’ve changed this situation. Similarly, if you lend that money and then when it looks like the company may become insolvent, pay it back to yourself, you have effectively shown preferential treatment to a creditor. The court could ask you to pay this money back.
Using the Limited Company Bank Account as if it were a Personal Bank Account
We see this usually with directors who have been sole traders for a sustained period and then, despite making a move to a limited company, continue to conduct their business affairs in the same way. Maintaining a clear legal separation between your own and the business’ finances is your responsibility as director. Remember, a director does not ‘own’ a company. This means keeping your personal expenses clearly distinct, to ensure you are safe from potential charges of fraudulent preference, or action for failure to keep proper books and records under the Companies Act.
Trusting your Fellow Directors Completely
When two friends, for example, become directors of a limited company together there may be an obvious distinction of responsibilities where one looks after the sales or production, and the other the finances. The point here is that if that company becomes insolvent, the director responsible for sales may feel aggrieved by the failure of the other director to manage the financial affairs properly. In legal terms, however, this is irrelevant. All company directors are held responsible if a company fails and, in certain circumstances, can be made personally liable.
If you are seeking free confidential advice on tax debt problems please contact us at your earliest convenience. We can also help with tax problems such as missing late PAYE payments, or not paying corporation tax bills on time to HMRC.
Author: Mike Smith