Jacq_Maud
Blogger
Share this content
0
32
8683

Accounting entries for s419

Accounting entries for s419

Hi I have acquired a client with a bf overdrawn directors loan account. It has increased during the year and still remains outstanding 9 months after year end. The bf figures include the overdrawn loan account and associated section 419 in Debtors. What are the accounting entries in respect of the increase. Assuming Dr debtors with increase section 419 and credit corporation tax with same amount in creditors? Also does the debtor for reclaiming section 419 stay in debtors indefinitely until the loan is repaid? Finally are there any national insurance implications?

Many Thanksk

Replies

Please login or register to join the discussion.

avatar
21st Dec 2012 08:01

The accounting entires must be....
Dr Corporation Tax (P&L)
Cr corporation Tax (BS)

I don't think it would be appropriate to recognise the debtor, it is a contingent asset (in that the Director actually has to repay that money before s419 can be reclaimed) and so should at most be disclosed as a note to the accounts if you can justify it is probable that the money will be received. I'd get a representation from the a director and a commitment to get it repaid.

Sounds like it may be wrong last year too.

No NIC implications unless the loan is written off in which case there might be applying the cash or equivalents logic. (seem to remember something changing not so long ago here)

Thanks (0)
avatar
21st Dec 2012 09:09

Might be worth mentioning ...

... that the first response above is not a unanimous view, both supported by and disputed by several respected posters in this forum, if you search back far enough.

I am one of those who takes a dissenting view, but I lay no claim to deserving of respect for my opinion.

It is my understanding that there is no circumstance under which the S.455 tax (formerly S.419) will not ultimately be repayable to the company.  Either the loan account will be repaid or it will be written off.  There is no third option.  You might not know, at the time that it arises, which manner of discharge will be appropriate (or when), but one or other it will be, and either event triggers a repayment of the s.455 tax.  If you wanted to be prudent you might wish to provide through the P&L account the NIC implications of writing it off, but that might be overkill.

The possibility, if it exists, of debiting the tax to the balance sheet can be a crucial lifeline to the company, preserving as it does distributable reserves out of which dividends may be paid in due course to repay the loan, where writing the tax off might plunge it into a permanent, spiralling and irrecoverable mire.  As we are supposed to be acting in the client's interests, I try to grab lifelines where justifiable.

The only additional point I would mention is that where debited to the balance sheet it should be disclosed as recoverable after more than one year.

With kind regards

Clint Westwood

 

Thanks (0)
avatar
21st Dec 2012 09:26

section 455
Many thanks. Much appreciated. Thank you for taking the time to respond.

When the loan is repaid what is the procedure with Hmrc. Assume it has to be a letter to reclaim s455? Do previous year accounts need to be re-submitted?

Thanks

Thanks (0)
avatar
21st Dec 2012 09:49

Letter.

No change to accounts already finalised and filed.

If it is repaid within the repair window of the tax return which gave rise to the liability then you could file a repair to the CT return.  In my experience it does not get actioned any quicker.

With kind regards

Clint Westwood

Thanks (0)
avatar
21st Dec 2012 10:03

for what it's worth....

.... under normal circumstance I agree with Clint. Having said that I seem to recall that Euan agrees with cparker's view.

I would, however, review the debtor (as I would for any other debtor) to consider whether a provision should be made against it. If I thought that there was little prospect of the director ever paying the money the the tax would never be repaid and I would, therefore, not carry it forward as a debtor.  

Thanks (0)
avatar
21st Dec 2012 10:42

s455
Thanks for sharing your knowledge. Really appreciate all the comments

Thanks (0)
21st Dec 2012 11:05

Euan does indeed agree with cparker

I do not consider that an asset should be recognised until the year in which the event giving rise to the tax refund occurs, whether it be repayment or write off of the loan.

The claim for relief is made in writing to the CT district under s.458 CTA 2010.

Thanks (0)
avatar
By DMGbus
21st Dec 2012 13:09

Consistency

If the directors loan account is shown as a debtor then the accounts are portraying / claiming that the money is recoverable from the director.

It follows that the s455 tax charge is recoverable in such circumstances and should also be a debtor.

 

 

 

Thanks (4)
avatar
17th Mar 2015 15:47

.

Thanks (2)
avatar
By DMGbus
21st Dec 2012 23:06

Timing

As I 've already inferred it is hypocritical to show an asset of a directors loan account (DLA) and then debit the s455 tax charge to P&L rather than Balance Sheet.  Action one (the DLA asset) suggests that there's a recoverable asset (debtor) whilst action two (charging s455 tax charge to P&L) is saying, no the DLA will not be recovered!  Action two is inconsistent with and contradictory to action one.

As I see it, if the DLA is portrayed as an asset (ie. shown as likely to be repaid) it then follows that the tax charge will also be an asset.    The only question is "when" - within 12 months or beyond 12 months.  Problem, I suppose is that it might be doubtful if the DLA really is recoverable, therefore maybe in such a circumstance a bad debt reserve is required against it - which would then justify the (otherwise) error of lack of consistency of omitting the tax debtor of s455 tax recoverable.

I'm another one who's not seen the concept of omitting a debtor because it might be recoverable in more than 12 months time.

 

 

 

 

Thanks (3)
avatar
17th Mar 2015 15:49

.

Thanks (3)
avatar
25th Dec 2012 00:32

Should be a double sided balance sheet entry in my view.

Thanks (3)
27th Dec 2012 13:08

Contingent Asset

As cparker said in the first response to this question, the recovery of s.455 tax is a Contingent Asset.

According to the FRSSE, the definition of a Contingent Asset is [my notes]:

"A possible asset that arises from past events [the payment of s.455 tax] and whose existence will be confirmed only by the occurrence of one or more uncertain future [whether or not it might happen and the timing if it does] events [repayment or writing off of the loan] not wholly within the entity's [company's] control [such as repayment by the shareholder]."

And FRSSE rule 11.7 is:

"Contingent liabilities and contingent assets shall not be recognised."

The only circumstance in which you can justify treating the s.458 recovery as a debtor is where the company has decided [so, within its control and not uncertain] by the accounting date [not in the future] to write off the loan, in which case the loan will not appear in the balance sheet and the real, not contingent, asset of the recovery of the tax will appear.  While there is any possibility of repayment of the loan, the recovery of the tax remains a contingent asset and cannot appear in accounts properly prepared under the FRSSE.

Thanks (0)
avatar
27th Dec 2012 17:55

Round in circles

I would say that we are talking about a certain future event, that being one or other of repayment or writeoff of the loan.  That we are unsure which it will be is, I agree, an uncertainty, but given that it has no bearing on the treatment of the tax, not an uncertainty which I would regard as relevant to the accounting treatment.

The only alternative to debiting it to the balance sheet would be to recognise as an expense of the business an amount which to anyone on the Clapham Omnibus is clearly not a loss to the business.  Sometimes I think you just have to go with what is sensible.

I expect that Schroedinger would have something to say about this.

With kind regards

Clint Westwood

Thanks (2)
28th Dec 2012 08:57

So why isn''t DCA a contingent asset?

@Euan. Your treatment appears to be dependent on the director having complete discretion over when they repay. My simple question is why?

In my experience the DCA is treated as a current asset on the basis that it is repayable on demand. In real life this right is not enforced because the shareholders and director are the same. No-one is going to call in a loan to themselves. That doesn't alter the fact that the right exists. The company is a separate legal entity after all. If the company has the right to call in or write-off the loan at will, then repayment of the section 455 tax is also entirely within the company's control and hence not contingent.

This is ignoring the fact that excluding a contingent asset is based on there being a possibility of the asset never existing. As has already been pointed out, there is no situation in which the s455 tax won't be repaid.

Thanks (3)
28th Dec 2012 13:48

Director's discretion

@stepurhan

I agree that the company may have the right to call in the loan on demand, but that does not mean that the shareholder/director has the personal funds to make the repayment.  Nor do I agree that "No-one is going to call in a loan to themselves" - if they have the funds, they might well choose to repay the loan in order to obtain the refund of the s.455 tax.

@clint

Putting the s.455 tax through the P&L tax charge is not strictly an expense of the business - it is the correct treatment for tax that is payable.  The point at issue is whether you should simultaneously recognise an asset credited to the P&L tax charge for an uncertain event in some year in the future.  Even though you recognise two alternatives under both of which the s.455 tax would be repayable, there is also a circumstance in which the s.455 tax will never be repaid - when the company goes bust with a loan to a shareholder still outstanding and no retained profits to be able to declare a distribution to clear the loan.  This is sufficient to make the s.455 tax a contingent, rather than a certain, asset.

I would also add that the companies which end up paying s.455 tax are those where the shareholder/director draws out of the company more profit than it is earning after tax.  Treating the s.455 tax as an asset increases the retained profits or more likely, reduces the accumulated deficit, which does these feckless one-man companies no favours.

Thanks (0)
28th Dec 2012 14:22

going round in circles here

the section 455 tax is not a contingent asset. refer to the FRSSE section quoted above:

"A possible asset that arises from past events [the payment of s.455 tax] and whose existence will be confirmed only by the occurrence of one or more uncertain future [whether or not it might happen and the timing if it does] events [repayment or writing off of the loan] not wholly within the entity's [company's] control [such as repayment by the shareholder]."

And FRSSE rule 11.7 is:

"Contingent liabilities and contingent assets shall not be recognised."

As the writing off of the loan is within the company's control, then this tells you you are not dealing with a contingent asset.

To give a straightforward example of a contingent asset, take a case where a company is claiming damages. This asset in entirely outside the control of the company and so it becomes a contingent asset.

The writing off of the director's loan account and subsequent repayment of the section 455 tax is within the company's control and so is not a contingent asset.

On this basis, the correct treatment is to show a debit and credit on the balance sheet and not write off in the P&L.

Whilst I do agree there are cricumstances in which the write off to P & L will be appropriate (eg liquidation cases), the treatment by the vast majority of firms is not to write off, but to show on balance sheet.

Thanks (3)
29th Dec 2012 14:24

@TonyKelly

Tonykelly wrote:

the section 455 tax is not a contingent asset. refer to the FRSSE section quoted above:

"A possible asset that arises from past events [the payment of s.455 tax] and whose existence will be confirmed only by the occurrence of one or more uncertain future [whether or not it might happen and the timing if it does] events [repayment or writing off of the loan] not wholly within the entity's [company's] control [such as repayment by the shareholder]."

And FRSSE rule 11.7 is:

"Contingent liabilities and contingent assets shall not be recognised."

As the writing off of the loan is within the company's control, then this tells you you are not dealing with a contingent asset.

Thank you for re-quoting my quotes from the FRSSE.

I don't know what circles everyone seems to think they are going round.  This thread is a simple head-to-head about whether the s.455 tax should be charged to the P&L or treated as an asset in the Balance Sheet.

The writing-off of the loan is within the control of the company, but not the repayment of the loan.  Either could happen, or the company could be dissolved with the loan still outstanding (which may or may not be under the company's control), which is entirely consistent with the second leg of the FRSSE definition of a contingent asset "whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity's control".  No-one can argue with the first leg - "A possible asset that arises from past events" - so the s.455 tax paid is a contingent asset until such time as the loan is repaid or written off.

Thanks (0)
29th Dec 2012 16:19

OK Euan, you win, I am going to take your advice,

but you do realise you are causing me a lot of extra work.

I'll have to amend the accounts I am working on so that the s455 tax is written off. I guess I'll also have to add a note that the accounts do not fully comply with the FRSSE.

Then I will have to explain to my client why I have changed the accounts. He will probably wonder why I am writing off the s455 tax, when I had already explained to him that it was recoverable in full in due course.

If he asks about the FRSSE note, I will tell him not to worry too much about the FRSSE, as I have it on good authority from an internet forum that the best plan is to write off the s455 tax.

 

 

Thanks (1)
avatar
By BKD
29th Dec 2012 19:20

New Years Day or Groundhog Day?

No point in my expressing my own view on the appropriate accounting treatment, as it has been expressed many times before. But just to add an observation:

If the logic is that the director may not have the funds to repay the debt, and therefore repayment of the loan is out of the control of the company and therefore the debt is a contingent asset, by the same logic every trade debtor must be a contingent asset and should therefore not be recognised on the balance sheet. An absurd suggestion of course. That is because in so much as the company can call in the debt at any time, it does have control over repayment. The debtor's ability to pay is of no relevance in that context.

Thanks (0)
avatar
02nd Jan 2013 17:34

1 Question

I have a question for Euan (or anyone else) the answer to which may render, for me, the issue to be something of an irrelevance.

Take a hypothetical company whose balance sheet at 31 Dec 2012 year end included the following two items:

Current account of director and sole shareholder, Debit balance £4000 (which arose some years ago, and no subsequent movement to date) on which S.455 tax £1000 has been declared, paid, and written off to P&L.

P&L reserves at that date (31 Dec 2012) stand at £1000 in debit.

Management accounts for the month of January 2013 indicate a profit for the month, after accruing for all provisions, CT etc, of £4000, and the director is minded to vote a dividend in the maximum amount permitted by Companies Act, payment of said dividend to be discharged by credit to the DCA.

Now, my question is: on the above facts what is the maximum dividend that can be voted which would be lawful under Companies Act?  Hint: I think that there are two possibilities: £3000 or £4000.

Argument for £3000:  B/fwd reserves (negative) £1000, + current month profit £4000 = net reserves £3000 available for distribution.

Argument for £4000: The very act of posting the dividend causes a simultaneous credit to the P&L account (and debit to debtors) of £1000 being recoverable S.455 tax.  Accordingly, the b/fwd £1000 overdrawn P&L account is expunged and the full £4000 profit for month of Jan can be distributed.

I think that the argument for £4000 is quite compelling.  If you do not like it then you could vote a dividend of £3000 at 09:00 am in the morning of 01 Feb 2013.  Credit the P&L account with £750 s.455 tax at 09:02, then at 09:03 vote a dividend of £750.  Then at 09:04 credit the P&L account with £187.50.  Then at 09:05 vote a dividend of ... well, you get the drift.  Would any court in the land object to your amalgamating it all into a single transaction?  I reckon not.

That being the case, my principal objection to writing off the s.455 tax to the P&L in the first place, in terms of its practical effect is somewhat diluted.

With kind regards

Clint Westwood

 

Thanks (0)
02nd Jan 2013 18:18

1 Answer

You charge the P&L with the s.455 tax in the year in which the loan is advanced and you recognise the asset and credit the P&L with the s.458 tax refund in the year in which the loan is repaid.  If we are talking management accounts for just January, you would include the same transactions as for the whole year's accounts if they occurred in January.  So, the P&L Reserves account in the January 2013 management accounts would be:

(1,000) B/f deficit

1,000   s.458 tax refund

4,000   Profit for the period after current & deferred tax

---------

4,000   Available for a dividend

====

Simples!

Thanks (0)
avatar
02nd Jan 2013 18:53

That works for me

There is, perhaps, one minor additional reason for posting the original s.455 tax to the balance sheet rather than P&L.  Before shouting me down I will be the first to agree that, as additional reasons go, this is particularly flimsy:

But I have on taking over cases observed that overlooking an available claim to recover s.455 tax is a regular failing.  It is of course an act of carelessness and incompetence, and yet I see it in practice more frequently than should happen.  Well, OK, once is more frequently than should happen.

If you debit the s.455 tax to the balance sheet it is forever staring you in the face until you do something with it.  If you debit it to P&L then there is just that one extra incentive, if ever you needed one, to lose track of the fact that you ever paid it in the first place.

With kind regards

Clint Westwood

Thanks (2)
02nd Jan 2013 20:10

the problem is this and this alone

the whole rationale for writing off the s455 tax stems from treating it is as a contingent asset.

As I referred to in an earlier posting, the s455 tax is not a contingent asset, as it fails the FRSSE definition of such, by virtue of the fact that the repayment of the tax is under the control of the company, which is triggered by the write off of the loan.

So while the accounting entries to write off the s455 tax are very simple yes, the accounts treatment is wrong.

This is not my opinion, this is simply the rules as they stand at the moment as per the FRSSE.

There will be occasions when the s455 tax should be written off, but on those occasions it should be documented as to why the s455 tax is considered to be a bad debt.

To write it off on the basis that it is a contingent asset is simply wrong. Clearly, if the s455 tax is recovered as per normal, 2, 3 or 4 years or maybe more down the line, the debtors will have been understated in previous periods.

Thanks (2)
03rd Jan 2013 12:26

Muddled thinking

Tonykelly wrote:

the whole rationale for writing off the s455 tax stems from treating it is as a contingent asset.

As I referred to in an earlier posting, the s455 tax is not a contingent asset, as it fails the FRSSE definition of such, by virtue of the fact that the repayment of the tax is under the control of the company, which is triggered by the write off of the loan.

So while the accounting entries to write off the s455 tax are very simple yes, the accounts treatment is wrong.

This is not my opinion, this is simply the rules as they stand at the moment as per the FRSSE.

There will be occasions when the s455 tax should be written off, but on those occasions it should be documented as to why the s455 tax is considered to be a bad debt.

To write it off on the basis that it is a contingent asset is simply wrong. Clearly, if the s455 tax is recovered as per normal, 2, 3 or 4 years or maybe more down the line, the debtors will have been understated in previous periods.

s.455 tax is payable 9 months after the accounting date.  There can be no argument that this s.455 tax should be included in the P&L tax charge and accrued in the balance sheet.

The point at issue is whether the s.458 relief, not the s.455 tax, should be simultaneously reflected in the accounts in the year in which the loan is advanced as a credit to the P&L tax charge (thus giving no net charge) and as a debtor.  Does the s.458 relief satisfy the FRSSE definition of a contingent asset?  No-one is arguing that the s.458 relief is not "A possible asset that arises from past events and whose existence will be confirmed only by the occurrence of one or more future events".  The argument is whether the future events are "uncertain" and whether they are "not wholly within the entity's control", both of which must be true if the s.458 relief is to be treated as a contingent asset which should not be included in the accounts.

certainty - I consider that when there are two options (repayment or writing-off), neither can be regarded as certain, even though the s.458 relief would apply in both cases.  However, there is a third option - that the loan is never repaid or written-off before the company is eventually dissolved - in which case the s.458 relief would never be available and could not be regarded as an asset at all.  When there are three possible future events, one of which will not confirm the existence of the asset, they must be regarded as uncertain.not wholly within the entity's control - only the writing-off of the loan is wholly within the company's control.  It may be within the company's control to demand repayment of the loan, but it is not within the company's control for the shareholder to find the funds to make the repayment.  Similarly, the company might apply for its own dissolution, but so might a creditor.  With only 1 out of 3 options being wholly within the company's control, it has to be true that the future events are "not wholly within the entity's control".

For these reasons, I believe that the s.458 tax relief satisfies the FRSSE definition of a contingent asset and must not be included in the account (until the year in which repayment or writing-off occurs).

Thanks (0)
avatar
02nd Jan 2013 20:57

Well said Tonykelly

The tax follows the debtor, if the DLA is good the Tax debtor is good (and vice versa)

Thanks (3)
avatar
03rd Jan 2013 12:45

@ Euan

Your comments on certainty seem to hinge on the possibility the loan is not repaid or written-off before the company is dissolved.  This strikes me as being contrary to the going concern principle under which such accounts have surely been prepared.  Therefore the only possibilities we can consider under the GC principle are the other two you mention, both of which will lead to your s458 refund and therefore allow recognition of the asset.

Should the accounts no longer meet the GC requirement the basis changes and the asset may well need to be posted to P&L, but until that point you have an asset not an expense.

 

I believe others have already addressed the fact that all debtors are regarded as recognisible debtors where the calling of the debt is within the control of the entity.  The ability to pay is irrelevant other than in respect of an allowable P&L deduction for bad debts.  Therefore if the loan is considered good, the control element is fully met.  Regarding dissolution - I refer to GC point above.

 

I therefore concur with the views stating that s455 tax is a balance sheet only matter for companies whose accounts are prepared on the GC basis, whether under FRSSE or FRS.

Thanks (2)
03rd Jan 2013 13:32

@mbdx7ja2

mbdx7ja2 wrote:

Your comments on certainty seem to hinge on the possibility the loan is not repaid or written-off before the company is dissolved.  This strikes me as being contrary to the going concern principle under which such accounts have surely been prepared.  Therefore the only possibilities we can consider under the GC principle are the other two you mention, both of which will lead to your s458 refund and therefore allow recognition of the asset.

Should the accounts no longer meet the GC requirement the basis changes and the asset may well need to be posted to P&L, but until that point you have an asset not an expense.

 

Perhaps, I did not make myself clear.  My third option - "that the loan is never repaid or written-off before the company is eventually dissolved" - was not meant to imply any imminent dissolution of the company, let alone an insolvent company, which might require accounts to be prepared on other than a going concern basis.  I meant that the loan would remain outstanding and not be repaid or written-off in the foreseeable future, which often occurs in practice.  This can only mean that it is uncertain that s.458 tax relief will be available, thus meeting the definition of a contingent asset.

Thanks (0)
03rd Jan 2013 13:27

@ Euan - I am afraid that you are the one that is muddled

maybe you have been imbibing too much over the festive periods.

Your arguments for writing off the tax are complete nonsense.

For example, you say

It may be within the company's control to demand repayment of the loan, but it is not within the company's control for the shareholder to find the funds to make the repayment.

This statement could apply to any of the debtors on the balance sheet.

You make a sale to your customer. It is within the company's control to demand payment for the work done, but we don't know if the customer will have the funds to pay us.

On this basis, our whole sales ledger balances are contingent assets.

 

Thanks (3)
03rd Jan 2013 13:36

@Tonykelly

Tonykelly wrote:

maybe you have been imbibing too much over the festive periods.

Your arguments for writing off the tax are complete nonsense.

Your comments are deliberately offensive and quite unnecessary.

Thanks (0)
avatar
03rd Jan 2013 14:17

@ Euan

But the GC basis is precisely that - an assumption made that all assets and liabilities will be realised by the company in the fullness of time and that the company will continue to exist in order for that to happen.

Your scenario implies that no asset could ever be recognised in the accounts as the company may be dissolved before it has the chance to realise it, thereby making all assets contingent, which is clearly a nonsense argument.

For example a company has a long term contract and recognised WIP on the balance sheet under UITF40 principles.  Your argument precludes this recognition as the company may be dissolved before they are able to complete the work necessary to recognise the income, making the asset contingent.  Or how about a prepayment which will cover several years - should that be posted to P&L as the company may not continue that long?

The recognition of the s455/s458 asset is precisely that - a statement that under the GC principles in the fullness of time this money will be repayable to the company.  If GC stops applying (when the company is dissolved) this asset is unlikely to be the only one requiring reclassification/differing treatment - fixed assets in particular come to mind.

Thanks (3)
04th Jan 2013 11:54

Listen, Euan, you seem to be taking this the wrong way

My comments are not directed at you in a personal capacity. My replies on this thread are directed at your reasoning or lack of it, with respect to the disclosure of the s419 tax.

This is after all a forum where each person is allowed to give their viewpoint.

I did make a little jest in the first line of my last posting, but this can hardly be called offensive now, can it?

I seem to recall you were equally dogmatic in your stance concerning dividend disclosures as related party transctions:

Quote from Euan: The Companies Act requires disclosure only of loans, quasi-loans and credit transactions with directors - this does not include dividends.

The FRSSE requires disclosure only of the sale and purchase of goods and services and of loans between related parties - again, this does not include dividends.

However, a short time later you seem to have reversed your opinion:

Dividends paid to shareholding directors are transactions with related parties which must be disclosed as they do not come under the exemptions in the FRSSE for remuneration and pension contributions.

 

 

 

Thanks (1)