Company can't pay it's corporation tax - hypothetical question

[Wanderer]

Imagine a company where the profits were calculated when an invoice was paid and taken as dividends which were properly declared and minuted. The directors loan account balance is zero. The contract income suddenly ends and there is no further income. While there was no money coming in, the company kept incurring running expenses in the expectation that it would continue to trade as a viable business. However, it didn't turn out that way - the director was offered a opportunity elsewhere and decided to wind the company up.

The company has incurred expenses and with no further income or assets, it doesn't have enough cash to pay all of the corporation tax due. I'm sure this happens to businesses quite frequently, what is the accounting position on this?

Would dividends paid be declared ultra vires and the shareholders pursued for repayment? Would the small (say £624/month) salary paid to a director while the company had no income have to be repaid somehow? Would HMRC just write off the balance of the corporation tax that the company couldn't pay provided the director could convince them they acted in good faith believing they would trade their way out of the debt rather than deliberately running the company down so they could fold it?

Just wondering, like.

[malvolio]

You've basically described exactly how a director becomes personally liable for corporate debts. Best case you are made a bankrupt, worst case you lose the house to defray the debt.

A director is legally required to keep his company solvent at all times. Bad planning or bad risk management is not an excuse.

[BolshieBastard]

Would HMRC just write off the balance of the corporation tax that the company couldn't pay provided the director could convince them they acted in good ............................

LOL! If only. Those bastard's would shop their own mum for a late tax return so they wont just write off the CT balance.

TBH, in such circumstances, I'd presume the best thing to do would be to pay the relevant money back to the company pronto.

However, Im not an accountant and would suggest one of the resident accountant types who frequent the boards could give an answer.

[cojak]

Company can't pay it's corporation tax - hypothetical question

You are expected to keep a reserve at all times for the payment of CT - it's not the company's money, it's the tax man's.

(From the book Finance on a beer mat, I can't remember the exact quote because I don't have access to the book, but that was the gist of it.)

Search for 'Director Loan', you'll find a couple of threads where one partner was lumbered with CT liabilities when the other partner defaulted on a Director's Loan.

[BrilloPad]

Once I was told by my accountant that the company owed me £2500 for stuff I had paid for. I thought he said I owed the company £2500. So there was £5k which I took as a dividend.

Accountant went bonkers later - trading while bankrupt - do you want to go to prison - blah blah blah.

You are supposed to take this stuff seriously - if you want to treat it as a joke become a permie.

[VectraMan]

You can use a loss to offset the previous year's profit:

HM Revenue & Customs: Making a loss and Corporation Tax

Which may help in your (hypothetical) situation. But I'm not sure if you can reduce the CT bill you have to pay, or whether you have to pay the bill in full, and then claim a refund for the subsequent year.

Either way you should probably lend the company the money to pay its CT bill. It might mean you end up closing the company with you as a creditor, but that won't be a problem. Owing HMRC will be a problem.

[SueEllen]

Would dividends paid be declared ultra vires and the shareholders pursued for repayment?

A salary is an expense and dividends come out of profits.

If there are no profits that year then dividends should not be paid, and if the directors are the only shareholders it's clear who the money should come from.


BTW when I knew someone in that situation HMRC let him defer his corp tax until the next year and pay it in instalments. However he did have to pay it.

[JamJarST]

A salary is an expense and dividends come out of profits.

If there are no profits that year then dividends should not be paid, and if the directors are the only shareholders it's clear who the money should come from.


BTW when I knew someone in that situation HMRC let him defer his corp tax until the next year and pay it in instalments. However he did have to pay it.

Are you sure about that? I thought Dividends could be declared out of reatined earnings even in a a year with no income or a loss.

[Maslins]

From cases I've seen, directors often get away with this...and actually, provided there were retained profits at the time they declared the dividend, I don't think they'd be doing anything illegal.

In the precise circumstances you mention Wanderer, I think the director in the real world would be able to walk away from it. I'd stress it would need to be as you say (ie genuinely were profits when dividends paid, with no expectation of things getting worse, and later expenses were not to the director/their mates).

[Jessica@WhiteFieldTax]

Are you sure about that? I thought Dividends could be declared out of reatined earnings even in a a year with no income or a loss.

Yes, thats correct, but I think there is a underlying assumption in OP that b/fwd retained earnings had been exhausted.