Accounting for capital loss and dividends
I am hoping someone can help me with the following query:
There are two companies, A and B. Both are owned 100% by the same director/ shareholder. Company B then buys the shares in Company A at an arms length valuation of £20,000. Six months later Company A ceases to trade and is effectively worthless.
We are drawing up the first year's accounts for Company B. It has accounted for the share purchase as Debit Fixed Asset Investment £20,000, Credit Other Creditors £20,000. Then, it recognises the loss and enters: Dr Loss on Investment (P&L) £20,000, Cr. Fixed Asset Investment £20,000.
If you ignore the above, and tax, the company has otherwise made a profit of £50,000 and the director/ shareholder has extracted £40,000 as a dividend. BUT...once you take into account the loss on the shares the reserves are "only" £30,000 so the dividends are illegal.
The question is...is there a way in the accounts to treat the £20,000 as a capital loss separate to the distributable reserves so the dividends are not illegal? Adding the loss back in the tax computation and showing it as a capital loss is great for the tax return but doesn't help with the accounts! I could show it as an exceptional item, but IRIS seems to automatically take it out of distributable reserves anyway so I am back to square one.
Is there a way for IRIS to somehow show it "below the line" so the dividends do not look illegal? Or can - or should - the £20,000 be shown as a capital distribution somehow ? Or should I call the £20,000 a "negative capital reserve" on the balance sheet, which sounds and is ridiculous as far as I can see!
I would appreciate any help with this.
- Unusual Self Employment Expense Claims? 443 6
- Sage Instant cash based flat rate 62 2
- Loan notes payment of principal and interest 38 2
- HMRC VAT misstatement disclosure 189 2
- How to account fot Cross-border vat. 202 5
- are receipts needed? 208 7
- Paint Manufacturer Flat Rate Scheme 456 27
- Sage 50 177 2
- New accountant 209 5
- sole trader - operating under cis 222 7
- Limited Company - Personal Bank Account 2,950 65
- Tax case refeence request 106 1
- A change from the old Q v NQ debate 785 28
- Sage Payroll with 'employees' not having tax or NI deducted 226 4
- Auto enrolment for one or two director companies 1,907 29
- PayPal Transaction Analysis 241 5
- Working out a daily rate 177 5
- Auto enrolment 1,246 13
- Payroll dates 142 5
- VAT reports on trade debtors and trade creditors 288 8
- Skandia using wrong address 1,575
- Nil Rate Band Trust - index linked debt by way of charge over property 872
- International interest certificate 483
- NOVA 338
- Can Limited Company Buy Share of Rental Property? 260
- Management expenses for investment company 230
- Bonus Bonds 229
- Have we escaped Gift with Reservation of Benfit & Pre-owned asset charges? - Gift after benefit 227
- Help with tax codes on Sage 173
- Capital reduction 165