Because, well, umm, because it’s limited liability?

Second, why can’t we change the law so that tax abuse cannot be protected by limited liability and the perpetrators can be held personally responsible?

Third, why do we provide limited liability so readily when so often it is used for such purposes? The government’s desire to slash regulation is going to cost us a fortune, yet again

32 comments on “Because, well, umm, because it’s limited liability?

  1. Why does he struggle with this? HMRC is a creditor like any other. A high-ranking creditor when it comes to liquidations, certainly, but a creditor nonetheless.

    If a Ltd. goes bust with no assets, 100k loan outstanding and 100k in unpaid VAT outstanding, why should HMRC be able to go after the directors personally but the issuer of the loan not?

  2. Well, depends what he means by ‘tax abuse’ of course. There are already laws in place enabling recovery of tax and NI if it has been illegally evaded using limited liability.

  3. “Third, why do we provide limited liability so readily when so often it is used for such purposes?”

    He has half a point there – in that limited liability is super-easy to get in the UK. In CH, if you want a GmbH you need 20k CHF in share capital (and you are restricted as to what you can do with it), and for an AG you need 100k CHF. In principle, there should be at least 50% (iirc, not sure of the details) of this capital remaining as a minimum to pay creditors in the case of bankrupcy.

    The other half, as if it’s super common for people to deliberately set up Ltd’s to defraud the taxman (rather than genuinely going bust, or to defraud creditors in the case of deliberate fraud) is just him taxsturbating himself to ecstacy as usual.

  4. In fact in abacab’s example there are mechanisms which already exist which might allow both HMRC and the issuer of the loan to pursue a director.

    Fraudulent trading and so on.

    Murphy ‘invents’ a problem and demands a solution. People believe the problem must actually exist and are shocked there is no solution. But there is no problem in the first place.

  5. @Andrew C,

    I’m not sure he’s capable of distinguishing a: company goes bust with VAT outstanding, or b: deliberate fraud.

  6. What’s limited liability got to do with it? As far as I’m aware it only applies to shareholders, not directors. Sure, they’re sometimes the same people wearing different hats, but limited liability doesn’t protect the directors if they’re found to have broken the law.

  7. Add to which, in most small companies, bank loans are guaranteed personally by the directors… My home was on the line for some years after I first started in business.

  8. I wonder what view Murphy has on the artificial situation of a tax advisory LLP having two members who are married to each other, one of whom is a tax specialist and one of whom has a very small profit share and has no tax expertise and seems only to check the spelling etc and to wipe the sweat off the brow of the other member. This structure achieves limited liability.

    Further, what opinion does he have of this when the married couple split up and the non-tax specialist member seems to have no contact with the other member, yet still achieves limited liability for the LLP?

    Abuse or what?

  9. “The government’s desire to slash regulation is going to cost us a fortune, yet again.”

    Yet El Cuntissimo also holds that the state can just create money when it needs it, so what’s the problem?

  10. @Bravefart,

    My memory is too good 🙂

    “And I have an LLP because the professional indemnity insurers of my accountancy practice asked me to sue a different (non self employed) structure from it – and an LLP was the best and most transparent option available. I never sought limited liability”

    http://www.t*xresearch.org.uk/Blog/2010/08/06/ireland-undermines-investment-in-south-africa/#comment-578735

    I wonder who he sued. And to pretend limited liability (in case of losing) didn’t help is disingenuous at the very least.

  11. Theophrastus – “cost us a fortune” is an extremely revealing phrase. In fact it illuminates his whole mindset. He seems to think that all production is the property of the government and earnings net of tax are some sort of grant, or gratuity, handed down by the all-beneficent State.

    The same thinking is everywhere on the left, though Murphy is one of its most loquacious – and egregious – articulators.

  12. @Noel Scoper

    I remember the thread. I am fairly sure ‘sue’ is a mistype for ‘use’.

    A company would have provided the same limited liability and could have shown how much salary was paid to Murphy and how much tax paid by the company. The latter, in particular is missing from an LLP so it isn’t the most transparent structure. And of course a company would not have needed a second member/shareholder.

    So the LLP was chosen over a Ltd company to hide tax paid and that necessitated a second person.

  13. @AndrewC

    sueuse, interesting thought!

    Of course at the time the LLP was created, the missus was a higher earning GP so giving her 1% created the LLP with a partner he needed while giving most of the tax over to lower earning Ritchie. With her being ill and not earning, he could have moved a chunk over to her but given she seems to now be MIA, lucky he didn’t!

    I remember him saying the 1% undervalued her contribution while simulataneously going on about Arctic Systems.

    I also remember him saying the 1% was within the rules; the letter of the law vs. Parliament’s intention not applying to Ritchie himself then.

  14. “I didn’t want limited liability, which is why I chose a Limited Liability Partnership’.

  15. AndrewC

    I don’t think disclosure of salaries in the Ltd Co would have been the issue?

    Simply in that abbreviated accounts filed at Companies House for an audit exempt small co only required the balance sheet and associated notes. No Directors’ Report or P&L at all (and no salary or tax details disclosed in the notes). Even the B/S disclosure is summarised so not even a separated HMRC creditor.

    I’m guessing other factors must have determined the choice?

  16. I’m guessing, but perhaps his u-turn on Limited Co’s (telling people how to carry out legal tax avoidance in limited co’s (back in the Guardian) and then later doing a full 180) may be more ro the point here?

    Not even the “100% lacking in self-awareness” Murf could have pulled off “preaching about evil Ltd Co tax avoidance” whilst risking it looking like he may be doing exactly the same! Perhaps?

  17. It’s worse than that. He was doing exactly that for several years until tax changes made it work not so well any more when he changed to an LLP.

  18. “until tax changes made it work not so well any more when he changed to an LLP”

    My memory must be going?

    There is the recent 7.5% dividend tax, but that’s long after his LLP. I can’t remember significant tax changes to Ltd Co suddenly making it worse prior to that – other than the 0% corp tax rate on the 1st 10K of profit which came in and then went under Brown?

  19. Limited company? HMRC debt is the same level as any other stock or service creditor debt.
    You owe HMRC £10k VAT and other creditors £10k in total (so £20k total debt) and have just £10k to spread between them? HMRC get a pro rata share same as the other creditors, £5k in that example.

    They are merely more aggressive at chasing debt than other creditors. That’s the only difference.

    I just think Richard is annoyed that accountants fees are no higher priority a debt and he has in the past lost out when a limited company was dissolved.

  20. @PF.

    But Murphy is big on disclosure – other than tax returns – and while you don’t HAVE to disclose company salaries you can do. Especially directors. So he would be painting himself into a corner by using an ltd company and using minimal disclosure in the accounts. With an LLP he can claim full disclosure.

  21. “. . . and the perpetrators can be held personally responsible?”

    But . . . but, the perpetrators *are* held personally responsible. Any corporate employee or owner that is found violating the law is held personally responsible for that violation.

    Limited liability doesn’t protect *anyone* from that. It just protects people who weren’t the perpetrators, and had no control over the actions of the perpetrators, from losing more than what they’ve got invested into the company.

    How can anyone think there’s more to it? That its some sort of blanket immunity for malfeasance?

    Oh, as to why we provide it so readily? Because all except the stupidest of politicians recognize (even if only privately) that the vast majority of the benefits that come from a business come from what the business does and the tax is pays is a trifle compared to that.

    So its worth putting up with a little tax avoidance.

  22. Plus I’m not sure how, if you’ve gone broke, that there could be much of a tax liability left anyway.

    Since you paid tax in the years you made a profit – and so they should be zeroed out – and you don’t owe tax in the years you don’t. And at least some of your losses can be used to later offset taxes owed on profits. And since you’ve gone bust, why wouldn’t the government just use those offsets against the *preceding* years instead of the future – so technically you might even pay more in tax than you should have once you’ve closed the doors.

    That’s me wearing my ‘I’m not trained as an accountant but I’m going to chime in anyway’ hat.

  23. Ritchie’s gyrations on his business are amazing to watch!

    He said he was told to use a LLP by his insurers. I can believe that, but that would only be true up to the sale of Murphy Deeks Nolan in 2000. There is no restriction on what he can use now.

    I think the LLP is to enable him to receive grants from charitable trusts. The Friends Provident Foundation website states they don’t fund individuals/sole traders, hence the use of a LLP to secure a £80k grant.

    I don’t know if he has benefited from the limited liability. He was sued by Ashcroft for posting material on his blog, which is written in the name of the LLP, but there was no reference to any settlement in the LLP accounts, which makes me wonder if he paid the damages and costs directly.

    I wonder if his wife reads this blog. If the speculation about a divorce is right, then his comments about her being underpaid might be very helpful to her lawyers!

  24. Martin, I could easily be wrong (it’s been known!) but isn’t there a distinction between VAT and, say, Corporation Tax? CT is just another liability, but VAT is a tax which the company has collected on the government’s behalf, so not to pay the VAT is surely to steal money from HMRC…

    Also, IIRC if one trades fraudulently, for example while insolvent, then the limited liability can be lifted. (Though maybe that is just for owner/directors….?)

    Lastly, the Spud’s PI insurers are surely demonstrating the whole point of ltd liability; that it enables more businesses to be established. Without limited liability, his premium would be much higher. Many entrepreneurs may be willing to risk everything, but in my experience, the missis often has other ideas. This was the intention and the effect of the Joint Stock Companies Acts and such like. But then again, Spud presumably skipped that lecture….

  25. Didn’t Spud point out some time ago that shareholders aren’t true owners of the company because they don’t have full control and can’t walk eg they can’t walk in and demand to see the books etc?

    To allow for that, and being last in line if a company goes bust, shareholders get limited liability.

    Still, can’t expect too much can we, if he can’t be consistent in the same paragraph its probably to much for him to be consistent across the years.

  26. Sam Jones, I contend that Snippa’s gyrations are good to watch even when they don’t involve thinking. The things he can get in his mouth without trying are every bit as amazing as his intellectual self-conyradictions. Sadly the bitstreams are not selling so well…

  27. abacab

    “He has half a point there – in that limited liability is super-easy to get in the UK. In CH, if you want a GmbH you need 20k CHF in share capital (and you are restricted as to what you can do with it), and for an AG you need 100k CHF. In principle, there should be at least 50% (iirc, not sure of the details) of this capital remaining as a minimum to pay creditors in the case of bankrupcy.”

    Switzerland has a very low rate of innovation and new company creation.

  28. Nautical Nick – the CT or VAT is tax that the company should have paid but doesn’t and goes under – the debt is the same level of priority as most other creditors (IP fees and staff wages are higher).
    Company gets dissolved the debt gets deleted.

    You don’t usually hear of companies going under owing hundreds. Going under owing tens or hundreds of thousands…. including almost always money to HMRC.

    They are also the most likely creditor to object to a request to dissolve company. Eventually companies house will ignore such objections and dissolve it anyway.

  29. Second, why can’t we change the law so that tax abuse cannot be protected by limited liability and the perpetrators can be held personally responsible?

    Actually the twat might have stumbled upon a halfway good idea here. The worst perpetrators of tax abuse are those who write abusive tax codes. He worded it terribly but I’d love to see those perpetrators held personally responsible.

  30. @BiND

    Didn’t Spud point out some time ago that shareholders aren’t true owners of the company because they don’t have full control and can’t walk eg they can’t walk in and demand to see the books etc?

    I think they can, with the Register of Members. It’s the general public that can’t; they need an appointment.

    And I have a feeling that certain other documents must also be available for inspection by appointment at the company’s registered address – don’t remember as my accountant deals with all this now.

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