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)
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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.