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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Close Companies: Settlement Problems: Insolvent Companies and Liquidations

The company route remains the preferred option for an insolvent company. A lack of funds is not in itself sufficient reason for adopting the employment income basis EM8700. Provided the directors have adequate means you should ask them to fund a company offer to at least the extent of their debt to the company, ie the established misappropriations. A normal joint and several offer should be sought EM8734. You must be realistic about what you can expect where the directors’ means are also limited EM8732.

Where the directors are not prepared to make a joint and several offer and approval has been given for the employment income route EM8700+ employment income liability should be established formally by assessment/amendment and obtaining directions under Regulations 72 or 81.

Given the close financial link that normally exists between a close company and its directors you should always keep all your options open so that you can, if necessary, attach the liability to the directors instead of to the company. Making the directors aware, as soon as it appears that extractive irregularities have occurred, of the possible alternative tax liabilities that may arise and the means of recovering these liabilities EM8700+, reinforced by protective assessments EM8515, may well persuade them that it makes no sense to contrive a company failure to avoid liabilities. Furthermore a director who has misappropriated company funds owes the money to the company and could be compelled to repay it in the event of the company being insolvent. Additionally a director can be held financially responsible for company debts under the Insolvency Act 1986. Further advice on contrived liquidations can be found in the Creditors’ Voluntary Liquidations section of the Insolvency Manual.

If the company goes into liquidation you should make alternative CT, CTA10/S455 and employment income assessments if not already in place. The Insolvency Practitioner has a duty to recover debts due to the company, which includes misappropriations by directors. Treating misappropriations as if they were employment income might be seen as gaining preference over other creditors. You cannot simply abandon potential company liabilities and proceed solely on the basis of employment income.

The initial aim should be to persuade the directors to reimburse the full amount misappropriated, without relief for any existing credit balance on their loan account.

Where there are no creditors other than the Crown you should firstly pursue a joint and several company offer, which has to be signed by the liquidator on behalf of the company as well as by the former director(s) as participators. Approval for the employment income route will normally be given where a joint and several company offer cannot be obtained.

Where there are other creditors and the directors will not reimburse their misappropriations the employment income route is likely to be the only option. However, to avoid any suggestion of preference you should establish the employment income liability by taking action to make assessment/amendment final and obtaining directions under Regulations 72 or 81 before seeking an offer EM8710. As the directors are unwilling to reimburse their misappropriations formal action is likely to be necessary anyway.