Bad debt relief ... or not?

Bad debt relief ... or not?

Didn't find your answer?

Company A is insolvent. It collected sales monies on behalf of Company B but has not yet paid these over. The balance owed is £50k. Company A is likely to be wound up and creditors may get 50p in the £, so Company B loses £25k. Both companies have the same shareholders, husband and wife 50:50.

As the sales were in Company B's name, it will be taxable on the £50k of sales but can it then get a bad debt write off for the £25k that has gone bad? I suspect not as it does not seem to me to be a trade debt. The customers have all paid up but the money has got "stuck" in an insolvent, connected company. I'm concerned that Company B will pay corporation tax on £50k even though it will only actually receive £25k. In effect, its tax rate will be 40%!

Replies (3)

Please login or register to join the discussion.

By petersaxton
12th Sep 2012 12:09

Why?

Why did the shareholders allow the insolvent company to take the money?

Thanks (0)
avatar
By User deleted
12th Sep 2012 12:53

A year ago ...

... I would have said the write-off allowable (subject to unallowable purpose block) - the companies not being under control of the same person (singular). However, HMRC have revised their interpretation and consider "person" to include "persons" - where those persons act together to control a company. In the case of a husband and wife, they are likely to assume that they are acting together. As a consequence, you may find it difficult to convince HMRC that the companies are not connected.

As for Peter's question above, a very valid point.

Thanks (0)
Replying to lionofludesch:
Red Leader
By Red Leader
12th Sep 2012 13:39

@BKD

Thanks for that. If the write off was allowable against trading income, would it be as a current year set off of a loss under "gains or losses of a non-trading loan relationship"? But as you say, probably blocked due to connected companies.

Thanks (0)