Many medical experts are predicting a second wave of the COVID-19 Pandemic, which may arrive in the autumn as temperatures fall.
Although we do not want to try to predict the future, we examine a few possibilities and suggest some planning ideas.
Government Support resumes
Since the software and legislation is in place for both CJRS and SEISS, it would be relatively straightforward for the government to reactivate the schemes, perhaps with a smaller percentage of state support or in the case of CJRS, with an enhanced contribution from employers.
It may be argued that this would prove ruinously expensive for the country, but government borrowing can be scheduled over decades, as were war debts from WW1 and WW2. Of course, the government may raise National Insurance (NI) and tax rates to recoup some of this expenditure. There have even been rumours of a Net Wealth Tax being introduced.
The continuation of bank loans guaranteed by the government such as Business Bounce Back Loans and Coronavirus Business Interruption Loan Scheme could be another tool in the hands of the Treasury.
Government Support is not resumed
In this case there will be considerable issues for those businesses which are dependent on government support which may need to carefully consider their future.
Safeguarding your position as a company director
Whilst remuneration planning has focused on the minimialisation of NI and tax liability, in these new uncertain times, remuneration should be structured to provide the maximum level of security, even if there is a consequent uplift in NI and tax payments.
Remuneration Structuring
Many directors of small and medium size companies in which they are shareholders prefer to take a small salary of around £12,000 per annum and the rest of their remuneration in the form of dividends which do not attract NI and which are subject to lower tax rates than other forms of income.
However, this results in a low level of CJRS support and potential redundancy payments. Company directors, as well as staff, are eligible for redundancy pay, also known as directors’ redundancy, in the event of company liquidation or closure.
If you are a salaried director of a limited company – which has been trading for over two years – and you are considering closing the company due to financial struggles (i.e. HMRC debts, creditor pressure, cash flow worries, potential insolvency), it is likely that you can claim for director redundancy for which the average UK claim is £9,000. In addition, it’s likely you can claim for other statutory entitlements such as notice pay, holiday pay and unpaid wages – yet many company directors are not aware that these entitlements are available to them.
If you do meet the criteria, claims can be made from the National Insurance Fund via the Redundancy Payments Service (RPS), and are tax-free.
You must be regarded as an employee of the company as well as a director in order to be eligible. The criteria for claiming statutory redundancy pay as a director include:
- Working under a contract of employment for at least two years – whether written, oral or implied, rather than only having a controlling interest
- Working a minimum of 16 hours per week
- The amount you’re entitled to depends on your length of service, age, and rate of pay. The rate of gross weekly wages at the time of redundancy (capped at £525/week) and your length of time in service (capped at 20 years) are used as the basis for calculating how much redundancy pay you’ll receive.
Overdrawn Director’s Loan Accounts – the Elephant in the Room
A director’s loan account (DLA) allows a company director to extract money from their business in a way that isn’t a salary, dividend, or expense. Any transactions must be clearly recorded, and if you take out more money than you put in, the account will be overdrawn and you will owe your company this amount. It is usually cleared, partially or fully, by payment of a dividend from the company to you.
As long as this figure is kept below £10,000, having an overdrawn director’s loan is not usually an issue; however, if the business becomes insolvent, the situation becomes much more complicated.
Should a business become insolvent, any overdrawn director’s loan accounts will be seen as an asset of the business. This means you will need to pay back the money you have borrowed from the company so that it can be used to repay creditors. Unfortunately it is often the case that directors are not in the financial position to do this at a time when his or her company is experiencing such problems.
Living on borrowed time
Business Bounce Back Loans and Coronavirus Business Interruption Loan Scheme are government backed 100% and 80% respectively so your liability is limited. However, if you then borrow these funds from the company via the director’s loan account, you are now 100% liable for the debt, should the company fail.
The moral of this story would be to become employed and finance the salary from these borrowed funds.
Can company debts be written off?
Business liabilities will be written off should the company enter a formal insolvency procedure such as a Creditors’ Voluntary Liquidation (CVL). Any outstanding creditors are not allowed to demand the company director make payments from his or her own personal finances to pay back this money. Essentially the debts of the company die with the company.
When can a company director be held liable for company debts?
While company status offers valuable protection to a director, there are certain situations where limited liability can be disregarded, leaving the director responsible for paying the company’s debts.
These include:
- Overdrawn director’s loan accounts
- Signing a personal guarantee
- Debts have accumulated due to fraudulent means (such as taking on credit s/he knew the company wouldn’t be able to repay)
- Director misconduct
- Continuing to pay shareholders dividends whilst the company is insolvent
- Withdrawing and/or using company funds for non-business activity; this is an offence known as misfeasance
- Disposing of the company’s assets at undervalue or no value
What are the consequences for a director if they become liable for company debts?
If directors are held liable for company debts then they will be expected to pay these just as they would any other personal debt. Unfortunately dealing with an insolvent business often has a negative impact on personal finances. Perhaps personal savings have been depleted in an attempt to keep the company afloat, or maybe the closure of the company resulted in the loss of the director’s only source of income.
Regardless of the reason it is an unfortunate fact that these problems often go hand in hand. Just as the company was unable to pay its debts and had to consider insolvency options, if you as an individual cannot meet your liabilities, you will also be required to look at the various personal debt solutions which exist. Depending on the scale of your debts and the level of personal assets you have, options can range from a Debt Management Plan (DMP), through to more formal insolvency procedures such as an Individual Voluntary Arrangement (IVA) or bankruptcy.
What about sole traders and partners?
If you are operating as a sole trader, the situation with business debts is different. As a sole trader there is no legal distinction between yourself and your business, therefore any debts your business accumulates will be classed as personal liabilities. Ceasing trading and closing down your business will not wipe out your debts, and you will be expected to continue paying them using your personal finances, as outlined in the above paragraph.
Partners, other than those in a Limited Liability Partnership (not discussed here), are treated as being personally liable for the debts of an insolvent partnership.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk or speak with an account manager to get any process started.
