It is accepted practice that changes announced at the budget take effect from Budget Day and so if you are planning or in the process of undertaking a transaction where tax is a significant factor, or you are seeking to make large contributions to a pension scheme, you may be well advised to bring this forward to 20th March 2012 rather that 5th April 2012.

The deadline for submitting the 2010/11 return and paying any tax due is 31 January 2012.  After this date the penalties for late self assessment returns are:

• An initial £100 fixed penalty, now applied even if there is no tax to pay, or if the tax due is paid on time.
• After 3 months, additional daily penalties of £10 per day, up to a maximum of £900.
• After 6 months, a further penalty of 5% of the tax due or £300, whichever is greater.
• After 12 months, another 5% or £300 charge, whichever is greater. In serious cases, the penalty after 12 months can be up to 100% of the tax due.

But, what happens when the business ceases to be as profitable as the Director expects or worse the company can no longer trade?

Unless the company has sufficient reserves to be able to declare a dividend to clear the debt, unlikely if the company is no longer as profitable, the loan to the director will likely remain on the balance sheet more than 9 months from the year end thereby triggering a tax charge equal to 25% of the loan left outstanding at this point in time and just when cash is probably drying up. This charge is repayable to the company but only 9 months after the year in which the loan is either reduced, in which case only some of the charge is repaid, or the loan is cleared in full.

In a worse position are those companies facing insolvency. Directors have no entitlement to monies drawn out of the business unless extracted by formal salary or legal dividend. This means that a substantial debt may have been built up by a director and which is now due to be paid back to the company at a time when that Director is likely to be having their own cash flow difficulties. In an administration or liquidation the appointed representative may seek to pursue Directors for the repayment of the outstanding debt.

So what does this mean for me?

Foremost, if you are an owner/director extracting funds via a loan account it is vital you monitor carefully the profitability of your company a regular intervals to ensure its is generating sufficient distributable profits to declare the required dividend at the year end. If there is any doubt, reduce the level of drawings.

Secondly, if you need to draw an income from the business consider switching to formal remuneration such as drawing a wage/salary. There are tax consequences to paying a director a salary but provided the level is reasonable and the Director fulfils their fiduciary duty to act on the best interest of the company, salary payments should not be repayable should the business cease.

If you have any queries related to Directors’ Loans, profit extraction, or insolvency please do not hesitate to contact us.

Following tax amnesties for offshore account holders and healthcare professionals, HM Revenue & Customs (HMRC) may offer a new disclosure opportunity for heating engineers, gas fitters and other trades persons to declare tax irregularities.

Under the plan, any plumbers, gas fitters, heating engineers and members of associated trades who come forward and state that they intend to disclose what they owe to the tax office before 31 May will benefit from a reduced penalty. They must then make a full disclosure and arrangements to repay their tax debt by 31 August.

In most circumstances the tax penalty will be limited to 10% of the tax due, but in cases where the person has deliberately deceived HMRC the maximum tax penalty will be 20% – still substantially less than the charge if HMRC catches offenders. HMRC has also promised to only look at records as far back as five years ago.

Due to commence in the second half of 2011, the HMRC are introducing a new Business Records Check consisting of a visit to the business premises by at least one officer for approximately four hours. Where the officer identifies significant record keeping failures it is likely that a penalty will be imposed.  The current maximum penaltiy for incorrect record keeping is £3,000.  Failures in record keeping are likely to lead to a tax investigation to quantify any tax underpayment.

So are your records good enough to pass a ‘check’?

HMRC has suggested that for records to be sufficient there must be (a) a clear record of all business monies in and out and (b) the records must allow an accurate interpretation to be made as to the nature of the receipts and expenditure.

If you have any doubt as to the quality of your record keeping or you have been putting off sorting through that mass of papers now is the time to review and reorganise.