A director resigned and left the company 31 March, but is still a 50% shareholder, and has refused all efforts to repay his substantial loan account.
The other directors are now wondering whether to write off the loan and want to know the tax & NI consequences on the company and the ex-director.
From memory I think the write off would be treated as a distribution in the shareholder's tax return and a tax deductible expense in the company but I'm not sure. I'm also aware there are NI issues but would that be the full NI based on his salary up to 31 March or would there be none, as he's now no longer an employee/officer.
Many thanks for any help.
Replies (17)
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@ Paul
Hi Paul
I'm pretty sure the write-off is not tax-deductible, but the Class 1 NI is.
Right and wrong
The write off will count as a distribution and therefore the company won't be entitled to a CT deduction.
The NI postion is as you imply is vexed. HMRC take the line that a loan write off (to a director/shareholder is earnings for NI purposes. However in the circumstances you describe I think there's a case to argue this isn't the case because;
the decision to make the write off is made after the director has resigned (incidentally has the company gone through the formalities required under company law to remove him as an officer?)and there was presumably never an intention or even a hint that the loan should be written off.
You can talk around this subject all day and still not be comfortable with an answer to the NI question. However Mark Mclaughlin wrote a good article on the subject ( you can find it on his Taxationweb site). Take a look there
http://www.taxationweb.co.uk/tax-articles/business-tax/taxing-directors-loan-accounts.html
(look under the Loan releases heading)
EDIT - Also make sure the loan is formally released by deed.
As I've suggested before on another thread why not serve a Statutory Demand -the link below tells you how. The second link is a more expansive guide to SD It does concentrate the debtor's mind as a bankruptcy petition might follow.
https://www.gov.uk/statutory-demands/forms-to-issue-a-statutory-demand
https://www.gov.uk/statutory-demands/how-to-serve-a-statutory-demand
You aren't compelled to present a bankruptcy petition. In my experience 80% pay up because of the threat. If they ignore it you have to wonder if they have any assets. However a bankruptcy Petition isn't very hard to prepare and the information is about the same as for a Court Claim.
You mentioned the loan a/c as being substantial. Can you quantify as that may change my advice?
Writeoff of Former Director Loan
I find the whole matter very complex. I don't think you would reach any resolution of problem unless all the parties to dispute should sit down together and resolve the problem. Firstly somebody in the company should make efforts to buy out the ex director 50% shareholding in the company and as part of package should include the ex-director outstanding loans etc. Writing off ex-director loan will not resolve the problem. The company may have to tax on this loan under section 249. Even after paying for HMRC, there will still problem about his 50% shareholding and his protégé on the board of directors. Litigation will cost the company thousands of pound without any resolution of the problem. As such all the parties to disputes should sit down together and bring about comprehensive solution.
A familiar scenario...
...to one I am involved in. In my case, the ex-Director and 50% shareholder incorporated a newco and transferred the entire business (single consultancy contract at £120,000 pa with Lloyds Banking Group) from the oldco. Very little ever paid in dividends to the other 50% shareholder of the oldco, and all assets mysteriously disappeared from the oldco at the same time as newco was set up. Because the ex-director and current director (his wife) of the 'oldco' continue to refuse to provide detailed accounts, I cannot see where the cash went, but it wasn't on salaries.
Latest 'wheeze' is they want to dissolve the 'oldco', which we have opposed, so the director wants to issue the remaining shares to 'cover admin and accounting expenses' because the 'oldco' has no assets. They should have thought of that before the assets disappeared!
I am advised that the other 50% shareholder should buy her 50% share of the new shares, even though the shareholder feels she is throwing good money after bad, and the 'fraudsters' will steal those funds too. Can someone please comment on whether she should buy her 50% of the new shares issue. What are the implications? What game do you think the director is playing?
A dodgy couple indeed, who need to be taken down.
Ex-director and other 50% shareholder in 'oldco' has a very nice house in his sole name with lots of equity, and the only way he could have afforded to buy it was by siphoning off the assets of 'oldco'.
A familiar scenario
If you cannot establish where the cash went, how do you know it wasn't on salaries?
Familiar Scenario
Personally I wouldn't invest further sums into the company, because throwing good money over lost cause. The problem is that whichever way you deal with the matter, you may not reach any resolution of the problem wihtout spending thousands of pounds in litigation costs. At the end of day even if you win the case there may not left any thing to collect personally from the individual concerned or the company. I know there are two to three cases, where persons concerned have spend thousands of pounds in litigation costs without reaching any solution of problem. The cases are still on going.
Tax relief
On another path but if they just want rid of the situation wouldn't voting a net bonus of 64k clear the loan account? I appreciate there would be NIC and tax to pay to HMRC but at least it would all be tax relievable........
I await the reasons this is a bad suggestion
Tax Relief
The situation is not so simple. This depend on the profitability of the company during the current year and whether there is sufficient profit to award the bonus + taaxes/nic.. If not then depend upon the distributable reserve in the balance sheet otherwise the company will be in state of insolvency after awarding the bonus.
Misunderstanding of bonus?
Dividends are dependent on there being profits available. Bonus payments are not. If the company simply wriites off the overdrawn loan, then they will just as much be in a state of insolvency as if they pay a bonus. The tax relief from the bonus should offset the employers NI payable. The situation is not so simple. This depend on the profitability of the company during the current year and whether there is sufficient profit to award the bonus + taaxes/nic.. If not then depend upon the distributable reserve in the balance sheet otherwise the company will be in state of insolvency after awarding the bonus.
You would need to inform the former director of the additional taxable income they need to report. Dependent on the timing of the bonus, there may also be RTI problems. The main issue, if this is a former rather than current director, is that the employers NIC will be calculated on a current period basis rather than cumulative. Check the figures before going ahead with this.
Loan account written off without the former director knowing
I have only recently found out that the company I was a former director of, wrote off a legitimate £7000 loan I had, as a director. I thought it had been repaid before I left ( as previous loans had been).
There are two loan amounts. One is for £5000 that was a loan from June 2006, the other £2000 was from May 2007.
These 2 amounts (£7000) were written off by the company in December 2007.
This has only recently come to light with the company wanting to claim the loan money back from me. As far as I'm aware, the company was wrong to write off the loan without contacting me first, at the time the loan was written off.
Can anyone 'enlighten' me please?
Regards.