INTRODUCTION
Borrowing money from a bank has become a challenging
exercise in recent months, and perhaps rightly so.
Many entities are suffering from cash flow restrictions as a
result of credit insurers adopting more stringent
procedures. Such procedures require more up-to-date
information than annual accounts e.g. reliable
monthly/quarterly figures are now the norm, with closer
scrutiny of one’s customer base, a quality system of
determining the credit-level afforded to each customer,
coupled with sound credit control procedures. This all
points to any entity being required to look after the cash
flow more carefully and taking tough decisions on customer
credit and cash collections. It seems only reasonable that
an insurer will either lower or withdraw cover if the
insured is not taking adequate steps to look after matters
internally.
Cash is a precious commodity and needs to be nurtured
carefully.
DEBT ARRANGEMENT SCHEME: A HIGHER HURDLE
DAS was introduced to Scotland in late 2004 and has
struggled to gain popularity as a means of dealing with
personal debts. For example, 2008/09 saw 908 DAS
applications whereas there were over 14,600 sequestrations
and 7,600 trust deeds. Briefly, a DAS provides for an
individual to pay all debts in full over an agreed period,
with interest being frozen at commencement of the DAS. The
family home is left untouched.
Perhaps the main reason for the low acceptance of DAS is
that the payment period is as long as necessary to repay
one’s debts whereas sequestration and trust deed typically
allow debts to be written off after a one year and three
year period respectively, with a maximum three year
contribution period.
With effect from 1 July DAS was likely to enjoy even less
public support. Current DAS rules require an individual to
obtain advice from a money advisor and this requirement was
to be removed, allowing an individual to apply direct to the
accountant in bankruptcy for DAS approval. Given that most
individuals have never heard of
DAS as an option for dealing with debt and would not know
where to find the various forms, it is hard to believe that
there would be a flow of applications direct to the
accountant in bankruptcy. Further, the application process
requires an individual to nominate a Payments Distributor
and again, most individuals do not know who/what this is.
The proposed legislation simply says that one can submit an
application without having spoken to a money advisor:
raising the suspicion that the current situation would
remain unchanged in practice.
There have been some disturbing reports of situations such
as a 15 year DAS for someone beyond retirement age. Perhaps
this is why the new legislation contemplates a maximum
repayment period of just over eight years. More worryingly,
it would also require an individual to pay a monthly minimum
of £100 or 1% per month of the total debt. Thus, if an
individual has unsecured debts of £15,000 (not uncommon
these days) a monthly payment of £150 is required as a
minimum. This is beyond many who operate on a tight budget
and are financially stressed.
Trying to make access to DAS a little more difficult might
suggest that the Scottish Government are beginning to draw a
parallel between DAS and a trust deed, whilst offering
bankruptcy as the principal option for those who have no
hope of repaying their indebtedness. This is understandable
as long as the Scottish Government take steps to make access
to bankruptcy easier in terms of being able to prove
apparent insolvency. To date, this has not occurred although
there is a consultation document in circulation.
On 25 June the Scottish Government stopped the new
legislation coming into force. Watch this space for
developments.
COME ON, BE FAIR
For many years it has been possible to deal with HMRC in
terms of finalising claims by using the practice of
“equitable liability”. HMRC has always been willing to
reduce an assessment raised against a taxpayer when the
amount due has been shown to be a different (normally
lesser) figure by the submission of tax returns. Equitable
liability applied even where a taxpayer failed to appeal
against estimated assessments and an HMRC determination was
issued. In May 2009 HMRC issued a statement to say that
equitable liability will be withdrawn from 1 April 2010.
This is unfortunate because it is fairly common for a
taxpayer to ignore HMRC correspondence in the period prior
to the onset of formal insolvency proceedings, if only
because they cannot afford professional advice. As a result,
assessments and determinations are issued and indeed, have
been the basis upon which a sequestration/liquidation
petition is based.
The withdrawal of equitable liability may mean that claims
submitted by HMRC which are known to be manifestly
high/incorrect are used to claim a dividend from an
insolvent estate, thereby reducing the amount available to
other creditors.
It will be interesting to see how this develops because a
trustee/liquidator may elect to ignore the withdrawal of
equitable liability, calculate the correct tax liability and
adjudicate on the lower sum for dividend purposes: leaving
the matter for a court to opine on what level of claim is
correct.
DIRECTORS: GOOD NEWS REGARDING YOUR REDUNDANCY CLAIM
A Court of Appeal decision earlier this year addressed the
issue of whether a company director and controlling
shareholder can also be an employee. This matter has been of
considerable importance to directors for many years because
typically, the Redundancy Payments Office rejected claims
from directors/majority shareholders of insolvent companies
in terms of making payments e.g. redundancy, unpaid salary,
from the National Insurance fund similar to those received
by employees. One commentator has estimated that in 2008
there were around 12,000 claims by directors to the RPO of
which some 600 were Employment Tribunal claims over
employment status.
The Court of Appeal upheld the position that directors can
also be employees if there is a contract of employment in
place, which can be either oral or in writing and based upon
all the evidence provided. Anyone advising directors may
care to ensure that there is a valid contract of employment
in place which, in many circumstances, will be different
from a contract of services between a company and the same
individual as a director.
Hopefully, clarity has been brought to a situation that has
provided an unhappy position for directors who did not want
to pay themselves in the last few months of a company’s life
lest they were seen to be preferring themselves over other
creditors, whilst not endangering the prospect of being able
to claim against the RPO.
DIRECTORS: PAYROLL RECORDS ARE VITAL
In these times of increasing corporate failure it may be
appropriate to revisit the Income Tax (Employments)
Regulations 1993 which, with particular reference to
regulation 49, provide that HMRC can make a director
personally liable for PAYE which should have been deducted
from a salary payment, but was not deducted when such
remuneration was paid. This regulation tends to apply to
smaller entities where a director has a demonstrable
involvement with payroll matters and if HMRC can show that,
as the employer, a director wilfully failed to deduct tax on
salary payments to him, such tax can be assessed on the
director with interest being charged thereon.
Some directors opt for the salary route rather than loan
account entries, and a director will want to exercise due
care if a company is heading for financial difficulties such
that the correct procedures are in place in the event of an
HMRC challenge.
Whilst a successful challenge may be welcomed by taxpayers
generally, a director may well start looking for someone to
blame. Ensure it is not you!
CONCLUSION
This update is provided for general information purposes and
does not purport to offer definitive advice. If other
information is required or specific advice sought please
contact either Michael Reid or Michelle Byrne at this
office. Thank you for taking the time to read this update
and please feel free to pass a copy to your colleague or
anyone else who you think might be interested.
Meston Reid & Co July 2009
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