In the distressing situation that you find yourself unable to find a
contract for any length of time you may have questions about what to do
with your company.
When your company is not engaged in a contract the company is still
trading even though it is not making sales. As the company director,
you may have decisions to make regarding the future of the company.
Some of your decisions may be based on your view of what may happen
in the future i.e. a new contract, an offer of self- employment, moving
into a different business direction or making an application for state
benefits to assist financially. This is not easy, but a necessary fact
of running a business.
The first point to remember is, although you don't currently have a
contract, this does not mean your company has ceased to trade. You are
still a shareholder in a Limited Company, your company may still have
operational expenses and you continue to have responsibilities as a
director.
During the period whilst you are actively looking for new
opportunities the company continues to operate with expenses
incurring and deadlines for HMRC and Companies House still need to be
met.
So whilst seeking new opportunities for your company, you may like to consider the following:
Salary
You will have set your annual salary at an annual level to obtain
the most tax efficient scenario for your personal requirements.
Where there is insufficient money in the company to continue paying your salary, you have two options
- Simply cease payments to yourself until you are back on contract
- P45 yourself , you can re-join at any time (you will need to do this to make a claim for benefits)
If you cease paying your salary and in the future secure a contract, the salary level set for the year may be caught up with.
For example with an annual salary of £6475 paid monthly at £539.58 per month:
April, March, June, July and August paid a gross monthly salary of £539.58
September, October, November and December no salary was paid
January, February and March paid a gross monthly salary of £1259.03
The total salary of £6475 has been paid within the year and NICs
will remain the same total amount for the year as they are based on a
cumulative basis for a director.
Dividends
Dividends are distributed from retained profits. You can still
raise dividends from your company if you have retained profits and
money in your bank account taking into account any payments due for
VAT, PAYE and Corporation Tax. Where there is sufficient profit but
insufficient funds to pay a dividend ( you may be waiting for payment
from someone for instance ), the amount unpaid can be owed to the
shareholder in the director's loan account thus utilising your income
within your 20% tax bracket in the year.
Where your company has no sales but is incurring expenses, the
amount of retained profit will be reduced and thus also the corporation
tax liability.
To keep an eye on your Dividend strategy you need to look at two figures:-
1) Monthly Profit and Loss - If your company starts to make losses
on a monthly basis, you may need to stop paying any dividends and
consider what to do to keep your company solvent.
2) Balance Sheet - If your retained profit and Loss account begins
to make a loss any dividends that you have taken so far in the
financial year may be at risk. The retained profit and loss figure is
the total profit retained in the company from the current and
proceeding years.
If your company has retained profit but then loses money for a
period of time as it has no sales, then that retained profit will be
used up by the losses over a period of time. It is important to keep
your eye on this figure as this is the money that is keeping the
company going whilst you have no sales, but still have expenses.
VAT
If you are VAT registered and not making taxable sales, you may wish
to consider de-registering so that you not have to submit quarterly NIL
returns.
The re-registration process may take a considerable time so the odds need weighing up before you apply to de-register.
Please note that if you remain registered you are obliged to
file quarterly NIL returns otherwise HMRC may issue penalties. If the
company is closing down, an application to de-register VAT must be
applied for within 30 days.
When an application to de-register for VAT is granted, the last day
that the company was deemed as VAT registered was the last date in
which it made taxable supplies, therefore no input VAT after that date
may be claimed.
PAYE
If you are not paying a salary and therefore not incurring PAYE to
pay to HMRC, a yellow booklet payslip or an on-line filing
submission will still need filing each quarter as a NIL return.
If you wish to de-register for PAYE you are required to file a P45,
P35 and P11d at the time of deregistration. You can re-register at any
time but it may take a few weeks to process.
Annual Accounts
For companies that are not making sales, some may have expenses and
others may have no transactions on the profit and loss account. Annual
accounts will still need filing with Companies House and HMRC after the
company year- end regardless of there being no transactions.
Cash-flow
Your company will need to retain sufficient funds to meet payments
for VAT, PAYE, Corporation Tax and the Annual Return fee. HMRC may seek
redress from the director under Regulation 72(5) A & B for any unpaid tax liabilities.
Keeping your records up to date each month will keep you informed of the company's liabilities.
It is not advisable to support yourself with the money you have in
your company bank account to pay Corporation Tax, VAT and PAYE, you may
end up personally liable if you do this.
Company Closure - Solvent
If your company is unlikely to make any further sales then you may
wish to consider closing the company. You could bear in mind that
should you obtain another contract offer then you could start a new
company, but also that you may wish to balance this with waiting a
comfortable time before making that decision. There are costs both
financially and time wise in closing down and starting a company, and
it's a balancing act only you can decide about.
Before company closure, you need to consider if there are any
purchase contracts in the name of the company that will require
changing to you personally such as mobile phones, rentals, etc.
Firstly, to close a company, the VAT, PAYE and Corporation Tax
registrations need de-registering. The annual accounts will need
completing and filing; if the year -end is somewhat distant, an
application to shorten the accounting period can be made.
If the company has assets, including retained profits on the Balance
Sheet, it may be possible to distribute these to the shareholders under ESC C16thus saving a personal tax charge
All money in the company bank account, after the company's
liabilities have been met needs withdrawing. Any monies remaining in
the company bank account after the company has closed become the
property of the Crown.
Once the above has been carried out, a 652 or 652A application is
made to Companies House. When all liabilities have been paid and the
annual accounts have been filed the application be granted. You can
expect the whole process to take at least four months after
the 652 application has been filed.
Company Closure - Insolvent
When a company is unable to meet its financial liabilities it is insolvent.
Voluntary Liquidation is the most used route for directors and
shareholders to deal voluntarily with an insolvent company. A Licensed
Insolvency practitioner has to be appointed to close an insolvent
company. You can expect to pay anything from £2,000 upwards for this
service.
If an insolvent company is not closed correctly, HMRC have the
power to recover any debts from the director or shareholder
personally. It is the director of a company's responsibility to have
taken 'reasonable care' and to be able to prove that you have done so.