Miss

Kerops

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Hi, a friend of mine has a question about some accounts she has recently had compiled for her companies (A and B). Company A owes company B £50,000 for expenses paid. Company B has written off this intercompany amount as an expense to their P&L. Company A is still holding it as an amount payable. Should company A write this off to their P&L and pay tax on it or allocate it against losses brought forward? I think it should be written off to the P&L as company B has acknowledged that it will not be paid

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By johngroganjga
28th Sep 2016 22:50

You are referring to your friend's two companies as if they have minds of their own and take actions your friend knows nothing about, like writing off an inter-company debt.

Companies don't do things by themselves. They only do what those who control them want them to do.

So I think the first thing you need to find out from your friend is why B's accounts include a write off of a debt due from A.

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By kerryrops
28th Sep 2016 23:23

Hi, she has not signed the accounts yet as she is querying this with her accountant but she needs an understanding of the correct treatment first

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By johngroganjga
29th Sep 2016 05:59

Correct treatment of what? Of the debt due from A in B's books?

You said it had been written of as if it were a fait accompli, but now it sounds as though the treatment is still under discussion.

Is the accountant advising that the debt should be written off? If so what are their reasons?

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By kerryrops
29th Sep 2016 06:41

Yes, the accountant has written off the debtor in company B's books as company A is not trading and there is no cash to pay the debt. But her question is why hasn't the creditor been written off in company A? She would like to write off the creditor in company A and post it to the P&L and can't see any reason why this shouldn't be done

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By johngroganjga
29th Sep 2016 07:56

So your friend agrees with the accountant that it is reasonable to prepare B's accounts on the basis that A is unlikely ever to be able to pay the debt it owes to B?

If so, so far so good with B's accounts.

Turning to A's accounts, why does your friend think that they should be prepared on the basis that B has released it from its obligation to pay the debt? It hasn't has it?

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By kerryrops
29th Sep 2016 08:26

Yes, she agrees with company B's accounts. Regarding company A, she thought that as company B had recognised that the debt will not be paid due to lack of funds, then company A should therefore release this creditor in its balance sheet? Is this incorrect?

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By johngroganjga
29th Sep 2016 08:36

Yes it's not correct at all.

Your friend is not thinking straight.

Like I said, if B had released A from its obligation to pay the debt that would be a different matter. But that hasn't happened has it?

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By kerryrops
29th Sep 2016 09:07

Yes that has happened

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By johngroganjga
29th Sep 2016 09:42

What has happened?

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By kerryrops
29th Sep 2016 09:43

Yes that has happened

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By johngroganjga
29th Sep 2016 09:49

What has happened?

B has formally waived the debt due to it from A?

Or something else?

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By kerryrops
29th Sep 2016 10:01

Yes B has written off the debt and acknowledged that it is not going to be paid. I've been told that it is the residual balance of a larger debt that was paid.

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By DJKL
29th Sep 2016 09:59

Re the end of the discussion I think Kerryrops has not appreciated that there is a distinct difference between a party providing for or writing off a debt in their own books and actually formally forgiving a debt, hence why the conversation is not making progress.

They can do the former without having done the latter, accordingly for the other party to remove the liability they require more than the fact that their debt has been written off in the creditors books, they need a formal debt forgiveness, without it the creditor can write of the debt in their books and still legally pursue the debtor and accordingly the debtor still legally owes the sum.

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By kerryrops
29th Sep 2016 10:17

Thank you for your help

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By Dr Gonzo
29th Sep 2016 14:19

You say they are your friends companies, so for tax purposes it is the loan relationship rules that determine any tax due or relieved.

As they are both your friends companies it sound like they are probably connected (both under her control), though this is not implicitly stated in the OP. If they are indeed connected then from a tax point of view company A will have no tax to pay, but equally company B will not get a tax deduction by virtue of CTA09/S354 to S357

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