“Well That’s Fortunate” said Jonathan, “that you did not engage in that cunning plan to circumvent the rules regarding the tax on overdrawn directors' loan accounts put to you by those dodgy cats Rumpleteazer, Mungojerrie, Macavity and Co.
(OK, I admit I do like the Cats musical, but a dog musical would be so much better!)
“While your diet to deal with your overdrawn loan account in Lyra Enterprises is working” (see the blog WTF! Overdrawn director’s loan account puts Lyra on a diet) he continued rather smugly, “it is nothing compared to a taxpayer who got involved in a bit of 'creative accounting', probably unwisely following the dodgy cat's advice."
A cunning plan - that's not so clever
It appears that, like me, the taxpayer had borrowed money from their company (albeit a somewhat larger amount). However, rather than lend HMRC the money due under the section 455 of the corporation tax rules, the taxpayer transferred an intangible asset to his company with a value of £4M which brought his loan back into credit.
The accounts and tax return were submitted on this basis, which meant, if the cunning plan had worked, there would have been a cash flow advantage to the company of approximately £827,000.
HMRC and a rather nasty tasting bone of a penalty
Not surprisingly, HMRC opened an enquiry into the tax return and it was found that there was no evidence available to support the existence or value of the intangible asset. Having discovered this, HMRC issued a penalty notice of approximately £434,000 for the submission of an inaccurate tax return. To make matters worse for the taxpayer they were made personally liable for the penalty, although HMRC did throw them a small bone in that the penalty has been reduced to £362,000.
So, if the director has to borrow the money to pay for the penalty from his company, this will mean that the company will have to find a further £118,000 to lend to HMRC under the Section 455 rules; a net gain to HMRC of £480,000.
Readers, I can tell you that I am so pleased that I did not listen to the siren song voices of the cats and instead took advice from Rowdens as to how to deal with my little problem.
If you want to avoid either the Lyra diet plan or finding £480,000 to pay to HMRC, please avoid overdrawing your director’s loan account. The accounting software that my good friends at Xero have developed will let you keep a close eye on where you stand with your company and is the only software recommended by Rowdens - see Why you should use Xero to find out more.
If, like me, you are already overdrawn, Jonathan will be happy to discuss with you how to resolve the problem without running the risk of a £362,000 penalty. Please get in touch.