From: Take a Walk 
Newsgroups: uk.finance uk.legal
Subject: Re: Liabilities if operate as sole trader
Date: Fri, 21 Nov 2003 20:45:53 +0000

On Fri, 21 Nov 2003 19:08:37 +0000, Jonathan Bryce wrote:
> Take a Walk wrote:
> 
>> If he incurs a crippling bad debt from a customer whilst PAYE for the
>> period is outstanding, he can fold the company and walk away from the tax
>> bill - it wasn't his fault the company folded, and they can't pursue him
>> for it - it is a company debt not personal. Ditto unpaid VAT etc.
> 
> If it is PAYE for his own salary, they can in some cases go after him
> personally.

Yes, true and if NI was included, I think these contributions would be
treated as 'not paid' for the period.

> 
>> 3) There are other benefits such as massaging profit and loss for Company
>> B - if he is making too much profit Company A can raise the rent - and
>> vice-versa give him rent free periods if he needs to show a bigger
>> profit when he wants to borrow money from a Bank.
> 
> I can't see how you can benefit here.  The lower bands for CT purposes will
> be split between the two companies, so the profits would have to be pretty
> much exactly equal to end up in the same position as if they were in the
> same company.
> 
> Also, Company B may well be considered a close investment company, which
> means 30% tax on everything, with no lower rate bands.  Company A still
> loses half its lower rate band though.
> 
> The bank manager is not going to be fooled by massaging intercompany
> charges, they will want to look at both sets of accounts.
> 
> The taxman won't be fooled either.  The company with the lower profit as a
> result of the massaging will have to pay the same tax bill as if the
> massaging hadn't taken place.  The other company will still probably have
> to pay the additional tax as a result of massaging.
> 
> Bank managers and landlords will look for cross guarantees between the two
> companies as well as a personal guarantee, so it won't help here either.

I was thinking shorter term massaging for temporary benefit, like I said
it will all come out in the wash over a longer period.
Also there is no need for the knowledge that the companies are linked to
be common knowedge, one company could be in wife's name with different
directors - this would also be the part of the 'massaging'
Ie
Assume Company B's accounting period ends 3 months after Company A.  
In month before year-end, A receives and pays rent bill for £10,000
lowering potential tax-bill due. In the next three months Company A issues
A with an invoice for £10,000 for 'property maintenance- (it has
contracted to repaint the property for the landlord)' which B pays.
B will have no tax bill to pay as income=outgoings.   

At the end of the year A will of course have to pay the tax on the
£10,000 (unless they spin it on again) , but they will have had the use
of the tax to aid cashflow for a year, and as long as the amounts and
methods are not too extreme, fairly un-noticable to the taxman. 

Same principle applies to VAT between 'separate' companies,
cross-invoicing can be used to 'borrow' funds from HMCE.

I don't know if this loophole has been closed since I used it but I
'borrowed' £17,500 from them by invoicing for £100,000 between Company A
(on cash-accounting) and Company B (standard vat accounting) - and NOT
paying the invoice.
A did not have to account for the vat (as they had not been paid), B was
able to reclaim £17,500 that quarter on the invoice received.
I had a senior inspecter round to check the paperwork (and both sets of
books in detail!) but they had to give me the money in the end.
The inspecter's face was a picture!