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Hike in directors trying to avoid tax debt by dissolving business

Avoiding tax debt
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Peninsula Team, Peninsula Team

(Last updated )

Directors trying to dissolve their own companies to avoid paying debts and tax bills have seen a threefold increase in objections by creditors in the past two years.

The number of objections to company strike offs at Companies House was 590,063 in 2022/23, more than double the figure just two years ago when there were 203,613 rejections in 2020/21. In the last year alone there has been a 30% increase to 452,209 in 2021/22, found analysis by Price Bailey.

This shows the spike in companies requesting dissolution when they have unpaid tax bills or bounce back loans issued during the pandemic, which means they are not eligible to stop trading.

The number of strike off applications has barely changed over the past year, and increased by just 18% over the last two years, from 280,086 in 2020/21 to 330,644 in 2022/23, indicating that a much higher proportion of strike off applications are from company directors with outstanding debts.

Directors should only apply to have their companies struck off the register if they have no outstanding liabilities, such as unpaid taxes owed to HMRC, Covid-related loans or money owed to staff or suppliers.

Directors who try to have their companies dissolved without settling their debts are risking severe penalties and criminal sanctions.

William Wilson, partner at Price Bailey, said: ‘These are essentially insolvencies by the back door. A company must be solvent with no outstanding debts for the voluntary strike off process to go smoothly.

‘The surge in creditors objecting to strike offs means that directors are trying to close their companies down and walk away from unpaid debts.

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‘Directors are taking huge risks by going down this path. In many cases these companies will have received bounce back loans, which may have been misused to finance the day-to-day living of directors.

‘Directors could be personally liable for the bounce back loan if misconduct is proved. HMRC can also shift liability for tax debts onto directors if they don’t adhere to their legal responsibilities.’

The rising amount of fraud from bounce back loans means that company directors are likely to be scrutinised much more closely.

He added: ‘The government has been clamping down on misconduct by directors in receipt of bounce back loans, including against directors who dissolve companies without paying off the loans. If any evidence of fraud or misconduct emerges directors can be disqualified for up to 15 years or face a prison sentence.’

Price Bailey warned that directors who pay the objecting creditor and resume the strike off process would be guilty of making a preference payment if other creditors are unpaid, which would also be a serious breach of their legal responsibilities.

William added: ‘Directors who pay a creditor in preference to others may face sanctions for wrongful or fraudulent trading. Directors could then face personal liability for company debts, disqualification or even prosecution.’

A director whose attempt to dissolve their company has been blocked should undertake a formal insolvency process known as a creditors’ voluntary liquidation (CVL). During a CVL an insolvency practitioner will be appointed. Any assets in the company will be liquidated and distributed to outstanding creditors on a proportional basis and remaining debts written off.

 Wilson added: ‘A CVL will likely be the best option for most of these companies. It ensures that creditors are dealt with equitably, legal obligations fully met and, crucially, directors cannot be held personally liable for any debts for which they have not provided personal guarantees.’

For answers to questions about payroll, visit BrAInbox today where you can find answers to questions like Can I make an employee give me back money that was overpaid to them?

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