Beware Of The Warning Signs Of Insolvency

Trading whilst in an insolvent position is an extremely risky situation for Directors. If the directors of a business continue to trade when they know that the company is unable to pay its debts they could be exposed to personal liabilities (and possible prosecution) and lose the usual protection offered by the limited liability status of the company.

For this reason company directors need to keep a careful eye out for the early signs of the company drifting towards insolvency.  These may include:

Negative Reserves
When the company’s annual accounts are prepared (or interim management accounts) the directors should take careful note of the balance sheet to ensure that there are no negative reserves due to the company’s assets exceeding its liabilities.  This often arises when losses have been made, or funds in excess of profits have been extracted.

 Negative Net Current Assets
Whilst the company may have positive assets overall, it is the company’s ability to pay debts as they fall due that is the real issue.  A company’s ability to meet short-term liabilities depends upon liquid assets (cash or assets that can be quickly converted to cash) available.  Looking at the Net Current Assets figure in the balance sheet you can provide a good indication of this.  Where Current Liabilities exceed Current Assets then this will warn of probable cash flow problems and the risk of subsequent insolvency.

 Over dependence on one large Customer
This is always a dangerous situation to be in.  Effectively your company is dependent upon the fortunes of your principle customer.  If they are in difficulty then so are you.  An extremely large bad debt, or simply a delay in them paying you, may cause your company to fail.  Diversify your client base as best you can, and ensure you keep a tight control over your debtors so that they do not build up large debts that you cannot afford to go ‘bad’.

 Taxation Arrears
Of all your creditors HMRC is often the last to be paid as they are not considered to be critical to the continuation of your business in the way that key suppliers and employees do.  However, HMRC is often the most likely to take action to put your company into liquidation.  As such, not paying HMRC is simply not a good idea.

 Aggressive Bank Action
In the past banks competed for the opportunity to lend you money.  Today it is a very different situation.  If your company is struggling, rather than holding out a helping hand they are often quick to try to withdraw their lending facility.  Overdrafts are repayable on demand and you may find that their action to reduce the facility may be sufficient to tip you over the edge into an insolvent position.

 Unexpected or Unusual Events
The receipt of a winding up order from a creditor, a demand for repayment of a loan, or the consequences of a County Court judgement going against you may be an indicator of you heading for trouble.

If you feel that you are having difficulty then you need to speak to your accountant about this.  Accountants are best placed to give you initial advice and should be your first port of call, although ultimately you may need to be referred on to an authorised Insolvency Practitioner.  If you are concerned about the risk of your business becoming insolvent and are not getting the help and support that you think you need from your accountant, please do not hesitate to contact us at DEB Chartered Accountants.

When Is A Debt Not A Debt

It would appear that the answer to this is when it is a debt used to obtain some form of Inheritance Tax (IHT) advantage.  Changes announced by the Budget 2013, when implemented, will have a significant effect on Inheritance Tax planning.  The proposal is to disregard certain debts in the calculation of the estates of individuals where they have been incurred under certain circumstances.  Simply put, they will not allow, as a deduction against the assets in an individual’s estate, any debt that has arisen as a consequence of taking assets out of the IHT tax net. Perhaps the most prevalent example of this will arise when people take out a mortgage on their own home and then use the funds to purchase an asset that is exempt for IHT purpose, such as those qualifying for Business Property Relief (i.e. Business Premises).  Under these circumstances, it will no longer be possible the outstanding mortgage against the value of the home on death.

These new tax changes will also impact upon debts to trusts, such as those to Employment Benefit Trusts (EBT’s) and Employer Financed Retirement Benefit Schemes (EFRBS).  Such debts often arise as a consequence of implementing tax strategies aimed at profit extraction from companies.

It appears certain, that this new tax legislation will represent a significant blow to planning used to defend against IHT liabilities.  Anyone who has been relying upon such loans as a means of reducing their estates will now have to revisit their planning in order to ensure that any steps taken to reduce their exposure to IHT are still appropriate.

At DEB Chartered Accountants we are well aware of the growing significance of Inheritance Tax to many of our clients.  In light of this we have developed software to review exposure to IHT and can give valuable advice to hep you minimise your IHT liabilities before it is too late.  If Inheritance Tax is a matter of concern to you please do not hesitate to contact us.

Do You Know #11 – Laundry Costs

Normally the cost of cleaning workwear is tax deductible for an employee or self-employed person.  This is particularly the case where the provision of the clothing or workwear is tax deductible also.  The cost of normal clothing however, including gents and ladies suits, is not deductible, whether or not they are used  solely for work purposes.

Dependent upon the type of industry that an employee works in, there are scale rates that HMRC publishes which they will accept as being a reasonable cost for maintaining protective clothing and uniforms.  No such round sum allowances exist for the self employed, who should claim the actual costs involved, unless they have negotiated something to the contrary with HMRC.

Do You Know #10 – Overnight Costs

If your business requires you to work away from home and there is a need to stay away overnight, there are expenses that you can claim as tax deductible.  These include accommodation costs such as hotel bills and meals.  If the cost of these is borne by the worker and they are not reimbursed then they can claim for these as a deduction against their income on their tax return.  If the employer pays for them, then they will be a tax-deductible expense in their accounts.

Personal incidental expenses of up to £5 per night if in the UK, or £10 if abroad can also be claimed.  This will cover such costs as newspapers, telephone charges, and mini-bar costs that may appear on a hotel bill.  The amount per night is taken as an average over the whole period away, and thus it is not a problem if some of the days exceed this amount.  If the average is not below the permitted amount, and the difference is not reimbursed, then the whole amount paid would be taxable pay for the employee.

A word of caution – you cannot simply pay the employee the above sum tax-free.  The payment is only tax-free if it is made wholly and exclusively for the purpose of defraying expenses that are incidental to the employee being away from home.  It is thus far safer to let the employee incur the expenses, and then claim them back, rather than simply paying a regular amount per night and hope to be able to substantiate the basis of the payments if challenged by HMRC probably several years later.  You would have significant difficulty in doing this.

If you would like to know more about deductible expenses, please do not hesitate to contact us.