Overdrawn DCA

Overdrawn DCA

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A client of mine draws a regular monthly amount of £2000 as dividends and a nominal salary to cover his personal allowances.

Two years ago they acquired a business and paid for goodwill. They decided to write this goodwill off over a period of 3 years. This has resulted in all their reserves wiped out. This year with the write off of the goodwill there are no distributable reserves against which we can off set the dividends paid.

As a result, there is a debit balance on the DCA of £24,000. The director has no credit balances with the company.

Any ideas how best to deal with this situation?

Another accountant friend has suggested that I leave it as a debit balance; declare the loan on a P11d and pay the tax on the loan interest benefit. Then in the following year, write off the balance on the company's accounts and gain tax relief.

Is this legal?

What are the tax consequences on the Comapny i.e NIC etc and the director personally?

The last thing we need is a tax investigation as a result!

Thanks to all who respond.

Madhu Morjaria

Replies (3)

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By NeilW
30th Jun 2005 15:46

s421
A loan written off is treated by s421 as though it was a dividend paid to the individual, with tax paid at Sch. F rates.

This overrides the benefits code.

NeilW

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By adam.arca
30th Jun 2005 13:31

Yes, but...
Yes, you could do what your friend suggests.

But:
1. The company must pay s419 tax on the O/D balance
2. If the loan is then written off, that s419 tax is irrecoverable
3. I'm pretty certain (but not 100% without checking) the loan write off would be a benefit for next year's P11D
4. There may be other taxation implications but can't immediately think what

Why not approach the problem from another angle and look at the goodwill write-down? Is it a fair charge? Why was 3 years chosen? Could the period be extended? Why not switch to an impairment review instead?

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By AnonymousUser
01st Jul 2005 09:13

Which presumably means....
That a loan write-off treated as Sch F distribution is not allowable for CT purposes.

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