Tax efficient or tax avoidance?

As a director you are probably advised to pay yourself a nominal salary with the balance of your remuneration package being paid by way of dividend.  This is perfectly sensible.  It reduces the tax burden and improves cash flow.  However, what happens if you draw dividends when there are insufficient reserves?

There has been a long-running debate on whether dividends are unlawful when there are insufficient reserves to cover them.  Some commentators (like me) always took the view if a director followed independent and professional advice and the payment of dividends was a tax-efficient way of paying remuneration then it should be fine.  Indeed, in recent years court decisions on various matters (such as wrongful trading or malpractice) have generally looked at the position and adopted the view if a person took independent advice and followed it then they have done what any reasonable diligent person is expected to do, irrespective of whether that advice is flawed.

The above approach was continued in a case that was brought before the court where a sole director had drawn some £23,000 in dividends over a financial year.  The company went into liquidation with a deficiency in excess of £173,000.  It was recognised the director took independent advice and acknowledged if there were insufficient reserves then he would have to adjust his remuneration back to salary and account to HMRC for the PAYE/NIC as appropriate.  The court adopted a practical, common sense opinion and the claim against the director was dismissed.  The Applicant (who had “Purchased” the action from the liquidator) appealed.

In Global Corporate –v- Hale [2017] EWHC(Ch) the appeal over-turned the earlier decision, saying,

“If it looks like a dividend and sounds like a dividend, it is a dividend.”

The court of appeal added further clarification in order to clear the waters muddied by the High Court by reaffirming:

  1. Companies must have sufficient reserves to pay dividends at the time they pay them, whether or not they intend to rectify any deficiency at the end of a tax year;
  2. Quantum meruitwill not act as a defence or set off to claims made by companies against their directors;

 

Personally, this decision does not sit well.  After all, in some cases directors may have been taking dividends when something that could not have been reasonably envisaged extinguishes the reserves, automatically making those dividends unlawful.  That, to me, is using the benefit of hindsight, something the courts have frowned heavily upon in the past, making the Global decision a little contradictory.  I am sure there will be some that disagree with me on this but is that not what freedom of opinion is all about?

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

How secure is your company?

How secure is your company?

A few years ago I asked an audience, “How many of you are self-employed?”  I followed that by then asking, “How many of you set up in business and planned to fail?”

The fact remains we do not set up a business with a view it will fail sometime in the future.  So, why is it we do not take steps to protect our company from any unfortunate incident that may fall upon its leaders?  Possibly because the UK business person is universally recognised as the poorest when it comes to discussing incapacity, or worse.

Perhaps 99.9% of companies that are incorporated adopt the standard articles of association (“Articles”) which governs the company in terms of directorships, voting and all other specific areas of corporate governance as laid down by the Companies Act.

Recently, I was asked to advise where the company operated with a sole director and shareholder.  Unfortunately, that director was injured in an accident, incurring a serious head injury.  As a result, personal injury claims were being prepared, which included a doctor providing a report stating the director was suffering from mental incapacity.  The problem is the Articles state:

“A person ceases to be a director as soon as—

(d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;”

Taking the above into account that particular company now has nobody with authority to operate the business and without  applying to court for the appointment of a personal representative (which can take several months) it is rapidly descending into a financial chasm, leading to its eventual demise.

The above should be a telling tale, if not a warning, for all those small, single director companies.  You should ensure there is a second director registered at Companies House.  This could be your spouse, although couples do have a tendency of travelling together so, try to consider a different person.  Alternatively (or simultaneously) consider a power of attorney whereby someone has the power to protect the company’s interests by (say) appointing a replacement director or being able to ensure trading can be sustained, thus protecting the share value, being a legacy you may wish to leave for your surviving family members.  It is also worth considering appropriate insurance protection as key personnel invariably need to be replaced if the business is to remain viable.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

PBC Moves into Bedford

 

Insolvency practice moves into Bedford.

PBC Business Recovery & Insolvency have announced opening their new office in Priory Business Park, Bedford with effect from 1 March 2019.

Highly regarded, PBC provide professional advice and services across both personal and corporate insolvency, whether that is for the client directly or where the client has an insolvent customer that owes them money.

In addition, Gary Pettit is a CEDR-accredited mediator, specialising in facilitating of settlements in corporate or insolvency-related disputes

Managing Director, Gary Pettit, said,

“This is an exciting move for PBC.  Bedford is a vibrant business town and, from my own experience there is an abundance of positive energy shown by its business people.”

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01234) 834886 or email to garypettit@pbcbusinessrecovery.co.uk

What has 2018 been like?

 

When I get that call from Business Times informing me it is time to draft your editorial reviewing the past year a mild panic strikes like a bolt out of the blue! Is it really that time already?  What has happened over the past year and what can I write about?

The year started with PBC launching its mediation service.  So far, the PBC mediation service has successfully settled every dispute where acted, either on the day or in the immediate period thereafter.  It has included insolvency-related matters, a shareholder dispute and a professional negligence claim.  All but one were pre-legal action and it is fair to say in two of those the claimant was probably relieved that a settlement was reached!

For those who believe they want their day in court then beware. The courts are penalising those who refuse mediation as an alternative dispute resolution by imposing cost awards.  In one report I read the Claimant won £10,000 but because they refused mediation a cost order of £35,000 was made against them!

While mediation is proving successful our principal area remains insolvency and once again we have found ourselves being asked to act on some challenging assignments, including a deceased estate on the South coast and a corporate group that has two foreign subsidiaries (one in Canada and the other in Australia).  We were also delighted to accept our first nomination from HM Revenue & Customs for the appointment as liquidator, replacing the directors’ choice of insolvency practitioner.

The advisory side has also seen some interesting matters where PBC have assisted creditors of companies either entering into an insolvency process or, in one case, challenging the conduct of the residing liquidator. As we always say at PBC, awareness (of your rights) can often protect your financial interest.

The retail sector has taken a pounding this year as we witness the likes of House of Fraser and Toys R Us fall under the regime of the Insolvency Act. Until the retailers look at new ways of improving foot fall then the outlook continues to look bleak.

Gary Pettit was also invited to be party to the Government consultation on corporate governance, being proposals following the experiences of these large-scale corporate failures and the devastating legacy they leave. As the Government say, “When Parliamentary time allows” there could be some stark changes imposed, including the ability to pursue directors of companies that are struck off the register.

For the time being directors should be aware HM Revenue & Customs are continuing their campaign to recover tax from “Disguised remuneration schemes” such as Employment Benefit Trusts and other tax avoidance schemes. At PBC we have seen an increase of these incidences and with the constant pressure to reduce the level of unpaid taxes, it is an area that will continue to grow in recovery procedure terms.

It has to be said the final word must go to Jamie Cochrane who passed his accountancy qualifications. It is a great achievement and the PBC Team all congratulate him on his success.  That hard work and his dedication to PBC has also been rewarded with promotion to associate.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit and PBC Business Recovery & Insolvency on (01604) 212150 or email to garypettit@pbcbusinessrecovery.co.uk

HMRC to be a preferential creditor once again

 

The 2018 Budget has seen the announcement that HMRC will regain their preferential creditor status, a position which they lost in 2002 under the Enterprise Act. Since then they have ranked alongside unsecured creditors (such as suppliers, landlords etc).

Chancellor Philip Hammond, speaking in Parliament said, “We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC”.

Further detail announced by HM Treasury states, “Taxes paid by employees and customers do not always go to funding public services if the business temporarily holding them goes into insolvency before passing them on to HMRC. Instead, they often go towards paying off the company’s debts to other creditors.  From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions”.

It is understood HMRC will become a “secondary preferential creditor”, ranking after current preferential creditors, which includes the Redundancy Payments Service and employees for certain elements of their employment rights. HMRC will only become preferential for debts collected by the company on behalf of HMRC, such as VAT, PAYE and employee’s NI contributions but will remain unsecured for Corporation Tax and employers’ NI contributions.

The Government believe this measure will result in an extra £185 million in taxes being recovered each year. However the policy will have other consequences such as:

  • Banks and other lenders may be unwilling to support companies, or charge higher interest rates on lending, as their risk will increase.
  • Other unsecured creditors, including small businesses, landlords, pension funds, suppliers and employees will see the amount they receive reduced.

The full release from HM Treasury is available here:

The budget also included confirmation of proposals whereby directors could be held liable for debts due to HMRC where there is a risk that the company may deliberately enter insolvency. Following Royal Assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism could be jointly and severally liable for company tax liabilities in certain cases.

The New Rules – 12 months on

The 6th April will mark the first anniversary of The Insolvency (England & Wales) Rules 2016, (commonly referred to as the “New Rules”). Doesn’t time fly?  So, we thought the anniversary was an opportunity to reflect and comment on the major changes introduced by the New Rules.

The right to opt out of receiving future correspondence – this has been used by about 5% of creditors, typically where there will be no return to creditors or where the creditor decides to write the debt off and does not want to keep being reminded of the bad debt every 12 months. This appears to be a well thought out change to the legislation and one which is well understood by creditors, particularly when you bear in mind that any notice of intended dividend must still be sent to these creditors, giving them the chance to opt back in when appropriate.

The right for an IP to post all documents online, having given notice to creditors they will do so – this rule change has not really been tested. The proof of how well creditors understand this change will come in the next few months as the second report since the New Rules is uploaded with no notice to creditors. The rule has been brought in to cut down on the copying and postage costs associated with each report to improve returns to creditors, but will that cost be replaced by phone calls with creditors asking for updates? Time will tell.

The abolition of physical meetings and the new decision procedures – this is probably the most fundamental change and is explained in detail in our blog here. Put simply, physical meetings can only be requisitioned by creditors (under a set criteria) and creditors’ views are now sought by virtual meetings, correspondence, electronic voting or deemed consent. We have had two instances where creditors have asked for physical meetings and, in both occasions, it was probably unnecessary (indeed in one the physical meeting was adjourned and nobody attended the adjourned meeting). Some good points of this rule change include the removal of final meetings (which nobody ever attended and were a waste of time and money) and the increased flexibility the New Rules now offer meaning two different cases, say a “Burial” liquidation of a company with minimal assets and a large complex company can be administered differently rather than applying a “one size fits all” approach which was excessive in many cases.

Standard Forms now longer exist – in their place have come a prescribed list of information in a set order (sounds like a form doesn’t it!) Despite the abolition of prescribed forms, Companies House have issued new forms for their purpose, which must be used when filing. The real purpose of this rule we suspect has not yet been met yet; at PBC we believe the purpose here is to allow online filing of the information at some point in the future.

The formation of creditors’ committee has changed – previously creditors had to vote for both the formation of a committee and its members at the same time. If the former happened but the minimum of three members were not forthcoming, then the committee was not formed. Now the New Rules mean that creditors can vote for the formation of a committee but not its members. If this happens, the IP then has to seek nominations for the minimum number of members and only then if there are insufficient members does the committee not form. At PBC we have seen this occur on several occasions, probably because of the creditors not understanding what a vote in favour of a committee means.

The New Rules have introduced many changes which are too numerous to list but these are, in our view, the major changes affecting creditors. It is also interesting to note The Association of Business Recovery Professionals, the industry’s trade body, took nearly ten months to update the standard terms it issues which form part of IVAs and are yet, at the time of writing, to update their Creditor Insolvency Guide website!

So in summary, are the New Rules good or bad? In theory our short experience is they are, in the main, a positive move forward.  However, it is a question that cannot be fully answered until they are tested in court over the next year or so.

Early advice aids survival of business

At PBC, we have written numerous blogs and articles about how taking early advice about a worsening financial situation can lead to more options being available and the earlier the advice is taken the more likely a recovery process can be instigated. This message was true in the recent administration of Noble Express Ltd.

The most common reasons why businesses fail

The company, which supplied catering equipment, cleaning chemicals and other non-food essentials to the hospitality industry, entered into administration on 16 January 2018. However, the board of directors first sought our advice in the autumn of 2017, at which point the sale of the company remained a genuine possibility.  Unfortunately, no sale could be secured but the traded during its busy period in the run up to Christmas.  The director then sought advice again at the beginning of January.

Following the company entering administration, the joint administrators (Gary Pettit and Gavin Bates of PBC) traded the business with a view to finding a buyer. Several expressions of interest were received and a sale of the business was secured in February.  The sale has seen the majority of the company’s employees retain their jobs as well as an increased return to creditors.

Gavin Bates said, “It is always pleasing to see directors take advice at an early stage when their company is faced with financial pressures and difficulties rather than burying their head in the sand only to emerge when it is far too late. In this instance, I was approached early enough to enable viable trading to occur whilst searching for a buyer.  The early approach ensured there was both cash available to fund trading and stock in the company’s premises which meant I could trade without seeking further supplies from creditors.  I am delighted with being able to secure a sale of the company’s business and assets, and look forward to distributing the funds I am holding to creditors”.

PRESS RELEASE – NOBLE EXPRESS LIMITED – IN ADMINISTRATION

Noble Express Limited, the Northampton based supplier of catering equipment, cleaning chemicals and other non-food essentials to the hospitality industry, has been placed into administration.

The company has experienced difficult trading conditions over the past two years, which affected cash flow and led to the appointment of administrators PBC Business Recovery and Insolvency last week.

The full level of debt is being quantified and known creditors have been notified of the administration. However, appointed administrator Gavin Bates of PBC is hopeful that a buyer can be found, and procedures are in place for the company to continue trading at this time.  Gavin added “Noble Express is well-known in the industry and consequently this has generated some interest in the purchase of the business.  We remain hopeful that we can secure the right buyer and Noble Express will be able to continue to build its reputation in the hospitality sector.”

It has been necessary to make two staff redundant, but the remaining 5 staff have been retained to assist with continued trading under the management of the Administrators.

For businesses interested in purchasing Noble Express Ltd, please contact Gavin Bates at PBC directly on 01604 212150 or gavinbates@pbcbusinessrecovery.co.uk and a Sales Pack can be despatched.