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Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE

SMEs need to keep on top of their tax bills

HM Revenue and Customs (HMRC) may have been accommodating in the early years after the 2008 financial crash, but not any longer.
In the last three years HMRC use of powers of distraint and seizure of goods from SMEs that have failed to pay VAT, PAYE and also on late payment of self assessment tax bills has been rapidly increasing.
In 2014-2015 distraint powers were used to seize business assets from 1,080 SMEs, according to the finance organisation Funding Options, quoted in an article by Business Money in July. By comparison, 1,376 seizures were carried out in 2011-12 and just 730 in 2010-11.
Previously, these powers had almost fallen into disuse. Then, after 2008 HMRC showed some forbearance for businesses facing difficult economic circumstances with them approving approximately 400,000 Time to Pay arrangements.
However, the signs are that for the last three years, with Government pressing for improved tax gathering, distraint has become more and more aggressively pursued and increasingly in cases of late payment of self-assessment tax bills.
Under these powers Revenue officers have enforcement rights and can attend company premises after issuing a Notice of Enforcement if payment is not made within seven days.
The officer can then take control of the company’s assets whether by walking possession (seizure of goods without removal) or immediate removal and if payment is not made within a further seven days, the goods can be sold to recover the money owed.
The introduction of real time monitoring of PAYE and wages SMEs a couple of years back means that HMRC has far more accurate information about what companies are likely to owe in tax and are plainly acting far more quickly and decisively to recover it.

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Cash Flow & Forecasting Finance General

The clock is ticking for Auto-enrolment for SMEs

This year the employers’ compulsory pension auto-enrolment scheme is starting to impact on some SMEs.
Employers will have to contribute to a pension scheme for any employee who is aged 22-plus, not already in a scheme and earning more than £8,105 a year. Initially the employer must contribute 1% of the employee’s earnings to a scheme, but this will rise to 3% by October 2018. Employees will also have 0.8% deducted from their salaries rising to 4% by 2018.
Every employer will eventually have to set up a suitable scheme and this will mean not only ensuring that they know their staging date (when they are due to begin payment) but have all the systems in place to meet the deadline.
The Pensions Regulator is advising that businesses need to allow 12 months ahead of their staging date to be sure they have everything ready.
A problem already identified is that the HMRC online PAYE software is not compatible with the online auto-enrolment system.
For those that don’t outsource their payroll management this will include buying and installing payroll software compatible with the pensions automatic enrolment software and identifying a suitable pension provider that is willing to participate.
Those who do outsource will need to check whether your payroll manager is able and willing to manage the auto-enrolment set-up and administration for you.
It is also becoming clear that many accountants, payroll management companies and pension providers are either unable or unwilling to take on the task for a very small workforce on the grounds that it is not cost-effective for them.
In that case SMEs as employers will have no option other than to manage the process themselves using the guidance to be found on the Pensions Regulator website, and this will be a challenge when trying to run a business, not to mention the significant increase in costs to business payrolls.
Make sure you know your staging date and allow plenty of time for planning.

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Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Personal Guarantees Turnaround

HMRC has powers to demand security payments

HMRC is using its powers to demand security payments from company officers for VAT, PAYE and NIC where it considers there is a likelihood of default.
In a case in November 2014 HMRC served a demand notice for a total of almost £70,000 on three named individuals, two directors and the company secretary, of a Berkshire-based metals fabrication company.
An amendment to regulations was made in 2012 allowing HMRC to demand security payments from officers of companies, where it was felt there was a high risk that taxes would not be paid.
HMRC can hold the money as a deposit for up to two years and use it to satisfy any overdue tax debts the company may have.
In our experience such notices have previously only been used for Phoenix companies and not for a trading company.
This new development of personal financial liability is something SME directors and company secretaries need to be aware of and if there is any risk of the company becoming insolvent or being forced into liquidation it would be wise to consult a business rescue advisor early.

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Accounting & Bookkeeping General HM Revenue & Customs, VAT & PAYE Insolvency Voluntary Arrangements - CVAs

Beware of Directors’ Loan Accounts

Accountants often advise clients to use directors’ loan accounts as a device to help minimise their personal tax liabilities. However, be warned, they only work when the directors are also shareholders and the company is making profits.
Essentially they involve the directors borrowing money from their company and drawing only a minimum salary through their company’s payroll. The loan account is paid off by declaring a dividend and this is a legal way for directors to minimise their personal tax and it avoids having to pay employee and employer NI contributions.
This is fine when a company is profitable but it can become a problem if the company does not have sufficient profits as distributable reserves that can be used to clear the loan.
We are coming across increasing numbers of companies that have not made a profit and where the loan cannot be cleared, leaving the directors effectively owing money to the company.
This can be a serious problem if the company is hoping to reach a Time to Pay (TTP) agreement with HMRC to defer payment of corporation tax, PAYE or VAT because HMRC generally stipulates that such loans are repaid as a pre-condition of approval.
Similarly, when proposing a Company Voluntary Arrangement (CVA) or when a company becomes insolvent, the appointed administrator or liquidator will most likely ask the director(s) to repay the loan. Before approving a CVA, experienced creditors particularly HMRC also tend to demand repayment of directors’ loans.
It is often forgotten that such attempts to reduce tax carry the risk of creating a huge personal liability. To avoid it, we recommend that such dividends are declared in advance so as to avoid a loan or at least regularly to avoid building up a huge directors’ loan account. This avoids the normal practice of waiting until long after year end when the annual accounts are prepared, during which time the company may incur losses that mean dividends cannot subsequently be declared.
A further note of caution relates to any directors’ loan account outstanding at the company year end, which will be highlighted to HMRC in the accounts. Despite any intention to reduce the tax liability, tax legislation seeks to limit the benefit by imposing a section 455 CTA 2010 tax liability (under Corporation Tax Act 2010, formerly s419 of the Income and Corporation Taxes Act 1988). While this tax can be recovered when the loan is subsequently repaid by the director, whether in cash or as a dividend, it triggers a significant tax liability on the company.

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General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

A Winding Up Petition Due to HMRC Arrears Need Not be the End

In early 2010 HMRC (Her Majesty’s Revenue & Customs) served notice for a Winding up Petition against a small trading company. The company had ignored HMRC for three years and had not submitted accounts for three years, not since 2007.  A director attended the winding up hearing in court unrepresented.  He said he was trying to reach agreement with the Revenue and was granted 3 weeks stay of execution.
During the three weeks the company sought our help and experience of turnaround and insolvency, to advise on restructuring options, help develop and implement a rescue plan and also help manage the court process.
After a business review, we concluded that it was possible to buy some time to allow the company to be restructured. We first recommended that a barrister should represent the company at the adjourned hearing.  The barrister successfully sought a six-week adjournment to give time for a rescue plan to be put in place, including proposing a Company Voluntary Arrangement (CVA) for approval at a meeting with creditors. This strategy was achieved and at the third hearing the petition was dismissed.
Winding-up petitions are generally used for two purposes:
They may be used as a final attempt by a legitimate creditor to force the debtor company to respond following previous failed attempts to contact them to try to agree payment terms for the outstanding liability.
They are also used to bully a debtor company into settling an outstanding liability, whether disputed or just to get paid before other creditors.
This second reason is often an abuse of process, where the courts are easily deceived. Procedure in court is often key, especially when experienced creditors who know how to play the court ‘game’ use barristers to deal with innocent directors doing their best to represent the company without expert advice.
Winding up petitions in themselves don’t mean that a company is insolvent but they do indicate underlying issues that have not been addressed. The issues can include a lack of cash to pay bills on time, being unaware of legal process, or a dispute that has been ignored or spilled over into frustration.
The courts are aware of this and tend to be lenient towards directors who ask for time to resolve the petition by granting an adjournment. However, their attitude hardens if, at the adjourned hearing, it is shown that the director has failed to fulfil the undertaking given at the earlier hearing.