I need to report the 25% charge to corporation tax on a directors loan at the financial year end ( Dec 10). The director is paying it off every month through salary deduction so I know in 9 months time I can claim corporation tax back on the amounts paid in the 9 months after the financial year end. Do I report the charge to corporation tax on the loan balance at Dec 10 in the statutury accounts (which I will issue in the next few weeks) or do I reduce the corporation tax liability by the amount I will claim back in 9 months time? Also, does this come within the realms of deferred taxation (I'm very rusty on deferred tax as I haven't dealt with it for 16 years!!!).
Any help appreciated.
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What charge?
If the overdrawn loan account is repaid within 9 months no ACT arises. In view of intention to repay do you need to make a provision?
If I understand you correctly ...
in that there was a loan at the year end but it will be repaid in full within 9 months (of the year end), then there will be no S419 liability arising. You report the fact of the loan by completing the supplementary pages on the CT600 but then claim relief immediately because it will be repaid within the time limit. No entry (for the tax) is therefore needed on the statutory accounts.
Don't forget P11D benefit in kind disclosure if the loan exceeded £5,000 at any point.
Also...
... I think your loan should be in debtors and not creditors.
Strictly, the relief for repayments can't be claimed until those repayments have actually been made. Assuming the CT return won't be filed until at least 9 months after the year-end, that shouldn't be a problem though.
Or are you saying ...
... that the deductions from salary for the next 9 months will pay off some, but not all, of the loan? If so, you only include in the tax charge 25% of the balance that will still be outstanding 9 months after the year-end.
I am assuming that the loan was made in 2010 and not in an earlier year.
There is debate about whether you include s.455 tax in the tax charge in the P&L (which I consider correct) or as a debtor (not due within 1 year) for tax recoverable in the balance sheet on the grounds that it will be recoverable at some point in the future when the loan is repaid or written off.
In practice, no-one ever accounts for it under deferred taxation although I can see an argument for that treatment if you charge it in the P&L. Charging it to the balance sheet is effectively treating it as a deferred tax asset anyhow.
Wait!
You said director! Is the director also a participator (shareholder) in the company?
If he/she isn't there's no tax charge under S.455.
If he/she is a participator, there still won't be a charge if he/she doesn't have a material interest (more than 5%) and works full-time for the company.
@Euan
glad to see that you are back to your beautiful best ;-)
@cirius i think he meant the tax for the loan
@ Euan
I expect that I have mentioned it before, but for what it is worth, my opinion is that the P&L treatment of the s.455 tax should mirror the P&L treatment of the participator's loan account: If the company considers the loan account to be irrecoverable then it should write off (or provide specifically for) the bad debt, in which case there is no s.455 tax but the reserves are impaired by the loan account provision. If the company considers the loan account to be recoverable then the s.455 tax is also recoverable (albeit as you say after more than one year). So either way the s.455 tax does not hit the P&L, although that is not to say there is never a P&L effect (ie in relation to providing for the bad debt). Where I suspect that some are mistaken is by debiting the s.455 tax to the balance sheet but making no provision for the participator's loan account despite that its recoverability is in sufficient doubt that, if normal yardsticks were properly applied, a provision would be made. The tax consequences of that provision are of course another matter.
What irritates me is that our CT software suppliers provide us with no choice but to write off the s.455 tax to the p&l.
With kind regards
Clint Westwood
Clint this one will run and run
and has done for a while
i am in the opposite camp to you
any tax should be in the norm be reflected in the P/L
in my view its not a question of ifs and buts but rather clearer than that
if at the signing date (lets say on the last day of the 9th month) the loan is still outstanding then in 99/100 cases there is no way of knowing for sure that the loan will be recovered so in my view the tax should go thro the P/L.
i would only puy it into debtors when i knew that the loan had been repaid and that the tax was due back probably in the next year.
@ carnmores
Just out of interest, what is the feature of taxation that singles it out for special treatment in determining whether it should be P&L'd, in contrast with the treatment of any other debtors or creditors?
Aside from that, the mere possibility (which I think that you recognise) that debiting the tax to the balance sheet may in some circumstances be correct, however remote a frequency, is sufficient in my view to criticise any software developer which apparently denies the user that choice.
With kind regards
Clint Westwood
@clint
i am all for having a go at the new gods of our age - software architects! anyway at least presumably you can journal it out - i believe its best practice to PL it so i can at least see some reasoning for their actions - you and a few others just dont and wont agree with the tretament and you are absolutely right to do so if that is your well held belief, we all have our points in the sand.
P&L charge
Clint
The main argument for not recognising the eventual s.458 refund as a debtor (and credit against the current year's tax charge, which includes the s.455 tax payable) is that the event which would give rise to it (repayment or writing-off of the loan) has not occurred by the end of the current accounting year. Whilst it is true that there can be no refund without a prior payment, the payment and refund are triggered by two separate events and should be treated separately (as they are in different sections of CTA 2010).