Is there any hope at all???

[RYN]

The story is a long one, but in short. We have a small limited company setup in 2003, we have worked really hard and trading profitably. However, last yr we had a normal tax inspection, they picked up that we had been paying (what we treated as subcontractors) over the last 5 years, but after a year of investigation they have decided they are 'employed', and discovered that less than 10% of them actually declared this additional income, as they all have full time employed jobs too. Consequently, they want to rack back all the tax and NI from us amounting to around £60k. For a business operating nr their OD limit, and bank has a debenture and personal guarantees - I am seriously getting a bad feeling.
My questions are :
- Will the revenue negotiate the liability to something the business has some hope of ever paying over a period of time
- If not, then we will be forced into liquidation, and if that happens will the bank exercise the debenture or the PG first?

[jpcentral]

I've printed out your query because I've lost track of the number of times I've warned clients about the dangers of using "subcontractors". I will use your case to reinforce the point.

You need to seek professional advice quickly. I suspect that the local Debt Recovery office will not be prepared to negotiate a repayment term long enough for you to be able to afford to repay. It may be to your advantage to take the case to the Commissioners to see if you can convince them (doubtful but it will buy you time). Your professional adviser will be in a better position to advise you once he/she is in possession of all of the facts. Do not attempt to negotiate on your own.

If the company is put into liquidation, the bank will normally exercise the debenture first because the personal guarantees normally only come into effect once it has been established that the company cannot, or will not, repay the debt.

I hope you manage to pull through.

John Perry
Central Business Services
Loughborough
www.centralbusiness.co.uk

[robbob]

Hi RYN

If these subcontractors have been proved not to declare their income(I would not necessarily trust what the revenue say) can you expect them not to chase all the monies they are able to exact?

Where these subcontractors paid by bank?
Did you get invoices before making payments?
Did you show these payments as subcontractor payments on the accounts and include on CIS returns?

Have you taken expert advise in relation to status decision? or has this decision gone before the commissioners?

I would imagine that the revenue would seek payment in full or they have given you competitive advantage over your competitors by letting you off with PAYE.

This is not to say you could make proposal plan or seek debt advise as anything must be worth trying when things are as bad as they sound.

[RYN]

Thanks for both your comments.
To clarify these are not CIS type subcontractors, we are not in the construction industry. They signed a contract with us to state that they would work for us in a subcontractor capacity, however due to the contract lacking various clauses such as substitution, i.e. if they cant do the work then it is their responsibility to find a replacement. They do not invoice us, we pay them by chq the month after they do the work. The tax professional opinion we have is that we have a slim chance of success if we take it the commissioner, but that they want the best part of £10k to argue it for us!
At the moment, I am desperately looking to how we can save a business we have worked so hard to build up, and we have also pumped in £60k of our own money via a remortgage last year, of which the company has only repaid around £30k, so we would lose the remaining £30k, and also yesterday someone said that the liquidator, if it got that far, might ask for the £30k that we did get back to be repaid back into the company under preferrential creditor rulings!! God - can it get any worse?

[jpcentral]

Essentially you have two options:

1. Accept the Revenue's interpretation and try to negotiate payment terms. You are then completely at their mercy and I think it is extremely unlikely that they will accept any long term arrangement - we had a client who offered to pay £180,000 over four months and they refused, preferring to take bankruptcy proceedings.

2. Try to argue with them. You can go through the full process and ultimately end up at the Commissioners with a slim chance of success. If you can't afford the £10,000 being quoted, try to find someone cheaper or prepare and present the case yourself (what have you got to lose?). This will at least buy you some time and allow you to start saving.

I have to say that, on the basis of the facts as presented, I think your case is pretty weak.

Of course, it could be that the potential liability makes the business technically insolvent, in which case the directors should consider placing it in liquidation in any case.

If the business is doing reasonably well, is it possible to sell the goodwill to someone else before it becomes too late or can you find an investor prepared to put in the £60k in return for a share in the business.

John Perry
Central Business Services
Loughborough
www.centralbusiness.co.uk

[davidbarry]

Reading carefully through all the above I would say that you do have a slim chance but it should not cost £10000 to take this case to commissioners unless you decided to appeal their decision.
Please also remember that tax and nic liabilities are fully tax deductible in the accounts of a limited company and so would generate a tax rebate that would help to somewhat offset paye due.
There are accountants that would review the correspondence (including me)and this may be worth an investment of time and money by you.
regards davidbarryaccountant.co.uk on 020 8252 7018/07877671423

[pallet]

Start a new ltd company up today and invoice out of that and as the old money comes in clear all dedts you wish to deal with again and get new credit agreements for the new company Then if the revenue what to close the old company down who cares .The bank will be only to pleased to change their dedt over to the new company .Do not take any money out of the old company to use in the new,that way all you have done is to except what the revenue love and that is to put your company in a no hope position.You must attempt to negotiate on your own for as long as you can the more time to close the old company down.Everone will be up in arms about this but why make you a tax collector when they know who owes the tax and who has had the benift of the money (not you)

[wamstax]

Have you tried researching the problem yourself for example see http://www.hmrc.gov.uk/manuals/esmmanual/esm0525.htm and then follow the links that you would see referred to in the various instruction manual extracts.

While I also fear that these were no more than employees - given that they all seem to have full time employments - do not be afraid to think out of the box - e.g. substitution should not be taken as the be all and end all of self employment v employment as there are a whole raft of contingencies. Equally have there ever been previous enquiries carried out by HMRC in relation to your business that would suggest that they are applying different standards now as against earlier. It would probably have been more helpful to have full details of the nature of your trade and the exact services that these wayward workers were providing.

Additionally if all workers had the same types of contracts then why havent HMRC gone after the individuals on the basis that they clearly knew that PAYE was not being operated and then failed to return the amounts in their personal tax returns. Additionally have you got the full names and addresses of the individuals concerned and if not why not given that amounts were paid to the bank.

regards and hiope this helps
bill@wamstaxltd.com
http://www.wamstaxltd.com

regards and hope this helps

[doityourselftax]

employment status is not something I know a great deal about but this sounds a little odd to me.

When you say they have full time employed jobs too, do you mean with a company other than your own? If that's the case they can't be doing that many hours for you. I could be mis-remembering it but I seem to remember there being a minimum number of hours worked before HMRC would suggest employment.

Could this be a case of a lot of workers doing a small amount of hours? With HMRC deciding that it's too much effort chasing the actual workers for unpaid tax so they're looking for some sort of return for their year long enquiry?

[wamstax]

Hi RYN,
May I add a question or two... If HMRC say that less than 10% returned the income is this because they failed to notify their chargeability to tax(in other words never submitted a tax return) for their self employment or understated their income in any tax return submitted in respect of the self employment. In either case the fault is theirs and HMRC should not be seeking to get the tax out of yourself who has been fully compliant. OK I know that it is a bit weak but isn't it an interesting line to take with HMRC. Might make them come out and say exactly why self employment not returned by 90% of workers.

You need to go on the attack in any case!!!
regards and hope this helps
bill@wamstaxltd.com