By Julien Irving, Director of Leonard Curtis Business Solutions Group – providers of the Lifecycle accountancy network
The introduction of the 2019 Loan Charge has put legacy tax avoidance scheme legislation high on the agenda for many accountants and their clients. The deadline is imminent but there are still settlement options available – we cover them, and some of the key issues, in our latest one-hour webinar.
HMRC have encouraged those with ‘disguised remuneration’ schemes to voluntarily settle before the Loan Charge comes into force on 5th April to secure better terms. It will affect both companies and individuals who have benefitted from such tax schemes, which means company directors might face company and personal tax liabilities.
Even if settlement is reached, the debt may not be affordable. So what steps can be taken if a client simply can’t afford to pay? Here – and in our webinar – we take a look at some of the options.
Firstly, a company can either pay the tax due in full or agree a Time To Pay arrangement (TTP), which can offer longer repayment periods of up to 10 years.
If an affordable TTP arrangement can’t be secured with HMRC then the company is technically insolvent and would need to consider a number of corporate insolvency procedures. We address them below – they include Company Voluntary Arrangement (CVA), Administration and Creditors’ Voluntary Liquidation (CVL). Because there could also be tax liabilities for directors personally, they might have to look at personal insolvency options too, such as Individual Voluntary Arrangement (IVA) or Bankruptcy. We’ll touch upon all of them in a moment and they’re covered in our webinar.
Where a business with a tax scheme debt is viable, our repayment preference is to use a CVA, which is typically paid over a five-year period. With this approach, HMRC is generally supportive where the full amount owed can be repaid.
HMRC have indicated that they would not accept a compromise where the CVA repays less than 100p in the pound, however this remains largely untested. It may prove to be the case that, if a compromise is still the best outcome available to creditors, then it would be considered.
As there is the prospect of an additional tax charge to directors personally which could cause them a problem, it may also be possible to combine company debt in a CVA with personal liability – another option that we’ll touch upon in a moment.
For those companies that are viable but for which a CVA wouldn’t work, then Administration is an option. This route permits the sale of the business as a going concern – preserving its value where possible.
However, in taking this route, an Administrator is required to investigate the directors’ conduct prior to the insolvency. This can create further issues as HMRC are now seeking to compel insolvency practitioners to pursue directors personally for claims of misfeasance if they’ve involved the company in a tax scheme.
Again, the legislation is very new – so the reality of the situation isn’t yet clear. Insolvency practitioners are looking at each case on its own facts but HMRC are certainly taking a hard line in expecting them to pursue directors and it will clearly increase the prospect of problems for directors once the company debt has been dealt with.
Where the business is not viable, then a CVL would be most appropriate. In this case, a business is shut down and its assets sold. Once a Liquidator is appointed and a company enters liquidation, an investigation must be undertaken into the conduct of directors. The Liquidator has greater powers to investigate which could, once again, result in personal liability for the directors.
So, as mentioned previously, as well as company insolvency, there’s also a risk of personal insolvency for the directors or beneficiaries. This could be due to an income tax charge but could also be in respect of misfeasance claims brought against directors, for example – making them personally accountable to repay to the company. Where a director or beneficiary is faced with a debt, it may make them personally insolvent – so what are the options available?
The more attractive option in such cases – although each situation differs – would be to avoid Bankruptcy via an IVA. A formal deal between the insolvent individual and the creditors, an IVA is a relatively straight forward way of agreeing a compromise over their personal debts. In situations where the personal insolvency has been triggered by a corporate failure, the IVA could be interlocked with a CVA of the company. HMRC is generally supportive of this approach but demands that if one process fails, the other must also close.
When an IVA won’t work, then Bankruptcy – albeit the more extreme approach – is an option. Company directors cannot, however, remain in post whilst their bankruptcy remains undischarged. Any shares will also vest in the Trustee, which could cause problems for the business, for example affecting decision-making or payment of dividends. Advisors should ensure it reviews client shareholder agreements for pre-emption clauses.
It is also important to bear in mind that the Trustee has enhanced powers to pursue individuals in relation to transactions defrauding creditors, where it is considered that assets have been put out of reach of creditors. Such a claim can stretch back beyond the legal limitation period.
So, while the whole area of tax avoidance schemes is a minefield and the Loan Charge will compound matters, there remain a number of options available to both companies and individuals, even where they can’t afford to repay the debt. At Leonard Curtis we’re working with accountants to negotiate the best possible terms and support their clients through these times of uncertainty.
You can find out more about available repayment routes and wider legacy tax avoidance scheme legislation by watching our new webinar here.
Become a member of the Lifecycle network here.
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