Settling a Director Loan Account – A potential tax exposure?

Settling a Director Loan Account - Potential Tax Exposure?

It has become an increasing situation to discover adverse director loan accounts (”DLA”) showing on the balance sheet of companies that are in financial difficulties.  All too often a director is left with a financial burden that requires settlement, whether that is in part or in full, paid by way of lump sum or over a period of time. 

Where it is part settlement, is the unpaid balance of that DLA deemed to have been written off or are you simply released from that liability?

That was the question the tribunal judge had to consider in the First Tier Tribunal of The Commissioners for his Majesty’s Revenue and Customs versus Gary Quillan.  The issue arose after Mr Quillan paid £57,000 to the liquidator of his company, leaving an unpaid balance of £382,456.  HMRC decided to levy a tax charge against Mr Quillan under section 415 Income Tax (Trading and Other Income) Act 2005 that permits the assessment against any adverse DLA which is either written off or released (from being pursued).  HMRC lost the appeal as the tribunal determined the DLA balance had not been written off nor released, merely left unpaid and available to pursue should the financial circumstances of Mr Quillan significantly improve at some later time in life, subject to the provisions of the Limitations Act.

Where an adverse DLA is concerned, if a director is incapable of repaying in full, paying a settlement in full and final satisfaction, it may expose that director to a section 415 tax assessment.  But, in leaving the matter “Open” the risk carried is they could be subsequently pursued for the unpaid element at some later stage, presumably within the 6 years limitation period?

When faced with a company that has an adverse DLA, PBC look to work with the director to review the construction of the DLA to ensure the balance is a genuine personal liability.  All too often we find the DLA includes genuine business expenses and often makes no allowance for setting off monies owed to that director.  Indeed, in a recent instruction, PBC were able to successfully defeat a DLA recovery claim by litigation funders (acting for a liquidator) by exercising a similar review.  Unlike that recent instruction, while a review may not extinguish the balance owed, it can often assist the director in reaching an agreement for repayment and in a manner that could minimise the threat of a tax assessment landing on the doorstep at a later date.

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Have you given a personal guarantee?

Have you given a personal guarantee

Perhaps an obvious question but, how many times do directors respond with something like, “I am not sure,” or “No, I do not think so.”  Alternatively, a director will say they have given a personal guarantee, only to discover all they have done is signed a credit agreement as director on behalf of the company.

When a company enters an insolvency event, whether that is a restructuring procedure or liquidation, a company creditor who holds an enforceable personal guarantee may ignore the insolvency process and pursue the guarantor.  This could result in the personal insolvency of the guarantor, which in turn, has an adverse impact on the company where a restructure or turnaround scenario is intended.  In a recent instruction, 80% of the company liability was subject to personal guarantees, resulting in the director having to consider his personal position in addition to the possible restructuring of the company.

Sometimes personal guarantees are a requirement for company borrowings or certain supplies contracts.  Every director should be afforded the right to obtain independent legal advice before signing a personal guarantee and should take that advice.  If possible, you should also ensure there is a cap on any potential exposure you could face.  You may even consider insurance in case the guarantee crystallises.

Apart from the obvious financial burden on a guarantor, personal guarantees may lead to directors acting in breach of their duties.  As a company begins to struggle, it will be a natural instinct to pay that creditor in preference to others or, in some cases, avoid the guarantee liability from crystallising by continuing to trade when, perhaps, you should have ceased trading.  This self-protection mindset may conflict with your duties under the Companies Act and expose a director to potential compensatory awards for malpractice.

At PBC we always consider “The person behind the limited company” and will discuss options where a personal guarantee could have an impact on the way forward.  In our opinion, unless the guarantee can be managed, you have a director whose train of thought is not necessarily focussed on their statutory duties.

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Debt Awareness Week

This week is debt awareness week, and it is reported that a third of all businesses are experiencing debt issues which will likely increase over the coming months for several reasons, including various tax increases.

Nicole Anderson states “If the above resonates with you or, one of your clients,  it is important advice is sought as soon as possible. At PBC Business Recovery & Insolvency, we do not consider debt as a sign of failure. In fact, it is quite the opposite, we applaud those that give business a go, but bumps in the road are part of life – it is how you get over these bumps which is important”

Should there be a need for advice surrounding your debt problems and options available, please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

THANK YOU

Who doesn’t appreciate a simple thank you message?

Reaching out to Insolvency Practitioners for advice can be daunting. It is not until a person, or a company director takes that leap that they realise we are here to try and help. Below are three emails received in the last week which we really appreciate.

Individual with personal debt problems:

“Morning

I’ve submitted my application for bankruptcy. Whatever happens, just wanted to say ‘thank you’. Will always be thankful and appreciative”

Individual looking to take over the running of a company from the current director and avoid a formal insolvency event:

“Hi

Hope you are well

I just wanted to say thank you so much for meeting with me and the company director to discuss matters. Your time was invaluable to us moving forward with any decisions. THANK YOU!”

The closing process made clear and easy for a shareholder to understand:

“I attach the signed consent to early conclusion as requested.

Thank you to all of you, especially Gary, Marli and Nicole, for dealing with the liquidation so smoothly.”

If you need advice, don’t leave it too late to speak to us.  We are all very nice, honest!

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Members’ Voluntary Liquidations – 7 Week Countdown!

Given the recent changes on the rate of CGT that applies to Business Asset Disposal Relief on the lifetime allowance of £1Million, the clock is ticking to benefit from the current rate of 10% until 5 April 2025 on capital distributions. From this date it will rise to 14% and then 18% in  April 2026

The above could be a significant tax saving for you or your clients and, if this is being considered, the time to start acting and planning is now.

Should you wish to discuss a Members’ Voluntary Liquidation further then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk.

HMRC ramping up winding-up action

It has recently been reported that HMRC appear to be ramping up the number of winding-up petitions being presented to the court. Figures published in the London Gazette for January 2025 indicate HMRC issued 480 petitions, compared to 327 presented by HMRC in January 2024.

The presentation of a petition is, generally,  the very last resort for HMRC and the recipient would have had significant correspondence with HMRC beforehand an attempt to recover the debt in an orderly manner.  If you or your client are facing the very real threat from HMRC of a winding up petition, it is imperative swift advice is sought to look at alternative options of recovery and saving the business.  

In our opinion, the hardest part for most business owners when financial trouble is imminent, is making that first contact and seeking assistance.  Here at PBC Business Recovery & Insolvency we understand this, but the sooner we are contacted, the greater the options available to you.

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Buy something for your money!

It is always pleasing when we advise company directors early on.  Especially when there is likely to be a bump in the road in respect of the company’s finances.   This provides directors with significant options to avoid a formal insolvency procedure.

Some of the time, the directors, believing in the company’s future, are looking to place their own funds into the company to ease the financial pressures. If they believe in the company and have the available funds, then this all makes sense.

Now, let’s say the bump in the road is too great to overcome, the directors have ploughed funds into the company, and it enters an insolvency event.  The directors will sit at the bottom of a pile as there are creditors that sit above them in the waterfall of recipients in insolvency should a dividend be paid. These are namely employee wage arrears, holiday pay and HMRC in respect of their secondary preferential status, and then secured creditors such as banks etc.

To cut a long story short, if you are a director or you have a client that is looking to shore up company finances by loaning the company funds, if the company has assets, then look to secure funds invested by buying company assets.  Make sure market value is paid and document the transaction. If the worst then happens, funds invested are not sitting at the bottom of a pile.  

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Is it a reasonable request?

How often has one of your clients entered into an insolvency event while owing you money?  If that is not bad enough, you then get the insolvency practitioner appointed (“IP”) demanding that you provide swathes of information and documents, at your expense.

Some IPs will inform you of your duty under section 234 Insolvency Act 1986 to deliver up the information sought and, most likely, failure to comply may lead to a court application.  Indeed, if they really wanted to get heavy they could point out the court ruled, in 2014, that you have a public duty to deliver up, irrespective of the cost to you.

The question is whether you should allow salt to be rubbed in by suffering more expense in addition to the unpaid fees you have already suffered.

What an IP will not be in a hurry to inform you is the requests for delivery up of records has to be justified and reasonable.  In a recent court case, in throwing the liquidators’ application out, the court said,

“any application for delivery of documents under the IA 86 should clearly explain why such documents are “reasonably required” and should not be unduly broad or burdensome to carry out.”

Indeed, we have seen sight of an information request with standard requests together with the following:

“Copies of any emails between you and the Company, including its officers.”  At PBC, we question if this request is reasonably required given the arduous task of collating this information, not least GDPR concerns, as some emails may not just deal with company matters but also, personal affairs of company officers.

So, if you are the recipient of a delivery up request from an IP, ask yourself is it a reasonable and justified request?  If in doubt then reply to the IP and ask for their reasoning behind the request.

If you need any advice or assistance on any corporate restructuring or insolvency-related issue, then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Members’ Voluntary Liquidations – 3 Month Countdown!

Given the recent changes on the rate of CGT that applies to Business Asset Disposal Relief on the lifetime allowance of £1Million, the 3-month clock is ticking to benefit for the current rate of 10% until 5 April 2025 on capital distributions.

The above could be a significant tax saving for you or your clients between now and then and, if this is being considered,  the time to start acting and planning is now.

Should you wish to discuss a Members’ Voluntary Liquidation further  then please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 033150 (Milton Keynes), 01234 989150 (Bedford) or email to enquiries@pbcbusinessrecovery.co.uk.