Directors loan write off S421 ICTA 1988

Directors loan write off S421 ICTA 1988

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Butterworths direct advises that the amount written off is treated as net income received after deduction of tax at the Schedule F ordinary rate which I understand to be the dividend rate of 10%. The grossed up amount is charged to tax at the higher rate of 32.5% and the notional tax at 10% is allowed as a credit. The tax is therefore 25% of the loan amount written off. Can someone confirm this treatment as HMIT is treating loan amount as additional Sch E earnings taxed at 40% with no relief.
trevor

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By Pete_Heslington
24th Mar 2006 10:23

HMRC guidance on the release or write-off of a loan can be found at CTM 6663.

S421 ICTA should intervene to ensure that the loan release is taxed as distribution. This should take precedence over the benefits code according to their guidance (it refers to s160 ICTA, now s188 ITEPA). It might also be worth looking at s189 ITEPA.

You do need to be slightly careful that a s419 charge has or would have arisen. If the exceptions in s420 apply then the release of the loan would probably end up being charged as employment income.

Finally, it is worth looking at the NIC position as well. There was a good article on this in Taxation by Roger Jones on 7 October 2004 entitled 'Small Family Companies'.

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By AnonymousUser
24th Mar 2006 12:37

Although ....
... let's not lose sight of the fact that the loan write-off is part of the agreement for the sale of the shares and therefore one instinctively feels it should not be treated as earnings for NIC purposes. Andrew Gotch of PTP suggested in a feedback item to Roger Jones' article that it may be possible to defeat an NIC charge on a loan write-off, so I wouldn't too readily concede - but perhaps that's a bridge the querist hasn't got to yet.

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By AnonymousUser
24th Mar 2006 10:48

It always used to be the case ...
... that a charge under s421 took priority over a Schedule E charge. As far as I can see this hasn't changed and you may wish to refer the inspector to EIM 21746, though the reference to s421 is out of date as the reference should now be to sections 415 onwards in ITOIA. As far as I can see the rewritten legislation makes no changes so the guidance should still hold good. If no s419 liability actually is payable because of the release I suppose it could be argued that there is no s421 charge either, but I think that would be wrong as the s419 liability is chargeable for the AP in which the loan is made - it is just that the tax is not due for nine months after the AP or not at all if the loan is repaid by then. What I am getting at therefore is that even though no s419 tax may actually be payable there is still a liability in which case s421 also comes into play.

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By AnonymousUser
24th Mar 2006 10:57

Yes I was forgetting ...
... the NIC position where I believe NICs may be due on the write off, which I seem to recall was what Roger's article was saying - will have to re-read it.

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By User deleted
24th Mar 2006 11:47

nic
The write off ofthe loan counts as earnings for nic purposes - refer to Revenue Manuals EM8623.

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By Pete_Heslington
24th Mar 2006 16:47

As Ken Moody says...
...it was in Taxation magazine. The link is:

http://www.taxation.co.uk/Articles/2004/10/07/46095/Small+Family+Companies.htm

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By AnonymousUser
24th Mar 2006 15:59

Thanks
for comments and guidance given. Employers compliance unit have already dealt with Class 1A NIC and S419 issues with company and their agents. As a result they are now following through on the director's personal obligations. In relation to the Roger Jones article can someone give me a thread as I can't find it on TaxationWeb.

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By AnonymousUser
24th Mar 2006 16:24

Not Taxationweb....
... it was in Taxation magazine.

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By User deleted
28th Mar 2006 11:30

And what happens in this scenario?
A director has a loan account which has been written off. It's for £2,498; £98 of called up share capital unpaid and £2,400 for a "genuine loan".

The director/shareholder is now deceased (and has been for two years or so), so there is no chance of recovery. Employer now needs to write off the loan.

How is this treated for tax purposes now?

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