We have written off a director's loan which is treated for tax as being a distribution to the respective director. How should this write off be treated in the accounts? Should it be shown as a dividend on the P&L or written straight to reserves in the Balance Sheet (and if so, which Reserve)?
David Swinnerton
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Loan write off
The debt was treated as irrecoverable in the resolution.
It is only the fact that s419 treats the write off as a distribution (and taxes the individual as though it were a dividend) that raised the dividend issue in the first place.
So to recap, you are saying that the write off should be shown on the face of the P&L and effectively used to reduce distributable reserves through the reduction in retined profits? Assuming this is the case, where would the write off appear in the P&L? The same as any other debt write off (in administrative expenses)?
Bad debt
My understanding is that, in common with any other 'bad debt', the loan write-off should be charged to the P&L account . From a corporation tax point of view the bad debt will be treated as a non-trading debit under the general rule in FA1996 Sch 9 para 5(1)as, with effect from September 2002, close companies and their participator-shareholders are not connected parties for loan relationship purposes. HMRC may seek NI contributions on the basis that the loan write-off was 'earnings' if it is not clear that the loan was made to the director in his capacity as a shareholder rather than employee. Either way the director will incur an income tax charge on the amount waived grossed up at the schedule F lower rate.
So what did the resolution say?
Sorry to be apparently addressing a different question, but the Resolution must have said something about how and why the sum was being written off? Did it say, for example , that the sum of £x , advanced to MrY was now irrecoverable?
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Simple double entry, absent any other guidance , will say credit debtors, debit reserves. It is not a dividend, unless the entry was to declare a dividend , and satisfy it by writing off the debt. Difficult unless the director was the only shareholder-in which case that will be a satisfactory solution.
The other question , which you have not raised, is whether the write off needs to be disclosed in the current year's P& L account. Strictly the answer has to be 'yes'.
Just to be a pain, was the size of the loan sufficiently large as to fall into CA s320? If so its writing off or forgiveness needs to be authorised by the members in general meeting, not merely by the Board.
It is difficult to see any authority to write it off against anything other than distributable reserves.
If there are none, then it becomes a debit balance on P&L account.
What are the Company law procedures which have been followed ?
Presumably there has been a formal Resolution to the effect that the company will not seek to recover the debt? The answer to your question will follow the Resolution.
If not , exactly on what basis has the debt been 'written off'? If the director dies tomorrow, what protection is there that the company will not seek to recover the debt from his estate-which can be good tax planning incidentally, if the shares qualify for 100% BPR, as the debt is also allowable for IHT, and the recovery of the S419 tax is also tax free as part of the company's assets.
IHTA s337A makes clear that this distribution is not an allowable expense for CT purposes.
There is a slight confusion, as the s 419 charge arises not because the individual concerned is a director, but because he(she) is a participator.
The distinction is important, because there would otherwise be Sch E consequences in 'writing off' the debt.
Accounting treatment is what I need!
Thanks for that but I am not really concerned with the tax implications (proper resolutions were completed to write off the loan).
What I really need to understand is now to report the write off in the company accounts. Any clues?