DLA write off prior to liquidation / tax credits

DLA write off prior to liquidation / tax credits

Didn't find your answer?

Following years of successful trading, a company become insolvent, thus unable to pay dividends, and payments made to the two director / shareholders were classified as loans.

Director A devoted his time to managing the company, purchase of goods and services, talking to clients and suppliers, etc., whereas director B, younger and fitter of the two, spent his time working on company projects and supervising work done by contractors. Company insolvency was generally blamed on A’s care-free recklessness.

The directors decided to part ways, B leaving and starting out on his own (A would find starting from scratch very difficult). On B’s leaving, his loan arising from illegal dividends was written off by A.

Unsurprisingly, after B’s departure the company’s position worsened substantially. If it goes into insolvent liquidation within 2 years of writing off B’s loan, the loan may become repayable as a transaction at an undervalue under s.238 of the Insolvency Act 1986.

Whereas there is no problem with B’s tax return (tax returns can be amended, etc.), there is a serious problem with Tax Credits. B’s family pays childcare costs and received substantial tax credits. Sudden income increase caused by the write off led to a very substantial overpayment in 2012/13 and 2013/14, and HMRC demand repayment. There are no provisions for a review of the situation if the loan has to be repaid.

What are the chances the liquidator demanding repayment of a loan written off?
Would the TCO wait a couple of years before finalising rewards based on income for 2012/13?

Please help!

Replies (1)

Please login or register to join the discussion.

By LucasJohnson
25th Sep 2013 01:42

Not just S238 you need to worry about

It is feasible it may be challenged on a number of grounds, not merely a transaction at an undervalue. As liquidator I would have an obligation to consider the recovery of those funds, although whether that recovery would be from A or B is unclear.

Most importantly though, does B have the ability to repay?  If not, the point may be academic in relation to the threat from the liquidator and therefore your concern with HMRC's stance may disappear too.

I would be interested to know HMRC's stance if B does repay the liquidator, so please do post an update even if it is 12 months or more down the line.

 

Thanks (0)