Free HMRC Research and Development Claims Service

Research and Development Claims

HMRC have recently released an online form that enables companies to create research and development claims for tax relief using their online portal and submit it to HMRC for free. They also have fairly detailed guidance to help you through the process.

We’ve taken a look at the new service and it looks really helpful for clients wanting to submit their own simple claims under the SME scheme. HMRC’s process makes it clear they don’t want pages and pages of information. However, you do need to know what to put into the forms! To use the service, log into the portal using your normal credentials and start a new claim. The form is relatively easy to fill in. You will need to enter the costs you’ve collated and provide details about the projects. The form sets out what you need to provide, which includes the “standard” research and development (R&D) questions and the total costs allocated to each project, with helpful drop down guidance notes to assist. You can also save your progress and return to amend/submit the claim at a later date – you have 28 days to do so.

Why are we Publicising This?

We know there are a lot of people in the market place charging more than 20% + VAT (up to 35% + VAT in some cases) to help you complete your research and development claims. If your claim is costing you this much, and you’re capable of doing it yourself, then you may wish to save the company what might be a lot of money by using the new HMRC service. DIY research and development claims have always been an option, but HMRC are trying to make it easier and more accessible for customers.

Why Might you Still use an Advisor?

Just like everything else related to tax, R&D is a complicated area of specialist tax advice. Some research and development claims are very straightforward, but as with all areas of self-assessment, the quality of the output depends on the quality of the input. A company may opt to still use an R&D adviser for the same reason they outsource many other areas of their business, for example:

  • R&D claims are not always easy – we know the rules inside out and will help make sure your claim is correct and is right first time.
  • Peace of mind – Our 100% success rate for research and development claims means we stand in good stead to help ensure your claim is robust and will withstand HMRC scrutiny and we’ll help you defend the claim in the event of an enquiry.
  • Saving time and money – We can take the pressure off having to complete your own research and development claims. We can agree fixed fees in advance – this may be a worthwhile investment when comparing the value of your time spent on other areas of the business.
  • Maximising your savings – We can ensure everything that you’re entitled to claim for makes it into the claim and that you aren’t missing out.
  • Mitigating risk – We know problem areas and stay up to date with current HMRC thinking – we can spot areas of risk and help you ensure these are dealt with (e.g. software claims, subcontracted R&D etc.).
  • Make your claims both HMRC and “due diligence” proof – Research and development claims can be seen as a significant risk area in transactions if a buyer thinks the claim is overstated or shouldn’t have been made. Specialist tax input takes away that risk.

With more than £40m tax savings across c700 claims under our belt, we’d love to have a conversation with you about how we can save you money and help you claim the relief; we can work with your existing accountant and we offer no obligation discussions.

DIY Review

If you’re confident on preparing your claim, but still want the benefit of professional advice, we are able to offer a middle ground service. You would prepare the claim yourself then we will review it for you to highlight any risks or issues. We will feed back any changes or advice and all that’s left to do is hit ‘submit’!

We offer this service for a fixed fee, allowing you to balance the best of both worlds. A fully outsourced claim can be costly, a free claim could be risky; our review only service can provide much needed support to a confident but cautious client.

If you have any questions or if you would like to discuss Research and Development claims with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Research & Development Tax team.

This article originally appeared on the blog of our member firm, Tait Walker.

Money Laundering Crackdown on Estate Agents

Estate agents money laundering

HMRC have recently been cracking down on estate agents who do not comply with the money laundering regulations. HMRC officers visited 50 estate agents across England as part of a week-long crackdown after they were suspected of trading without being registered. Inspectors questioned the businesses to establish whether they were in breach of the regulations and assessed whether further action was required.

In cases where the estate agents have been uncompliant, large fines and potential criminal procedures have been levied against them. Some estate agents who have failed to comply have even had their names published online, with one firm being fined £215,000.

Simon York, Director of HMRC’s Fraud Investigation Service, commented:

“Estate agents need to understand that criminals prey on weaknesses, so it’s vital they take all steps to protect themselves. The money laundering regulations are key to that, but there’s still a minority of agents who ignore their legal obligations. These inspections are a wake-up call that if you continue to trade illegally we will come knocking”.

In the last 3 years, HMRC has carried out over 5,000 interventions on supervised businesses and issued 655 penalties worth £2.3 million in 2017 to 2018. In a recent report by the Financial Action Task Force, the UK was rated as having the most robust processes in the world for tackling money laundering.

If you are operating an estate agency business, it is vital that you keep up to date with your anti-money laundering responsibilities. You must ensure that you are correctly registered with HMRC and if you notice any suspicious activity you should ensure that a report is made as appropriate.

You can find guidance on registering your estate agency, as well as money laundering supervision on the HMRC website.

If you have any questions or would like to discuss this in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Construction and Real Estate team.

This article originally appeared on the blog of our member firm, MHA Carpenter Box.

Funding an Acquisition

Funding an Acquisition

It is vital for a buyer seeking to acquire a company to understand the different options available to them for funding an acquisition. The mix of finance chosen will determine how the proposed deal can be structured and will affect the overall cost of the transaction. Some of the most common acquisition funding options are:

Cash Reserves

All forms of external funding are expensive and time consuming to secure. Often the cheapest way to finance an acquisition is to use your own resources. The more cash you can put into a business purchase, the less finance you need to borrow from a bank or the less equity you need to provide to a private equity or venture capital investor. It is worth looking closely into your cash position to identify any surplus funds available or considering selling non-core assets to generate funding towards a deal.

Bank Funding

Debt funding by way of a term loan from a bank is at the core of most funding structures. To obtain this type of funding you usually must be able to demonstrate that security is available and that post acquisition the business will have strong cash flows to enable you to comfortably service the loan.

Where there is limited available security, but the company has strong recurring cash flows, the bank may consider providing an unsecured “cash flow” loan. This will usually be based on a multiple of EBITDA or annual cash flow. As the bank is unable to take any security on this loan, they perceive the risk to be significantly higher and so the interest charges and set up cost are higher and the repayment term offered is much shorter than for a secured loan. Not all businesses will be deemed suitable for such higher risk lending and our recent experience is that banks will look at this type of loan only for businesses with EBITDA of £0.5 million or greater and where the cash flow loan provides no more than 50% of the value of the deal.

Invoice Financing

Raising funds secured against the trade debtors of a business is now very common and has become increasingly widely used in funding transactions. Invoice discounting is a flexible source of finance that that can sit alongside other funding options. It is well-suited to fast-growing businesses because it links your sales ledger directly to your credit facility. This means that the funding available grows in direct proportion to business expansion.

Equity Investment

Acquisition funding through equity investment involves selling a proportion of the ownership of your company in return for investment from a private equity or venture capital investor. Whilst this will reduce your control over your business, the investor will typically bring valuable commercial expertise to the business. Businesses which are attractive to private equity or venture capital investors will generally exhibit very strong growth prospects.

Vendor Finance

A highly viable funding option for small and medium sized businesses, vendor finance involves the person selling a business funding part of the purchase price. Typically, the buyer pays an initial amount upon completion, and then meets the deferred balance (including interest) over an agreed period with regular repayments. Vendor finance can be a useful mechanism to bridge differences in the seller’s and buyer’s value expectations, to enable a deal to be done.

Asset Based Lending

Asset-based finance allows the borrower to secure revolving loans using available assets, such as stock, equipment and other fixed assets. However, the amount that can be borrowed may often only be a relatively small proportion of the asset value, depending on the liquidity of the asset class.

When investigating any potential acquisition, it is important to engage an experienced Corporate Finance adviser. At MHA we have long-standing relationships with the UK’s most active corporate banks and private equity houses, and we have a track record of successfully obtaining acquisition finance for our clients.

If you have any questions or if you would like to discuss  your company plans with us, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Corporate Finance team

This article originally appeared on the blog of our member firm, MHA Moore & Smalley.

Will New Car Personal Contract Purchases Survive HMRC’s Latest VAT Change?

Personal Contract Purchases

HMRC have announced a policy change in the VAT treatment of Personal Contract Purchases (PCP) vehicle sales which is likely to have a major impact on the future of the market. Whilst the way in which dealers invoice finance companies won’t alter, the impact on customers is significant and dealers will inevitably need to change the way in which deals are sold and explained.

What is the Change?

In simple terms, the supply of a car by a finance company to a customer will be treated as a supply of services rather than a supply of goods in most cases. PCP will become indistinguishable from Personal Contract Hire (PCH).

Why has This Changed?

A typical customer considering a car purchase will often be unable to pay the full amount in cash. Most will be looking for some form of finance and PCP has been a highly successful means by which dealers assist customers to obtain that finance. Although dealers go to great lengths to explain the full financial impact of a PCP deal, most customers are interested in two things: what deposit is required and what are the monthly payments? It is those two factors which determine immediate affordability in the eyes of the consumer.

The balloon payment required to finally own the car in 2, 3 or 4 years in the future; it may be a sum which the customer knows they will not be able to pay; and importantly there is no requirement to pay that final instalment. A customer is perfectly entitled to hand back the car at the end of the PCP term. The option to purchase at the end of a PCP agreement is often irrelevant to the customer.

In commercial terms, there is no difference between a PCP and PCH deal. In the eyes of the consumer, both require an initial upfront deposit, monthly payments for an agreed term and the return of the car at the end of that term.

Mercedes-Benz Financial Services were the first to publicly recognise this and persuaded the European Court of Justice in 2017 that their existing PCP product, Agility, was equivalent for VAT purposes to a long-term hire agreement. It has taken 2 years for HMRC to react, but they now expect the industry to change its procedures within 3 months.

What is the Impact?

HMRC have explained the technical details in Revenue & Customs Brief 1/2019:

Under current rules where PCP is regarded as a supply of goods, VAT is due on the full sales price at the initial handover of the car. In future, however, HMRC’s position is that if the final instalment is approximate to the vehicle’s open market value, then PCP will be regarded as a supply of services. As with PCH, this means that VAT will only be due on the amounts the customer actually pays to the finance company and only at the time of those payments.

Furthermore, interest currently charged on PCP deals will no longer be recognised as anything other than part of the payment for the hire of the car and will therefore attract VAT. This differs from the current position where the interest charge is VAT exempt.

The new arrangements are advantageous in two respects – VAT is deferred until the date of customer payments and is only due to the extent of those payments. For customers who hand back their car at the end of the deal, this results in a significant reduction in the VAT cost. However, there are two factors which means that the VAT burden to the sector is likely to increase overall. Firstly, interest on PCP deals ceases to qualify for VAT exemption. Secondly, there is one critical aspect overlooked by HMRC in their announcement. Under current rules when PCP cars are returned to a finance company, they are eligible for sale using the margin scheme. However, cars returned after a lease are ‘qualifying cars’ and VAT is due on their full selling price. This change will be significant to the used car market within a couple of years. Dealers and customers alike will need to adapt to the idea that most used cars will be liable to VAT.

Example

It is useful to compare the same deal pre and post-change to help visualise the impact. Table 1 shows the VAT treatment under existing PCP rules of a car which is sold new on PCP for £12,192 with an agreed final payment after 3 years of £6,606. In this example, the dealer buys the car at that residual value from the finance company and resells it for £7,000. If the customer makes the final payment the total amount paid is £14,135.96 with £1,943.96 attributed to VAT exempt interest charges.

Table 1 – A PCP Deal Under Current Rules

Transaction Net Price VAT Gross Price Date VAT Due
Initial sale £10,160 £2,032 £12,192 Date of handover
Deposit Included in above £2,000 Date of payment if pre-handover
36 monthly instalments 36 x £153.91
Balancing Payment £6,606
Totals on original deal £2,032 £14,135.96
Sale of used car post PCP £65.67 £7,000 VAT due on margin on date of sale of used car
Total VAT Charge £2,097.67

The second table shows the same deal, with the same payment profile, but with very a very different VAT outcome.

Table 2 – A PCP Deal Under New Rules

Transaction Net Price VAT Gross Price Date VAT Due
Initial sale price £12,192 Not considered a sale by finance company
Deposit £1,667.67 £333.33 £2,000 Date of payment if pre-handover
36 monthly instalments 36 x £128.26 36 x £25.65 36 x £153.91
Balancing Payment Customer returns car
Totals on original deal £6,284.03 £1,256.73 £7,540.76
Sale of used car post PCP £5,833.33 £1,166.67 £7,000 VAT due on margin on date of sale of used car
Total VAT Charge £2,423.40

The Future

Adapting to this change will be a significant challenge for the sector. Dealers may not notice an immediate difference as they will continue to sell cars to finance companies and will be required to account for VAT on that sale.

For the future, much depends on how the finance companies react. The revised treatment does not apply if the final payments are set at a level which is demonstrably below market value, so revised payment profiles could preserve the status quo. If not, new car deals may migrate to pure PCH and the used car market could shift towards VATable ‘qualifying’ cars.

If you have any questions or if you would like to discuss any of the issues raised in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our VAT team. 

This article originally appeared on the blog of our member firm, MHA MacIntyre Hudson.

Changes to Charity Tax Relief Thresholds

Charity Tax ReliefCharity fundraisers need be aware of two changes to charity tax relief thresholds that apply from 6 April 2019.

Gift Aid

Charities often encourage donations by giving a small reward to their donors. Where this is more than token value, this needs to be measured and assessed against value thresholds to make sure that gift aid can still be claimed. The benefit value thresholds will be simplified slightly in April, reducing the thresholds from three to two. The new limits will be:

  • For donations up to £100: 25% of the value of the gift (as before)
  • Donations over £100: £25 plus 5% of the excess over £100
  • Maximum annual benefit £2,500 (as before)

As before, beware of some pretty grey areas in the gift aid rules on assessing benefits ‘associated with’ donations. Take care or get professional advice.

The Gift Aid Small Donations Scheme (SDS) allows charities to claim a gift aid type benefit of 25% of donations without requiring a personal declaration. Until now, the maximum donation under SDS has been £20. This limit will increase in April to £30, making a small difference to charities that receive impromptu small donations from individuals, e.g. from bucket collections.

Trading

Charities with total turnover above £200,000 can undertake non-primary purpose trading of income up to £50,000 and benefit from a tax exemption (trading towards their primary charitable purpose can be at any level). For charities whose total income is below £200,000, there is a scale of lower trading exemption limits.

The small trading thresholds, which haven’t moved for 20 years, will be revised upwards in April 2019, effectively allowing charities to undertake more trading activity before a trading subsidiary is needed. The new limits for non-primary purpose trading income will be:

  • For income below £32k: limit at £8k
  • For income £32k to £320k: limit at 25% of income
  • For income over £320k: limit at £80,000

Remember, of course, that subsidiaries aren’t set up just to prevent tax in a charity. The decision on whether or not to run operations in a subsidiary often requires assessment of other factors, including risk management, VAT, business rates exemptions and cost of administration.

If you have any questions or if you would like to discuss charity tax relief with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Not for Profit team

This article originally appeared on the blog of our member firm, Larking Gowen.

Brexit

Brexit

The UK is due to leave the EU on 29 March 2019

Businesses need to have contingency plans in place before 29 March 2019 and they will need to be sufficiently flexible to cope with a variety of possible unknowns. Our member firms have produced a range of materials that keep you informed with the key points you need to know and provide tips about what you can do now to prepare.

Guides:

MHA Brexit Planning Guide

 

Article Library:

Summary Articles:

An Update on Brexit by MHA Moore & Smalley

Brexit & VAT Update by MHA Broomfield Alexander

Planning for Brexit:

Preparing Businesses for Leaving the EU by MHA Broomfield Alexander

Government Launches Service to Prepare Firms for EU Exit by MHA Broomfield Alexander

Time to Prepare for a No Deal? by Tait Walker

Brexit Tax Planning – Customs, VAT & AEO by MHA MacIntyre Hudson

Post Brexit Britain – Keep Calm and Keep Preparing by MHA MacIntyre Hudson

Brexit Insights:

Good News for Intra-EU Importers in the Event of a No-Deal by MHA MacIntyre Hudson

What Impact Will No Deal Have on Your Workers? by MHA MacIntyre Hudson

Do you Understand how Brexit may Impact Your Business? by MHA Moore & Smalley

Sector Articles:

Brexit and the Travel Industry by MHA MacIntyre Hudson

No-deal Advice for Agriculture by MHA Carpenter Box

Hard Brexit – How Will Tour Operators be Affected? by MHA MacIntyre Hudson

 

If you have any questions or if you would like to discuss Brexit with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

Ponzi Schemes

Ponzi SchemesA top of the range Bentley at a substantial discount to list price? A deal too good to be true? Unfortunately, it was. We often hear about Ponzi schemes and ever since Charles Ponzi pioneered the idea in 1919 through to Bernie Madoff perfecting the concept to fool the financial markets out of $50 billion, they reappear, reinvented but always “robbing Peter to pay Paul”.

In 2012, we were instructed by the Police to help unravel a series of financial transactions associated with the purchase and sale of luxury motor cars.

Wealthy potential purchasers were lured in with the prospect of a substantial discount if they paid up front. Before the car was delivered, the opportunity arose to sell it on unseen and make a quick profit. Word spread and before long, over 90 individuals had contributed over £9 million which resulted in only a handful of actual cars being delivered.

Unsurprisingly, suspicions were aroused, questions asked and the whole scheme collapsed with only a fraction of the cash being returned to its rightful owner.

This was an interesting case for a variety of reasons. The number of victims was considerable, nearly one hundred witness statements had to be checked and reconciled back to the accounting records. The primary conclusion of which, was that people’s recollection of events, even when significant sums of money are involved, is not perhaps as good as they believe.

Fortunately, and unusually in this case, the accounting records maintained by the perpetrator of the fraud were more accurate than the victims!

Confronted with the volume of transactions and complexity of the banking arrangements, the Police considered it essential to engage the analytical minds of a Forensic Accountant.

Our brief was to take the financial information and to unravel the story. This meant not only being able to identify the victims who lost money and how much they lost, but also some of the early participators that gained from it. Also, we were asked to prove that the scheme originator has received financial benefit from the scheme. This was not easy as there were so many transactions and none of them seemed to be with the perpetrator. However, ultimately, we were able to reconcile all of the transactions, by vehicle (to the bank and the witness statements) and this was able to prove beyond reasonable doubt that the perpetrator had benefited and the amount in our report was ultimately quoted in the final criminal charges, which despite the huge sums involved, was relatively small.

Remember the old adage that, if it looks too good to be true it probably is. If you suspect fraud, MHA Forensic Accountants have a wide, diverse range of knowledge and expertise to help you.

If you have any questions or if you would like to discuss Ponzi schemes or other fraud with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Forensic team

Crown Fraud – Stealing from the State

Crown FraudThis article focuses on crown fraud – fraud concerning Crown monies, in particular the non-payment of tax liabilities.

The Consequences of Crown Fraud

There are significant consequences for businesses and individuals who do not pay their tax liabilities. It deprives public services of the funds they need to survive. The shortfall in uncollected tax revenue must be made up elsewhere, therefore leaving society worse off.

In the 2016/17 tax year, HMRC estimated that the “tax gap”, i.e. the difference between tax owed to HMRC and the amount actually paid to HMRC, was £33 billion. The largest portion of the tax gap usually comes from amounts due from small businesses. Taxpayer error, criminal intent, underpaid National Insurance Contributions and VAT also play a significant part.

What Happens After the Fraud?

When business owners do not pay their tax liabilities, they often use the funds to sustain short term trading instead. Examples of this would be paying themselves a salary, or paying another creditor (a classic example of robbing Peter to pay Paul). By withholding money owed to HMRC, perpetrators are effectively treating their tax liabilities as a loan they can pay off on their own terms.

In many cases, the withheld funds act only as a temporary lifeline to businesses that may already be insolvent. When a Liquidator is appointed to wind up the business and realise its assets, HMRC is usually the majority creditor and stands to gain the most from these proceedings. However, the business is often severely in debt and has insufficient assets to enable a repayment in full.

Additionally, these businesses’ owners frequently incorporate a new company and repeat the process. Serial offenders have been known to repeat this procedure every time a company fails. This results in HMRC chasing a never-ending series of dead-ends that will not help them recoup the amounts they are due.

Fines

When directors of liquidated companies are found personally liable for their company’s demise, they can be fined. If it is not their first offence, they can be disqualified as acting as a company director for years. However, by this stage, the damage has often already been done.

What to do if you Suspect Crown Fraud

If you suspect that a company or individual is not paying the taxes that they owe, you can report this to HMRC.

HMRC rewarded tip-offs in the 2015/16 tax year by paying £605,000 to the whistle blowers who alerted them to illegal activity.

If you have any questions or if you would like to discuss crown fraud with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Forensic team

This article originally appeared on the blog of our member firm, Tait Walker.

Insolvency Q&A

Insolvency

What is Insolvency?

A company or individual is deemed insolvent if they can’t pay their debts as and when they fall due.

Inability to pay debts is defined broadly in the Insolvency Act as:

  • Unable to pay debts as they fall due (known as the cash flow test)
  • Liabilities greater than the value of its assets (known as the balance sheet test)
  • Unsatisfied county court judgement or statutory demand

Where a company or individual is deemed to be insolvent, there may be suitable insolvency procedures available for handling the affairs.

What is an Insolvency Practitioner?

An insolvency practitioner is the person appointed to deal with the insolvent company or individual and will act as the office-holder. It’s possible for more than one insolvency practitioner to be appointed to act jointly as office-holders on a case.

In order to act, an insolvency practitioner must, since 1986, have passed the Joint Insolvency Examination Board (JIEB) examinations and be licensed to act by an authorising body.

Our member firms have licensed insolvency practitioners, who are authorised to act by the Institute of Chartered Accountants in England and Wales.

What is an Official Receiver?

An official receiver (also known as the OR) is a civil servant in the insolvency service and is an officer of the court. They are notified by the court about all bankruptcy or winding up orders.

The official receiver is responsible, through their staff, for administering the initial stage (at least) of all bankruptcy and compulsory liquidations. This includes collecting and protecting any assets and investigating the causes of insolvency.

What is Liquidation?

Liquidation is a legal process to wind up the affairs of a limited company. There are three types of formal liquidation that a company can enter:

  1. Compulsory liquidation
  2. Creditors’ voluntary liquidation
  3. Members’ voluntary liquidation (only available for solvent companies)

Either the official receiver (compulsory liquidations only) or an insolvency practitioner will be appointed as liquidator. The role of the liquidator is to oversee the winding up of the company’s affairs; realise the company’s assets; pay dividends to creditors and, in the case of a solvent liquidation, make distributions to shareholders.

What is Compulsory Liquidation?

A compulsory liquidation is a court based process for winding up the affairs of a limited company.

The liquidation procedure begins with the making of a winding-up order through the courts. The order is made following the presentation of a petition, usually by a creditor or director of the company.

Directors will have no control over the timing of this procedure, which typically takes a minimum of two months, and it’s extremely rare for any part of a business to be rescued once it’s entered compulsory liquidation.

Either the official receiver or an insolvency practitioner will be appointed to deal with the liquidation process and the business ceases to trade immediately.

Directors are encouraged to contact one of our insolvency practitioners to discuss whether a creditors’ voluntary liquidation (CVL – see below) will help achieve their objectives in a more planned and orderly manner.

What is a Creditors’ Voluntary Liquidation (CVL)?

This is the most common type of liquidation used in England.

A CVL is initiated by the directors and involves the passing of resolutions by shareholders to wind up the company and appoint an insolvency practitioner of their choice as liquidator.

There’s greater involvement of the directors and more opportunity for a controlled sale of the assets. This procedure can take effect in a matter of days.

What is a Members’ Voluntary Liquidation (MVL)?

An MVL is a formal process of bringing the company to an end in order for the remaining assets to be distributed to its shareholders. This is commonly used when a company has fulfilled its purpose or the current management wishes to retire and there’s no succession plan. The company must be solvent (i.e. it can pay all of its creditors in full).

An MVL can be a highly tax efficient method of distributing the surplus assets in a business back to its shareholders. Often the shareholders will qualify for reduced tax rates due to eligibility for entrepreneurs’ relief.

Contact one of our insolvency specialists today to see if an MVL is the best option for disposing of your solvent company.

What is Administration?

Administration is a rescue procedure with a variety of exit strategies. The administration process provides a statutory moratorium to prevent creditors from taking legal action.

There are three entry routes into administration:

  1. By an order of the court
  2. Appointment by a qualifying floating charge holder
  3. Appointment by the company or its directors

Administrators will often continue to trade the business in order to complete outstanding work in progress, to facilitate a sale of part/all of the business or to provide time to propose a company voluntary arrangement to creditors.

An insolvency practitioner must be appointed as administrator to manage the company’s affairs during administration.

What is a Pre-Pack Administration?

A pre-pack administration is where a sale of the company’s business and assets is completed by the administrator prior to the meeting of creditors to consider the administrator’s proposals.

Typically, the sale is completed immediately or shortly after the appointment of the administrator. The deal will have been discussed and agreed in principle prior to the application to place the company into administration and should provide the best deal for creditors.

A pre-pack can be a suitable option where the business would no longer be viable if it were traded under administration, there are insufficient funds to trade the business and the value of the business would be lost upon insolvency or the assets were of a perishable nature.

Pre-packs are highly regulated and specific guidance has been published in the form of Statement of Insolvency Practice 16.

It’s possible for the existing board of directors or company shareholders to acquire the company business and assets from the administrator. Additional regulations are in force for governing pre-pack sales to connected parties.

What is a Voluntary Arrangement?

A voluntary arrangement can be proposed by the following:

  • A company – company voluntary arrangement (CVA)
  • An individual – individual voluntary arrangement (IVA)
  • A partnership – partnership voluntary arrangement (PVA)

These arrangements are formally binding agreements that set out the basis and terms under which the debts will be repaid (not necessarily in full). In order to be approved they will require the consent of 75% or more of the creditors but, once approved, will legally bind 100% of creditors.

Voluntary arrangements provide greater flexibility and fewer restrictions for the proposer. This usually allows trading or employment to continue and from which funds can be introduced over a period of time (often 3-5 years). Alternatively, the arrangements can provide some breathing space whilst assets are sold (i.e. properties). Additionally, third party funds can be introduced as a lump sum.

An insolvency practitioner is appointed as supervisor of the voluntary arrangement for the purposes of ensuring that the terms of the arrangement are adhered to.

What is Bankruptcy?

Bankruptcy is a process for dealing with the affairs of an insolvent individual. It’s initiated in one of two ways:

  1. A creditor, who must be owed at least £5000, can petition the court for a person’s bankruptcy. A judge will determine whether a bankruptcy order should be made at a hearing.
  2. Alternatively, an individual can submit an online application for their own bankruptcy. The application is considered by an adjudicator who will decide if they should be made bankrupt.

The official receiver will initially act as trustee but an insolvency practitioner may replace them.

The individual will lose control of all assets belonging to or vested in them at the commencement of the bankruptcy. The trustee is responsible for realising those assets and paying dividends to creditors (where possible).

Individuals are encouraged to contact one of our insolvency practitioners to discuss whether an individual voluntary arrangement is suitable and could help them avoid bankruptcy proceedings.

Can I Strike Off/Dissolve an Insolvent Company?

The Companies Act allows the directors of a company to make an application for a company to be struck off and dissolved. The directors are not prohibited from making such application due to the company being insolvent. However, the www.gov.uk website provides the following guidance:

“This procedure is not an alternative to formal insolvency proceedings where these are appropriate. Even if the company is struck off and dissolved, creditors and others could apply for the company to be restored to the register.”

To add further to the point above, a dissolved company can be reinstated to the register and a petition to wind up the company could then be made. We therefore recommend that directors consider formal insolvency proceedings for dissolving a company.

How can I put my Company into Liquidation?

In order to place your company into a creditors’ voluntary liquidation, the directors will need to hold a board meeting and convene a meeting of the company’s shareholders. You’ll need 75% of the company’s shareholders to vote in favour of passing a winding up resolution and an insolvency practitioner who is willing to act as liquidator of the company.

Following the introduction of the insolvency rules 2016, there are now varying routes for engaging with creditors as part of the appointment process. It’s advisable to engage an insolvency practitioner to help you through the legal process.

When Should I Seek Advice?

Seek advice as soon as you become aware that the company may not be able to pay its debts as they fall due. Failure to get advice early may result in reduced options being available for the company. Speak to one of our insolvency practitioners today to arrange a free confidential consultation.

When Should my Company Stop Trading?

When a company should cease trading depends on the circumstances of the company. Typically, a company will cease to trade when the directors reach an agreement that the company ought to be placed into insolvent liquidation. You should not continue to trade if there’s no prospect that you’ll be able to pay your debts as and when they fall due. Continuing to trade beyond this point could have further consequences for the directors.

My Company has Just Been Served With a Winding-Up Petition. What Should I do?

Timing is key if your company has been served with a winding-up petition. The petitioning creditor will be entitled to advertise the petition in the London Gazette seven days after serving it on the company. Once the petition is advertised, it’s likely that the company’s bank account will be frozen, which could have severe consequences for your business.

If the debt is disputed then it’s likely that you’ll need to seek legal advice. We can provide you with contact details for a number of lawyers who are suitably experienced in dealing with these matters. If the company doesn’t dispute the debt then you should seek advice from an insolvency practitioner as soon as possible. It may still be possible to avoid the company entering compulsory liquidation.

How Much Will it Cost to Wind up a Company? I’m Looking for a Cheap Liquidation

The costs of winding up a company will vary depending on the size of the company, the complexity of the case and the nature of the assets the liquidator has to deal with. Contact one of our insolvency practitioners to get a competitive quote.

Who Pays to Wind up a Company? Who is Liable for the Liquidator’s Costs?

The costs of assisting directors with placing a company into liquidation and acting as liquidator are payable out of the funds realised from the sale of the company’s assets. The directors are not liable to contribute to the costs. However, if there are no assets to pay the costs of liquidation then a director can choose to meet the costs personally.

Am I Liable for Company Debts? Can a Director be Liable for Company Debts?

Ordinarily a director of a limited company is not personally liable for the debts of a company. However, a director may have personal liability in respect of a debt if they have provided a personal guarantee (PG). It’s not uncommon for banks to seek security in the form of a PG from one or more of the directors when a company applies for credit.

A director could also become liable to contribute to the assets of a company if it can be shown that they have acted incorrectly. Directors in the UK are legally considered to have ‘fiduciary duties’ which means that, in the event of insolvency, they are duty-bound to act in the interests of the company’s creditors and not of themselves.

Will my Personal Guarantee be Called Upon by the Bank?

It’s common for the bank to contact directors who’ve provided a personal guarantee upon the liquidation of the company; however, early negotiations with the bank will leave the director more options.

My Company has Gone Bust, can I Still be a Director?

Being a director of a company that enters formal insolvency proceedings does not automatically prohibit you from continuing to act or taking new directorship appointments.

Can I Start up a New Limited Company Immediately?

You’re entitled to set up a new company immediately (assuming there are no matters affecting your ability to act, such as disqualification or being an undischarged bankrupt). However, there may be some restrictions, such as trading with a prohibited name. Our insolvency practitioners can provide further information.

Will I Have to Attend Court?

A creditors’ voluntary liquidation doesn’t involve the court and allows the director(s) to control the timing and appointment of an insolvency practitioner. However, a compulsory liquidation is a court based process which does require a court hearing. You’re not required to attend the hearing, but failure to attend is likely to result in the judge simply making an order for the company’s winding-up.

Will I Have to Face the Company Creditors?

Historically, a creditors’ meeting would be held as part of the process to place a company into creditors’ voluntary liquidation. A physical meeting, however, is now only held as part of the appointment process, if requested by creditors and certain triggers are met. If a physical meeting is requested, then at least one director is required to attend. During the meeting, there’s opportunity for any questions to be asked of the director(s).

Can I Pay Family Creditors?

Family creditors are likely to fall into the category of ‘associated creditors’ within the definition of the Insolvency Act 1986. Associated creditors who have been repaid in the two years prior to the date of liquidation may be requested to repay these sums to the liquidator.

How Long Does an Insolvent Liquidation Last? When Will the Company be Dissolved?

There’s no definitive timescale for the duration of a liquidation. A liquidator will remain in office until all of the company’s assets have been dealt with. Once the liquidator considers that the administration of the company’s affairs has been concluded, they’ll take formal steps to conclude the liquidation, which will ultimately result in them being released from office. The company will be dissolved at Companies House three months after the final return is lodged by the liquidator.

How Long Does a Solvent Liquidation Last? When Will the Company be Dissolved?

Similar to an insolvent liquidation, there’s no definitive timescale for the duration of a solvent members’ voluntary liquidation. However, there is a legal requirement that all of the company’s creditors must be repaid in full, plus statutory interest, within a period of 12 months. A liquidator will remain in office until all of the company’s assets have been dealt with and the funds have been distributed accordingly. Once the liquidator considers that the administration of the company’s affairs has been concluded, they’ll take formal steps to conclude the liquidation, which will ultimately result in them being released from office. The company will be dissolved at Companies House three months after the final return is lodged by the liquidator.

When do my Director Duties Cease?

Your duties as director cease upon the passing of a winding-up resolution or following an order of the court for compulsory liquidation. However, you have an ongoing legal duty to cooperate with the liquidator. Failure to cooperate with the liquidator or official receiver could result in you being examined at court.

Will my Employees get Paid?

Employees may claim for arrears of wages, holiday pay, redundancy pay and pay in lieu of notice from the redundancy payments service, although certain restrictions will apply. Please note this isn’t an exhaustive list of all items that an employee can claim. The money comes from the Government’s National Insurance fund and they aim to pay within three to six weeks of receiving a claim. The office-holder will issue a fact sheet to employees advising them how to submit claim, which is done via the Government website.

Is the Liquidation Advertised?

Yes. There are a number of statutory notices which are advertised in the London Gazette for both a creditors’ voluntary liquidation and compulsory liquidation. However, advertisements are only placed in regional or national newspapers if the insolvency practitioner considers it appropriate.

Can a Director Purchase Company Assets? Can a Shareholder Purchase Company Assets?

Yes, a director or shareholder is able to purchase the assets of an insolvent company. If a company’s assets are sold prior to an insolvency event then that disposal will be reviewed by the office-holder. An office-holder has the power to overturn such transactions if it can be shown that market value wasn’t achieved for the disposal. However, if the assets are sold to a director/shareholder by a liquidator, then it’s the liquidator’s duty to make sure that fair value has been paid for the assets. A liquidator has a duty to disclose details of transactions with connected parties to creditors.

If you have any questions or if you would like to discuss  your company plans with us, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Corporate Finance team

This article originally appeared on the blog of our member firm, Larking Gowen.

Bank Fraud

Bank Fraud

This article focuses on bank fraud and fraud against other funding organisations.

Bank Fraud

Fraudsters often defraud banks by securing an overdraft and then maxing it out with no intention of repaying it. When banks do not impose a form of security, such as a bond over the company’s assets, they stand to lose a considerable amount.

Another method fraudsters use is to breach their loan covenants. A loan covenant is an agreement between the bank and the recipient that they will not undertake certain actions, or will fulfil certain conditions. Businesses with ailing financial health often manipulate their financial statements to satisfy the terms. An example of this would be by overstating turnover or understating their liabilities. When these businesses later collapse, the bank is unable to recover the loan.

Fraud Against Funders

The techniques used by fraudsters to defraud other funders are similar to these. We often encounter company directors who submit overly optimistic forecasts, which are based on excessively generous assumptions. These forecasts predict an unrealistic financial performance and often conceal liabilities and amounts due to third parties. This is to convince funders of the sound financial health of their companies.

Due Diligence

It is standard procedure for banks and other lenders to perform due diligence checks before taking on new clients. However, these checks can never guarantee that some fraudulent clients won’t slip through the net. This is particularly prevalent when the clients in question operate within high-risk sectors, e.g. cash in hand businesses, investment companies, or have overseas dealings. Forecasts from younger companies are also subject to a higher risk. This is because less established businesses may not have historic trading results to back up the figures used in their forecasts.

How we can Help

We are experienced in reviewing financial information for reasonableness and we can assist in identifying red flags. Forensic analysis of transactions can analyse records to check the reliability of financial information. It can also look for information that has been omitted or changed to achieve a required level of financial performance.

We assist banks and third party funders, and have provided expert evidence in investigating an entity’s financial position and use of funds. Our experts prepare reports in accordance with Part 35 of the Civil Procedure Rules. This is to assist in achieving a fair settlement as part of dispute resolution.

If you have any questions or if you would like to discuss bank fraud with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Forensic team

This article originally appeared on the blog of our member firm, Tait Walker.