Conducting a client’s statutory accounts provides our accountants with the opportunity to identify any potential queries or issues, as this process involves filing accounts, tax returns and reviewing financial records, which provides a clear image of a client’s financial health.
This was particularly significant for one of our accountancy clients; a married couple who own and operate a business together but were not aware of their growing HMRC debt or how to prioritise their financial commitments.
Unfortunately, the clients’ focus on completing the work and leaving administrative matters until later led to cashflow difficulties, resulting in missed VAT payments to HMRC. This legally classified them as insolvent and as a result, our accountancy team referred them to the Cooper Associates Accountancy insolvency team.
They were in need of a proactive plan and additional support to ensure their business could continue to flourish whilst minimising their outstanding debt and improving their financial position.
The situation
Establishing the client’s circumstances
Our Associate Director of Insolvency, Stacey Phipps, explained that the clients were a husband-and-wife team jointly managing and operating a limited company together, having previously operated under a sole trader structure.
“The business had evolved from a sole trader setup into a limited company, which is often a positive step, but it does bring new responsibilities and considerations.”
Since incorporation, the structure of the business had remained relatively informal. One director was responsible for delivering the core trade services and generating income, while the other managed the administrative side of the business, including maintaining VAT records and completing bookkeeping tasks for submission to our accountancy team.
“They were doing what many business owners do which was keeping records and submitting information, but they lacked a full understanding of what that information was telling them because at the data entry level, it is impossible to see the big picture.”
While this structure is common in owner-managed businesses, it can cause significant financial oversight without proper accountancy training or support, making proactive, professional advice and oversight particularly valuable as businesses transition from start-up to growth.
Identifying the early warning signs
During routine statutory accounts work, our accountants identified several indicators that suggested the business would benefit from additional support beyond standard compliance.
As Stacey explains:
“We could see that outstanding HMRC debt was increasing and that the directors had inadvertently built up a Director’s Loan Account by withdrawing funds from the company that were not salary or dividends.”
At this stage, the business was not generating sufficient profit to support dividend payments and, as a result, any money withdrawn by the directors was treated as a loan from the company rather than income. While this is not uncommon in owner-managed businesses, it can lead to unexpected and costly tax implications if left unmanaged.
The meeting
Taking a step back to establish the full picture
Rather than focusing solely on historic accounts, the clients were invited to a free, no-obligation meeting to explore their wider financial position and to help Stacey and the accountancy team understand what had led to the situation developing.
“Accounts show what has already happened, but the meeting allowed us to look beyond that information and understand the decisions being made month by month that were negatively impacting the company.”
The conversation focused on awareness, understanding and future planning, including:
- The clients’ goals for the business.
- Their household income requirements.
- How they were extracting money from the company.
- Whether they understood the tax implications or not.
- Whether they were aware that their HMRC debt was growing.
This approach helped move the conversation with the clients away from isolated issues and towards a holistic view of both their personal and business finances, allowing underlying pressures to be identified.
Understanding how money was being taken from the business
The clients had chosen not to take a salary, as they received rental income from additional properties that they owned. However, this income alone was not sufficient to meet their household expenses.
“The clients were not taking a salary and could not take dividends at this time, but were still drawing money from the business. This meant that the money being withdrawn could only be treated as a loan.”
As these withdrawals were not taxed as income, they were instead posted to the Director’s Loan Account (DLA) and treated as funds owed back to the company. Where a director’s loan remains outstanding nine months and one day after the end of the company’s accounting period, the company may become liable for a Section 455 (s455) tax charge which currently stands at 33.75%, which is paid alongside corporation tax. It can later be reclaimed once the loan is repaid.
In addition, where loans have been made to directors, further tax consequences may arise, including a potential benefit‑in‑kind charge for the director if interest is not applied at HMRC’s official rate (currently 3.75%, but may be subject to change following 6 April).
Although Director’s Loan Accounts are common, Stacey emphasises the importance of awareness:
“Director’s Loan Accounts are not an issue in themselves, but unless they are short-term and well understood, they can become expensive due to the potential tax and cash flow implications.”
In this case, the clients had not yet reached the point where tax charges would apply, but they were approaching the relevant deadline. This made it an appropriate time to step in, raise awareness and review their remuneration strategy to ensure it remained both tax-efficient and compliant.
Reviewing the remuneration strategy
With dividends not yet being an option due to both profitability and outstanding HMRC liabilities, Stacey worked with the clients to consider whether introducing a salary would be an appropriate option.
“Although a salary comes with PAYE and National Insurance, it removes the uncertainty and risk that comes with relying on a Director’s Loan Account, as DLAs can be subject to tax implications, penalties, interest charges and legal scrutiny if they are left overdrawn or the company is classed as insolvent.”
This discussion formed part of a broader view of:
- The client’s income sources.
- Their household requirements.
- Cash flow within the business.
- Tax efficiency for both the company and the clients.
The objective was not to implement immediate change, but to ensure that the clients’ decisions moving forward were informed, sustainable, and aligned with their wider circumstances.
Discussing bookkeeping, VAT and cash flow visibility
The meeting also highlighted that their bookkeeping was being completed at a basic level, which limited the insight available to the clients.
“Their bookkeeping was not providing them with the information that they needed to understand whether they were profitable, where their profits came from or if they were able to meet their financial commitments each month.”
As a result, the clients had fallen behind on their VAT payments, meaning the business was effectively continuing to trade without settling its tax obligations.
“When taxes are not being paid as they fall due, HMRC is effectively funding the business. That is rarely a comfortable or sustainable position for any company.”
Although the business had recently returned to profitability towards the end of 2025, Stacey highlighted that falling behind on their VAT payments made planning essential, not optional.
Why Stacey’s support was beneficial
From a legal perspective, the business met the definition of insolvency on a cash flow basis, as VAT liabilities were overdue.
“Even a single overdue VAT payment means the business is technically insolvent.”
Stacey’s involvement provided an external advisory perspective, supporting both the clients and the existing accountancy team.
“When things feel overwhelming, it is common for clients to stop communicating. Having an external voice can help reopen those conversations before problems escalate.”
Next steps for the client
Creating a clear, forward-looking plan
Following the meeting, Stacey summarised the discussion in writing, clearly outlining:
- The issues that were identified.
- What they meant in practical terms.
- The options available to the clients.
- Additional support that could help them moving forward.
This allowed the accountancy team to re-engage with the clients, now having a clearer, more holistic understanding of the client’s full situation.
Their key areas of focus following the meeting included:
- Cash flow forecasting to understand minimum monthly income requirements.
- A realistic plan to address the HMRC debt gradually and sustainably.
- Ensuring any plans for expansion were financially feasible.
- Improving the quality and frequency of financial information.
Stacey explained that cash flow forecasting gave the clients clarity, not only on what they needed to earn, but on what they could safely commit to.
Maintaining their awareness
The clients were considering business expansion due to an unforeseen opportunity that they wanted to seize while it was available. However, this would involve acquiring a new lease and investing in new machinery.
“Growth is positive, but only when it is supported by the right information and strategic planning that aligns with the capabilities of the business.”
By understanding their cash flow, repayment obligations and future commitments, the clients were better placed to decide when and how they could move forward with the expansion without increasing financial pressure.
The outcome
The clients left the meeting feeling reassured, informed and clear on their priorities.
“The clients left with an increased understanding and awareness of where the pressure points were in their business and what support was available to them.”
Stacey notes that many insolvency situations arise not from failure, but from businesses attempting to expand too quickly, without the appropriate structure and support in place.
“Speaking with a professional who will help you take a step back and reflect on the plan, can make a significant difference to how successfully a business grows.”
Ongoing support and advice for the clients
The support that was offered to the clients following the meeting included:
- Bookkeeping services.
- Monthly reviews.
- Cash flow forecasting.
- Remuneration planning.
- Proactive, year-round advisory support.
“Our role is not just about producing accounts for clients. It is about supporting our clients in their decision-making throughout the year to ensure they remain compliant, profitable and informed on any changes that may impact their business.”
Final reflection
This case demonstrates the value of early, open conversations and proactive advice. By understanding the full picture and not just historic figures, clients are better equipped make confident, informed decisions, supported by advisers who are focused on long-term stability and sustainable success.
