The taxpayer (Mrs B) had a company supplying management services to actors, however the company was placed into liquidation following demands from HMRC to repay tax arrears amounting over £125,000.
The key issue to address within this case is the disputed director’s loan account (DLA) in excess of £250,000. The Liquidator applied to court to ask for a declaration that the DLA was an asset of the company and once recovered it could be distributed to creditors.
The dispute lay in the fact that Mrs B was paid an annual salary of £8,000, otherwise taking dividends from the company, avoiding NIC and PAYE deductions on a regular basis. Dividends, in this case, were paid from permitted reserves but the balance on the DLA was allowed to increase year on year. No further salary was paid or accrued, and it is important to note that the statutory accounts were clear in showing the overdrawn directors loan account.
Mrs B was advised to avoid the section 455 by repaying the DLA by her accountant, alongside this, the company was incurring increasing tax liabilities with persistent requests for payment by HMRC.
Mrs B consequently sought advice from her solicitor (also her husband) and an insolvency specialist. Mrs B retrospectively amended the company’s records to reclassify the outstanding loan as “remuneration”. It is important to note that no provisions for NIC or PAYE were made. Mrs B stated she relied on advice from the insolvency specialist, however, this was denied by the insolvency specialist.
Mrs B argued that c£6k monthly payments should have at all times be classified as remuneration as she was an employee working 15 hours a day, she was in charge of 8 employees and more than 400 clients and a salary of £8,000 pa was in no way commensurate for her work for the company.
The court was clear that Mrs B could not re-write history and the journals to re-classify the DLA as remuneration had no legal effect. The DLA remained an asset of the company and would be recoverable for the benefit of creditors accordingly. Mrs B now faced the prospect of repaying a sum close to £300,000.
This is a really important lesson for both business owners and their advisors.
Mrs B’s accountants had historically advised her that the build up of the loan account not only created a tax problem but in the event the company became insolvent she would have to repay her DLA.
If you are producing regular management accounts for your clients or have access to their online accounting software please review how your clients remunerate themselves on a regular basis to avoid the buildup of a substantial DLA. In this case the accountants could rely on the “historic” advice previously given to Mrs B but it becomes increasingly difficult to rely on this “historic advice” if you are subsequently doing the book keeping or preparing management accounts (which may often be done by junior members of staff). Clients will often look for someone else to blame.
Our top tip for any business owners – if your accountants are advising you to do something, please listen to avoid repeating the mistakes of Mrs B!
For more information on bankruptcy, liquidation, administration and all the other insolvency procedures, or should you or your company be facing financial difficulties and you need to chat, please telephone Charlotte Hutchinson on 01377 257788 and she will make you an appointment with one of our insolvency professionals at our Driffield, Hull, Grimsby, Scunthorpe or York offices. Our initial meetings are free and without obligation. Meetings can be held virtually or in any of our offices whilst observing the socially distancing guidelines.
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