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.
- Bereavment payment 92 2
- Increasing the personal allowance: A top priority? 481 18
- Double tax treaty Italy and UK 98 1
- Anyone Heard of This Outfit? 1,107 7
- Can anyone advise on the best VAT Scheme to change to? 273 4
- Apologies for reposting this but first post was on Friday afternoon! 346 2
- CT600 Computations - Company Tax Return help 1,295 14
- Sage Bank Reconciliation 150 2
- Companies House incorporation service 349 12
- Factors affecting tax charge FRS 19 (marginal rate) 78 1
- P35 and Service Company questions 151 3
- VAT chargeable to conference attendees 193 6
- Is Accountancy Becoming like an Insurance Policy 205 1
- Long period of account for Corporation Tax 267 7
- Flat Rate VAT and EU sales (Non VAT) 143 3
- NIC £2000 Allowance - Care Support Worker 153 3
- VAT, vans, sole traders and business use. 1,598 12
- Share Capital 133 2
- Trading income or not? 199 1
- Charge HMRC 428 3
- Xtuple 549
- Qtac payroll for bureau 376
- Confused - Professional Association a Mutual trader, or not? 320
- Industrial & Provident Societies 314
- Why would HMRC offer to close an investigation by contract settlement 293
- CIS schemes 223
- Domain name sale and limited company 205
- Director legal fees in loose connection to the company 187
- Investment 187
- Italian friend wants to set up a UK company to reduce taxes 178