A parcel of land purchased by my company turned out to be almost worthless as the vendor had made fraudulent claims regarding a planning consent which never materialised.
The fraudster was convicted and his company (from whom the land was purchased) was eventually put into liquidation with some 2.5p in the £ (of purchase price) paid back by the receivers to my company. The land continues to sit on my company’s balance sheet at it's exorbitant cost value having been previously financed by a loan from a sister company (owned by me). The loan will remain mostly unpaid as a consequence.
Could someone please tell me whether the amount paid by the receivers is taxable ? Also, how should this payment be treated in the books and what other adjustments ought to be made ? Any helpful comments would be very much appreciated.
Replies (13)
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Reduction to cost
It sounds like any amount received from the receiver is a refund of part of the purchase price. As such, it would reduce the capital cost of the land and not be treated as taxable income.
An impairment definitely needs to be shown in the accounts, on the basis that the land is demonstrably worth less than its carrying value. This should be undertaken after accounting for any refund received. Not sure about the tax treatment for any write-down in the value of the land. Don't think you would be able to get any relief for this unless you sold the land on at a loss, which is presumably unfeasible. Hopefully someone else will know some piece of legislation which will get around this.
I'd leave the inter-company loan as is for now. Subject to a accounts note that it will not be called in unless the property company is in a position to pay, there does not seem to be any value to writing it off now.
No planning consent now, but is there likely to be any chance of you obtaining it?
Associated company loan
If you own both companies, then write-off of the loan is likely to be tax neutral at present due to association. This means that any write-off wouldn't be treated as taxable income in the property company, but equally you wouldn't get any tax relief in the other company either. The same will apply to any bad debt provision specifically related to this loan.
Sorry to not have any good news on that point, but better that than making a claim that HMRC claw back with penalties and interest later.
What loss?
Until you actually sell the land no loss has occurred. Why would the waiver of a loan cause an entitlement to tax relief? Stepurhan is correct.
If you were an individual I would be advising you to make a negligible value claim to establish a capital loss to carry forward but I do not know if this rule applies to Companies too. It is only a paper claim though and would not be reflected in a taxable event any more than a property revaluation exercise increasing the value would produce a taxable gain.
Sometimes tax is unfair
Unfortunately, unless someone else can find a provision, negligible value claims only appear to apply to individuals.
The lack of tax relief on a loan write-off is to do with the relationship between the two companies. The reason for the write-off is irrelevant, it is the relationship that makes it non-deductible.
I really wish I had better news on this one. Anyone else got any ideas?
Negligible value claim
Incidentally, whilst only a paper exercise, negligible value claims do create a real loss. The claim is treated as if you had sold the asset at its current (negligible, so effectively nil) value and bought it back immediately for the same price. This "virtual" sale creates a real capital loss. If the asset then goes up in value and you sell it, the new base cost is the negligible value.
If there was some way of getting the property out of the company and into your hands at its current value, that might make a negligible value claim possible. However, I don't see a simple way of doing that. I shall keep thinking.
Commonly controlled
Firstly, let me just check something that is implied by your opening post. My understanding is that you own, or at the very least control, both companies.If that is the case, then the two companies are considered connected.
If unconnected companies agree a write-off of debt between them, there is a tax consequence for both. The company no longer having to pay the loan has to account for the "income" of having the liability written off. The company no longer expecting to receive payment gets relief for the "expense" of no longer being able to get their money (the latter being similar to normal bad debts from trading)
With connected companies, neither company enjoys a tax effect. The main reason for this is to avoid someone controlling both companies from being able to manipulate the profits to reduce the overall tax due. Otherwise it would be possible for a single person to shift profits between two companies by making a loan and immediately writing it off. When this kept both companies within small companies rate (less of an issue these days) then there would be an overall reduction in corporation tax, which the single owner would benefit from.
Unfortunately, in your case, this leaves you a bit stuck. If you sell the land in A now, you would crystallise the loss, but you wouldn't be able to do anything with it, as there is no way of transferring it to company B at present.
Possilble approach
If you made the property company a subsidiary of your other company, they would form a group. If you were then able to sell the land, then the loss would be transferable under group relief. You probably want to see an accountant to run through the actual figures and check for any other pitfalls in this. Whether group relief is going to solve your problem will depend a lot on the amounts involved in both companies.
Tax rules written for exploitation
Sadly, the tax rules often end up written to close off exploitation without thinking that there might be a legitimate reason, like yours, in some cases.
Just being in general practice, there may be an obscure tax rule I don't know to help with this. If no-one else comes forward with anything, I shall try to remember to ask a tax specialist friend of mine about it.
On a tangent
apart from the financial implications as you were the victim of a criminal scam is there any kind of compensation available for the victims of a crime? I am assuming that David's well described confiscation processes will have kicked in so logically where there is an identifiable victim something should be possible?.....
I expect you have already looked into this but we do tend to get tunnel vision sometimes