Advice On Shutting Down Ltd Company With Corp Tax Owed

John Dooh · Oct 15, 2020

Hi guys i came across this forum by chance, i was doing some research after someone told me i can close my Ltd company and forget about paying the corporation tax that's due.

I started my ltd company in 2016 and i was contracting as a cnc machinist. My accountant did everything by the book and there was no creative accounting advice given. I lost my contract in April 2020 due to covid and i have not traded since. After a couple of months of not trading i stopped my accountants services. I still communicate with my accountant as there is still things to be wrapped up.

I was vat registered but i have been deregistered and my vat has been paid.

I have been claiming the self employed furlough money since May so that means a salary payroll was done each month and my last one will be October. It was for 575 pounds each month. I have to do the claim myself on the gov gateway and i do the payroll on free-agent myself. Im still paying 18 pounds a month for my free-agent fee's

I owe corporation tax for about 6000 pounds for 18/2019 and about 3300 for 19/2020 . I have been phoning hmrc and delaying the 18/19 payment 3 months at a time as it was due in march. My accounting year ends at the 30th June and my accounts for 2020 have not yet been filed.

There is no money in my business bank account because of covid and lockdown i had to use it all to survive. I took it out in different amounts as a directors loan over many months.

I have hit rock bottom and my life has been devastated because of the lockdown and losing my job. If i can find a way of not repaying this money to HMRC then it would be some kind of recompense for what has happened.

I have some assets but nothing of great value. Laptop , mobile phone and some other i.t stuff.

I have read through the spongebob plan and i understand most of it. Is this going to work for me? If there is any more info you need then please ask away.

Regards.

mattk · Oct 16, 2020

The sticking point is likely going to be the money you have taken out as Director's Loan and therefore owe the company. In turn, this money can be used by the company to pay the CT.

How much in Director's Loans have you taken?

ChrisCallaghan · Oct 16, 2020

John, I'm very sorry to hear about your circumstances, and sadly your scenario is one I hear all too often at the moment.

The 'spongebob method' is certainly one way you can explore closing your company. What is crucial is that you cease to trade for three months before filing your DS01 and that you notify HMRC of your application to strike off, otherwise you may breach your duties as director.

HMRC will have the right to object to your company being closed in this manner, but for small amounts of debt they often do not. For the level of debt you've described I would say it is worth considering the 'spongebob method' but be mindful there is no guarantee this will succeed. If HMRC do object, it would then be best to take advice from a licensed insolvency practice and to explore liquidation. As Mattk advised, at that point it would be worth being aware of any potential overdrawn directors loan account, as this may need to be paid back. Are you a homeowner? Would you have an alternative source of income if you close your company?

If your application to strike off is successful, the HMRC liabilities will no longer be enforceable. In effect, the debt will be written off. Technically any assets belonging to the company will become bona vacantia, meaning property of the crown. In reality it is unlikely that the Bona Vacantia office will come calling for small low value assets like laptops.

Lisa Thomas · Oct 16, 2020

Depending on the DLA position then dissolution might be the best option.

The procedure is explained here:

https://www.gov.uk/government/publications/company-strike-off-dissolution-and-restoration

UK Contractor Accountant · Oct 16, 2020

Chris Callaghan said:
In effect, the debt will be written off.

which means it becomes taxable income requiring disclosure on your personal tax return.

ChrisCallaghan · Oct 16, 2020

UK Contractor Accountant said:
which means it becomes taxable income requiring disclosure on your personal tax return.

The above is valid point. If your company is successfully dissolved, then the funds you have taken out of your company that haven't been put through PAYE (i.e. the directors loan account) would become a personal tax consideration.

DontAsk · Oct 16, 2020

Chris Callaghan said:
The above is valid point. If your company is successfully dissolved, then the funds you have taken out of your company that haven't been put through PAYE (i.e. the directors loan account) would become a personal tax consideration.

Presumably these are treated as income and offset by his personal tax allowance so there may be no, or little, tax to pay depending on the size of the DLA and any other income.

Financial-Modeller · Oct 16, 2020

Note the irony of asking here if one can evade payment of tax due because the amount of tax has been spent personally, whilst simultaneously having enjoyed furlough payments for 6 months, ...paid from other people's taxes!

mattk · Oct 16, 2020

Financial-Modeller said:
Note the irony of asking here if one can evade payment of tax due because the amount of tax has been spent personally, whilst simultaneously having enjoyed furlough payments for 6 months, ...paid from other people's taxes!

Hopefully, in an attempt to close the tax gap, HMRC will clamp down on this shenanigans. I'd also like to see the Govt remove limited liability for this deliberate attempt at fraud.

John Dooh · Oct 16, 2020

mattk said:
The sticking point is likely going to be the money you have taken out as Director's Loan and therefore owe the company. In turn, this money can be used by the company to pay the CT.
How much in Director's Loans have you taken?

Many thanks for your reply. Yeah i had no option other than to borrow this money it was certainly not so i could treat myself. The loan amount is approx 9300 which is the 2 years CT. As far as i know this years year end accounts have not been submitted so HMRC will not be aware of the directors loan at the moment as it was all taken out 2020.

Lisa Thomas said:
Depending on the DLA position then dissolution might be the best option.

The procedure is explained here:

Many thanks for your reply. The loan amount is approx 9300 but as i said above that this years accounts have not yet been submitted i dont know if that helps me in any way. So far HMRC wont know about the loan.

UK Contractor Accountant said:
which means it becomes taxable income requiring disclosure on your personal tax return.

Thanks for the reply. It is something i need to be aware of but as if i did get away with it would still be a worthwhile saving.

Mr D · Oct 16, 2020

mattk said:
Hopefully, in an attempt to close the tax gap, HMRC will clamp down on this shenanigans. I'd also like to see the Govt remove limited liability for this deliberate attempt at fraud.

Not HMRC. Government.
I think they may be a little busy with some other stuff at the moment, maybe in a year or two they'll have time to do something about tax rules.
Don't bet on much - they still haven't got the money in from the sellers on amazon yet.

Mr D · Oct 16, 2020

John Dooh said:
Many thanks for your reply. Yeah i had no option other than to borrow this money it was certainly not so i could treat myself. The loan amount is approx 9300 which is the 2 years CT. As far as i know this years year end accounts have not been submitted so HMRC will not be aware of the directors loan at the moment as it was all taken out 2020.

Many thanks for your reply. The loan amount is approx 9300 but as i said above that this years accounts have not yet been submitted i dont know if that helps me in any way. So far HMRC wont know about the loan.

Thanks for the reply. It is something i need to be aware of but as if i did get away with it would still be a worthwhile saving.

You are aware of the directors loan.
If you get the company dissolved without paying it back then simply enter it as untaxed income on your personal tax return.

John Dooh · Oct 16, 2020

Chris Callaghan said:
John, I'm very sorry to hear about your circumstances, and sadly your scenario is one I hear all too often at the moment.

The 'spongebob method' is certainly one way you can explore closing your company. What is crucial is that you cease to trade for three months before filing your DS01 and that you notify HMRC of your application to strike off, otherwise you may breach your duties as director.

HMRC will have the right to object to your company being closed in this manner, but for small amounts of debt they often do not. For the level of debt you've described I would say it is worth considering the 'spongebob method' but be mindful there is no guarantee this will succeed. If HMRC do object, it would then be best to take advice from a licensed insolvency practice and to explore liquidation. As Mattk advised, at that point it would be worth being aware of any potential overdrawn directors loan account, as this may need to be paid back. Are you a homeowner? Would you have an alternative source of income if you close your company?

If your application to strike off is successful, the HMRC liabilities will no longer be enforceable. In effect, the debt will be written off. Technically any assets belonging to the company will become bona vacantia, meaning property of the crown. In reality it is unlikely that the Bona Vacantia office will come calling for small low value assets like laptops.

Chris many thanks for your kind words and your helpful reply.

I stopped trading in April this year so i have not been trading for over 3 months. I was claiming furlough money each month and doing a payroll for 575 pounds as a salary which i will stop doing in October.

my income is about 550 a month. After Oct i will be going down to the basic 400 a month from universal credits. I have no other income and i dont own my own house. Im in a private rental but i should be getting housing benefit too.

I was always planning on doing this legally, my car is worth about 6k and i was planning on selling that. Someone owes me 7k but i have no guarantee of when and if i will receive this. So i was planning on trying to keep trying to delaying the payments until i was in a position to pay them back for the CT. Only about 6k is due earlier in this year for CT the other 3300 is not due until next year.

I am happy to try the 'spongebob method' however getting an insolvency practitioner in sounds expensive for me.

The directors loan was taken out this year and as far as i know this years accounts have not yet been submitted. Im not sure if that helps me in any way.

Chris Callaghan said:
The above is valid point. If your company is successfully dissolved, then the funds you have taken out of your company that haven't been put through PAYE (i.e. the directors loan account) would become a personal tax consideration.

Yes i guess paying tax on it is not something i can avoid but it might be a worthwhile saving than paying the full 9300 pounds.

DontAsk said:
Presumably these are treated as income and offset by his personal tax allowance so there may be no, or little, tax to pay depending on the size of the DLA and any other income.

Thanks for your reply. My income for this year is very low so there is a chance that my personal tax allowance might mean i dont pay tax on the full amount. that would be nice.

John Dooh · Oct 16, 2020

thanks

simon field · Oct 16, 2020

Am I missing something here?

The OP wants to be ‘recompensed’ for not paying tax??

John Dooh · Oct 16, 2020

Mr D said:
You are aware of the directors loan.
If you get the company dissolved without paying it back then simply enter it as untaxed income on your personal tax return.

Hi yes i am aware of that now however it might be a better option than paying the full amount.

Lisa Thomas · Oct 19, 2020

Either way it has to be disclosed on your personal tax return.

ChrisCallaghan · Oct 20, 2020

John Dooh said:
I am happy to try the 'spongebob method' however getting an insolvency practitioner in sounds expensive for me.

Most insolvency practices are always happy to offer free advice before giving a quotation for a liquidation. The cost of a liquidation can vary from practice to practice, but for a basic liquidation, as it would be in your case, you should be looking at anywhere between £2,500 - £4,000 + VAT. As you say, a bit pricey. It is worth bearing in mind that whatever you pay for a liquidation would also go towards reducing your overdrawn directors loan.

Regarding the repayment of the directors loan in liquidation, based on your personal financial circumstances (i.e. minimal income and not a homeowner) I think it is likely that a insolvency practitioner would simply write off the directors loan account as not collectable.

UK Contractor Accountant · Oct 21, 2020

Chris Callaghan said:
would simply write off the directors loan account as not collectable.

I would get that in writing before engaging an IP. Heard several cases of IP's backtracking on not chasing DLA balances once signed up!

Lisa Thomas · Oct 21, 2020

Same and agreed!

ChrisCallaghan · Oct 22, 2020

UK Contractor Accountant said:
I would get that in writing before engaging an IP. Heard several cases of IP's backtracking on not chasing DLA balances once signed up!

To my knowledge an insolvency practitioner cannot put this in writing until they are actually appointed as liquidator. Until their formal appointment, my understanding is that they would not have the authority to put such an agreement in writing.

However, John Dooh has advised his only income is Universal Credit and that he lives in rental accommodation, meaning they'd be little to no chance of an IP being able to recover an overdrawn directors loan account. It would be of no benefit to creditors or the IP to incur time costs attempting to recover an amount that is not recoverable.

Lisa Thomas · Oct 22, 2020

A proposed Liquidator could confirm what stance they would be prepared to take in relation to the DLA if and when appointed.

Of course there is always a small risk a different IP might be appointed.

ChrisCallaghan · Oct 22, 2020

I certainly agree with Lisa that it would be beneficial to get an understanding from a proposed IP what their stance on the ODDLA before instructing them to act.

UK Contractor Accountant · Oct 22, 2020

Yes exactly an understanding in writing

John Dooh · Oct 26, 2020

Guys my sincere apologies in getting back to you i have a lot of things going on at the moment and i really appreciate your patience.

Lisa Thomas said:
Either way it has to be disclosed on your personal tax return.

Many thanks for the info Lisa.

Chris Callaghan said:
Most insolvency practices are always happy to offer free advice before giving a quotation for a liquidation. The cost of a liquidation can vary from practice to practice, but for a basic liquidation, as it would be in your case, you should be looking at anywhere between £2,500 - £4,000 + VAT. As you say, a bit pricey. It is worth bearing in mind that whatever you pay for a liquidation would also go towards reducing your overdrawn directors loan.

Regarding the repayment of the directors loan in liquidation, based on your personal financial circumstances (i.e. minimal income and not a homeowner) I think it is likely that a insolvency practitioner would simply write off the directors loan account as not collectable.

Many thanks for your reply Chris. Are you saying that if i paid £2,500 towards an IP thats same £2,500 will be deducted from my directors loan?

UK Contractor Accountant said:
I would get that in writing before engaging an IP. Heard several cases of IP's backtracking on not chasing DLA balances once signed up!

Thanks for your reply i will keep this in mind.

Chris Callaghan said:
To my knowledge an insolvency practitioner cannot put this in writing until they are actually appointed as liquidator. Until their formal appointment, my understanding is that they would not have the authority to put such an agreement in writing.

However, John Dooh has advised his only income is Universal Credit and that he lives in rental accommodation, meaning they'd be little to no chance of an IP being able to recover an overdrawn directors loan account. It would be of no benefit to creditors or the IP to incur time costs attempting to recover an amount that is not recoverable.

Many thanks for your reply Chris. DO you think its worth giving this a try using the spongebob method, from what i can understand it looks like whether i need to instruct and IP or not i could possible save a few grand or a lot more depending how it goes.

Lisa Thomas said:
A proposed Liquidator could confirm what stance they would be prepared to take in relation to the DLA if and when appointed.

Of course there is always a small risk a different IP might be appointed.

Thanks for your reply Lisa.

Chris Callaghan said:
I certainly agree with Lisa that it would be beneficial to get an understanding from a proposed IP what their stance on the ODDLA before instructing them to act.

Ok many thanks for your reply Chris. Do i only contact an IP if the spongebob method does not succeed?

UK Contractor Accountant said:
Yes exactly an understanding in writing

Many thanks for your reply much appreciated.

John Dooh · Oct 26, 2020

Guys if i am lucky enough to find a regular PAYE job will that affect anything with this discussed process. I mean with the spongebob method or having to use an IP or my DLA

ChrisCallaghan · Oct 27, 2020

John Dooh said:
Many thanks for your reply Chris. Are you saying that if i paid £2,500 towards an IP thats same £2,500 will be deducted from my directors loan?

Many thanks for your reply Chris. DO you think its worth giving this a try using the spongebob method, from what i can understand it looks like whether i need to instruct and IP or not i could possible save a few grand or a lot more depending how it goes.

Ok many thanks for your reply Chris. Do i only contact an IP if the spongebob method does not succeed?

John, yes if you pay an IP for a liquidation, say £2,500, this will go towards reducing any overdrawn directors loan account.

There is no wrong or right answer to which way is the best route. However if you were to try the spongebob method, if any creditors were to object you could still then come back to the idea of instructing an IP to place your company into liquidation. In the simplest terms, the benefit of the spongebob method is that it is free. The negative is how long it takes and the risk of a creditor objecting. The positive of the liquidation is that it is quick and no creditor can object. The obvious negative of a liquidation is the cost and the directors loan account issue. However, as I've previously mentioned, based on your personal financial situation I feel it is likely that an IP would write of any director loan account as not recoverable in liquidation.

ChrisCallaghan · Oct 27, 2020

John Dooh said:
Guys if i am lucky enough to find a regular PAYE job will that affect anything with this discussed process. I mean with the spongebob method or having to use an IP or my DLA

In practical terms not of these things should affect any PAYE job you apply for. It would only be an issue if you were applying for jobs that involve some sort of financial management or similar where the potential employer would run detailed credit file and Companies House checks. This is not common.

John Dooh · Oct 28, 2020

Chris Callaghan said:
John, yes if you pay an IP for a liquidation, say £2,500, this will go towards reducing any overdrawn directors loan account.

There is no wrong or right answer to which way is the best route. However if you were to try the spongebob method, if any creditors were to object you could still then come back to the idea of instructing an IP to place your company into liquidation. In the simplest terms, the benefit of the spongebob method is that it is free. The negative is how long it takes and the risk of a creditor objecting. The positive of the liquidation is that it is quick and no creditor can object. The obvious negative of a liquidation is the cost and the directors loan account issue. However, as I've previously mentioned, based on your personal financial situation I feel it is likely that an IP would write of any director loan account as not recoverable in liquidation.

Chris i really thank you for your reply and explaining this is a way i can get my head around. I cant get my hands on any money at the moment so i think i will just go for the spongebob method and hope for the very best outcome. Is there any ballpark figure as to how long it may take? How likely do you think i will be using the spongebob method?

I have not been trading since April however i have been claiming the self employed furlough money each month which end in Oct. I have been processing a payroll on Free- agent each month for the small amount i was receiving, this was paid into my business bank account and paid as a salary into my personal account. Does the salary payment count as trading?

Chris Callaghan said:
In practical terms not of these things should affect any PAYE job you apply for. It would only be an issue if you were applying for jobs that involve some sort of financial management or similar where the potential employer would run detailed credit file and Companies House checks. This is not common.

Ok Chris many thanks for clearing that up, my job is not in finance so that wont be an issue but thanks for clarifying that.

ChrisCallaghan · Oct 28, 2020

John,

If you have not been actively trading since April, aside from processing payroll and furlough payments, I would say your safe to apply for a strike off. Once you send your application, it usually takes 1 - 2 weeks for CH to process your application. From there it will be advertised at CH for a minimum of two months. If no creditors come forward to object, the company should then be dissolved. However please note Corona has affected these timescales but I understand CH is now working to normal timescales.

John Dooh · Oct 29, 2020

Chris Callaghan said:
John,

If you have not been actively trading since April, aside from processing payroll and furlough payments, I would say your safe to apply for a strike off. Once you send your application, it usually takes 1 - 2 weeks for CH to process your application. From there it will be advertised at CH for a minimum of two months. If no creditors come forward to object, the company should then be dissolved. However please note Corona has affected these timescales but I understand CH is now working to normal timescales.

Chris many thanks once again for all the good information. Is it now a case of using the DS01 to apply for a strike off and then sending the spongebob letter and a copy of the DS01 to HMRC?

Do you know which address or department i should send the above to for HMRC ?

Scalloway · Oct 29, 2020

John Dooh said:
which address or department i should send the above to for HMRC

If you have received correspondence from HMRC I would use that address.

ChrisCallaghan · Oct 30, 2020

John,

As Scalloway has suggested, I would send to the address listed on the most recent correspondence you have had from HMRC that relates to the debt.

John Dooh · Oct 30, 2020

Scalloway said:
If you have received correspondence from HMRC I would use that address.

I have not received any correspondence. My accountant is the registered address but i recently gave them my own address for correspondence, i cant register my home address as it has to be in England and i now live in Scotland.

Chris Callaghan said:
John,

As Scalloway has suggested, I would send to the address listed on the most recent correspondence you have had from HMRC that relates to the debt.

Many thanks for your reply. At the moment they are not chasing me for the money. They let you delay payment of CT due to covid so i have been doing that. The other CT amount of 3300 is not due until next year. Maybe i could ask my accountant.

John Dooh · Nov 2, 2020

what do you guys think of this below?

Write to HMRC for help with general Corporation Tax enquiries.

If you have a Unique Tax Reference include it in your letter and on the first page of any documents you send.

You do not need to include a street name, city name or PO box when writing to this address.

Couriers should use a different address.

Corporation Tax Services
HM Revenue and Customs
BX9 1AX
United Kingdom

Scalloway · Nov 2, 2020

As long as you include the UTR it should reach the correct person.

John Dooh · Nov 3, 2020

Scalloway said:
As long as you include the UTR it should reach the correct person.

Ok many thanks for reply and i will do that, thanks again .

John Dooh · Nov 6, 2020

Guys. It looks like the coronavirus job retention scheme has been extended to March 2021. Am i right in thinking i can keep claiming the furlough money for myself as company director? It will help me a lot to be able to claim this going forward.

Should i still try to apply for strike off as im thinking it might stop me being able to claim for the furlough money.

My accountant has not yet filed my 2020 year end accounts. Should i tell her not to file them?

John Dooh · Nov 10, 2020

The DS01 form i have now downloaded this. Is it better doing this strike off using the form or should i do it online instead?

Scalloway · Nov 10, 2020

I don't think it makes any difference.

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Advice On Shutting Down Ltd Company With Corp Tax Owed