We were approached by a number of such companies in 2005 and now see a rash of them again in Summer 2007. The issues here are commonplace amongst small "service companies". Typically a consultant working for a large company is classed as having direct employment by HMRC (this is called IR35). A commonly used solution is to set up a small service company which then offers their services to the client.
Unless this is done carefully and with tax planning the IR35 issue does not simply "go away". HMRC may still see the service company as a device and the director as an employee of the client company. The usual answer is to be employed directly by the client or to prove that it, the client, is not the only customer of the service company.
There is another issue here, often the consultant takes drawings from the company each month and then has no cash left at the end of the financial year to cover corporation tax. She or he is also then hit with personal tax bills as the earnings from the company have not been taxed through the PAYE scheme.
Alternatively, the director takes too much cash out and although the earnings are taxed through PAYE, the company cannot find the cash to pay the monthly PAYE and NIC deductions.
We advised a director of a company based in Hampshire that had built up liabilities for Corporation Tax, VAT and PAYE. The solution used was a creditors voluntary liquidation for the company - killing off the tax debts and then he as an individual was employed by the client company directly.
Luckily the client valued his services so much that they elected to take him on to their payroll. However, there is still the risk in this solution that the "veil of incorporation" may be lifted and he could be personally pursued for an element of the tax owed by the company. This would occur if the Crown creditors could prove wrongful trading.
In this case that was not too much of a threat, as he also had serious personal credit card debts.
Our answer here was to propose an individual voluntary arrangement. Our team at www.debtless.co.uk set up an IVA which was accepted by his creditors. Clearly, he could demonstrate good future earnings now he was employed by the client company and his creditors supported a deal that binds all of his tax and credit card debts.
So although a small company there were big and difficult problems to deal with. If you have similar problems, please call our solutions team on 01289 309431.
Think liquidation will solve your problems? Then call 01289 309431 or 0800 9700 530 NOW, we'll take away the worry, stress and pain.