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Company loan to a friend of the director - w/off

Accounting and tax treatment of a company writing a loan off made to a friend of the director.

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A client company made a loan to a personal friend of the director for approx. £30K. The director wishes to write the loan off. What is the accounting procedure and tax implications of doing this? Will the company be able to claim a capital loss? Am I right in thinking that the loan does not fall into the Loan Relationships regime?

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By Paul Crowley
15th Feb 2021 12:00

Why?

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Replying to Paul Crowley:
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By steverose
15th Feb 2021 13:22

The loanee is a long-time close friend of the director and has suffered a drastic change in circumstances. The director wants to help. No more than that.

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Replying to steverose:
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By Paul Crowley
15th Feb 2021 13:38

Reason asked
Very tax efficient way to make a gift, for someone who can afford it
Probably OK if a genuine business loan that has gone bad, but if loan was recent......

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Replying to Paul Crowley:
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By steverose
15th Feb 2021 13:52

Thank you. I understand that the loan was to help pay off personal debts and a loan agreement was drawn up. I have recently taken this client on and have requested a copy of the agreement. The director can afford to write the loan off and any tax efficient ways of doing so would be welcome.

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Replying to steverose:
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By Paul Crowley
15th Feb 2021 14:15

That sounds less good
Even with no tax relief in company it sounds like a gift
But gift from company means the giver avoids tax on getting the money out to make the gift.

Does company have money lending as part of its trade?
I could forgive the HMRC for wanting a bit more detail should they ever become aware

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Replying to Paul Crowley:
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By steverose
15th Feb 2021 14:40

That's a good point. Money lending is not part of the trade and I assume that the previous Accountants checked the Mem and Arts.

But gift from company means the giver avoids tax on getting the money out to make the gift
How would this work?
Thank you.

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Replying to steverose:
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By Justin Bryant
15th Feb 2021 16:05

In that case the write-off is likely to be a taxable distribution on the shareholder, as it's not a genuine bad debt that he's tried to recover (via enforcement action etc.).

Otherwise, this would be an easy tax-free profit extraction solution for companies (i.e. just lend to friends & (wider) family and write-off in due course).

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Replying to Justin Bryant:
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By steverose
15th Feb 2021 17:16

Thanks for your comments. The loanee is not a shareholder or director.

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Replying to steverose:
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By Youareatit
15th Feb 2021 17:21

steverose wrote:

Thanks for your comments. The loanee is not a shareholder or director.

he means the lender

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Replying to Youareatit:
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By steverose
15th Feb 2021 17:32

Thank you.

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Replying to steverose:
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By Hugo Fair
15th Feb 2021 18:12

In the OP you say "The director wishes to write the loan off" ... but now you're saying "The loanee is not a shareholder or director" (where apparently loanee = lender). So which is it?

What did the company get 'in return' for making the loan? If it wasn't something central to the company's business, then writing it off sounds more like a distribution to someone than a loan (so hardly a capital loss in accounting terms). And if that distribution can be laid at the door of the specified director then he/she will acquire other tax liabilities.

As Justin said "otherwise this would be an easy tax-free profit extraction solution for companies" ... which it isn't.

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Replying to Hugo Fair:
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By Youareatit
15th Feb 2021 18:25

I took it to mean the person who received the loan is the loanee. That person is not a shareholder nor director.

Out of interest OP, is that person who received the money a relative for the person whose business has cash to throw about?

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Replying to Youareatit:
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By steverose
15th Feb 2021 18:25

The person who received the money is not a relative, just a long-standing friend of the director. The director is wealthy and wanted to help. It was originally proposed that the loan would be repaid to the company within 5 years. However, as circumstances changed, it was clear that this was not going to be possible.

(I did mean that the loanee was the person whom received the money)

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Replying to Hugo Fair:
Psycho
By Wilson Philips
15th Feb 2021 19:07

I assume he means that a company (not having a mind of its own) cannot decide to do anything but that its directors can. In other words, the director(s) has/have taken the decision to waive a debt due to the company from an unconnected individual.

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Replying to Wilson Philips:
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By steverose
16th Feb 2021 09:42

Thank you WP. That is what I meant.

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Replying to steverose:
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By Justin Bryant
16th Feb 2021 08:58

I mean the distribution is taxable on the shareholder(s), like any other distribution (and taxed like a dividend). It is totally irrelevant that the shareholder(s) may not receive a penny from the company and that the whole benefit of the distribution is received by the friend (by way of the loan waiver "gift" by the company).

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Replying to Justin Bryant:
Psycho
By Wilson Philips
16th Feb 2021 10:19

I'd be interested to learn just what provision(s) you think might apply to treat this as a distribution in the hands of the shareholder.

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Replying to Wilson Philips:
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By Justin Bryant
16th Feb 2021 11:45

I find it unsurprising you don't know this. Have a read of the recent Aikido tax avoidance case.

Why on earth wouldn't it be a distribution on basic principles? The definition is very wide and obviously catches company payments (including those dressed up as a bad debt) to your (non-shareholder) mates etc.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
16th Feb 2021 12:40

I find it unsurprising, based on previous experience, that you would reference a case that has absolutely no bearing on the OP's query.

What basic principles? The company has made a loan to an unconnected 3rd party. The debt has gone bad. The company has tried unsuccessfully to recover it and so has decided to write it off and release the debtor. Or are you suggesting that all bad debts written off by a company should be treated as distributions? Your view seems to be based on the premise that there has been some skulduggery here. Perhaps in reality there has been- but there is nothing whatsoever in the OP's comments so far to suggest that there has.

I am aware of the wide scope of the definiton of 'distribution'. Nevertheless, I'd still be interested to learn exactly what part of the definition you think would apply in the OP's case.

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Psycho
By Wilson Philips
15th Feb 2021 13:29

Cr loan debtor (B/S)
Dr bad debt (P&L)

No tax relief

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Replying to Wilson Philips:
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By steverose
15th Feb 2021 13:37

Thank you for your reply

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By Calculatorboy
15th Feb 2021 23:30

Here we go again...a director has a fiduciary duty to safeguard company assets , not to help out his personal mates

Do you not get this,

Ffs

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Replying to Calculatorboy:
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By Paul Crowley
16th Feb 2021 00:06

We do seem to be inundated with gifts by to and from companies

Are we in Corporate Christmastime?

These companies do appear to have a mind of generosity to their owners desires

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Replying to Paul Crowley:
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By Youareatit
16th Feb 2021 06:15

OP said "The director is wealthy and wanted to help"

But he didn't help. His company did.

A case of another using the business as his own personal bank account?

Tax break? a wheeze that won't work.

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Replying to Youareatit:
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By steverose
16th Feb 2021 09:52

The loan by the company was never intended to be a tax break. If it was, it would have been a very poor one. The intention was for the company to be repaid and this would have been possible had it not been for a a very sad life-changing event.

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Replying to Calculatorboy:
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By steverose
16th Feb 2021 09:46

FFS. Really?
And yes. I do get it. The director has spent the last 30 years satisfying his fiduciary duties. Correct procedure was followed (including obtaining a CCL prior to making the loan) and all decisions and actions minuted.
Some directors do follow the rules.

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By bernard michael
16th Feb 2021 09:12

If I were cynical I would infer it's an interesting way around the directors loan a/c overspend
Company lends to friend A
A lends to director B
Company writes off loan
A writes off loan
MDTP strikes again

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Replying to bernard michael:
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By Justin Bryant
16th Feb 2021 09:32

No, that obviously does not work either per my above distribution comments.

Indeed, your above idea is bordering on tax fraud.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
16th Feb 2021 10:29

It's not even close to fraud, as Bernard's suggestion would be squarely within CTA 2010 s459. (Assuming that for "director's loan" one reads "shareholder's loan".)

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Replying to Wilson Philips:
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By Justin Bryant
16th Feb 2021 11:46

Really? These look like sham loans to me (to strip out company cash tax-free). (Based on previous experience, I find it entirely unsurprising that they don't look like that to you and that you stated above there are no potential tax (distribution) issues in all this.)

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Replying to Justin Bryant:
Psycho
By Wilson Philips
16th Feb 2021 12:31

First - any 'sham' aspect of the loan would be dealt with under s459. But I'm nevertheless intrigued that you think that there are ulterior motives here, when the OP clearly states that the loan was properly documented, recovery action was taken etc. Of course, it may just be that you don't believe the OP or his client. You did suggest how such arrangements might be manipulated in an attempt to provide tax-free cash to friends or wider family members. I don't see anything here to suggest that is what the OP's client had in mind.

Second - based on previous experience, I find it entirely unsurprising that you misconstrue or deliberately twist my words. I never "stated" above that there are no potential tax (distribution) issues - I posed a question, and it was a genuine question.

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Replying to Wilson Philips:
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By steverose
16th Feb 2021 12:25

Thank you to all contributors. Just to be crystal clear. The loan arrangement was never intended to be a sham or tax dodge. Any tax that becomes due following the cancellation of the loan will be paid in full. My client was trying to do a good deed, but unnecessarily complicated matters by lending the money through the company.

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Replying to bernard michael:
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By steverose
16th Feb 2021 09:47

My client is more than happy, and able, to settle any personal tax liabilities which may arise. You are being cynical.

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By meadowsaw227
16th Feb 2021 11:18

I do not understand why if the person is "wealthy" why he would complicate things by using company money and not just giving his bestie the £30k from personal funds ? .

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Replying to meadowsaw227:
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By steverose
16th Feb 2021 11:30

Agree. That would have been my advice.

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Replying to meadowsaw227:
Psycho
By Wilson Philips
16th Feb 2021 11:35

"Wealthy" doesn't always amount to lots of spare cash - ask any farmer.

Whether or not you understand why matters were 'over-complicated' is of no relevance. We have not been asked to advise on what should or should not have been done but to consider what actually was done and how it should now be dealt with.

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By Justin Bryant
16th Feb 2021 16:22

As well as a distribution, HMRC could of course also tax the loan waiver (AKA gift to friend) as a BIK on his s/h director friend per the following from the link below:

"However, it could be dangerous to do this. HM Revenue and Customs also has the power to tax loan waivers as a benefit in kind and may do this where the loan was clearly just a device to avoid income tax and national insurance."

https://www.taxcafe.co.uk/resources/companytax_loanstodirectors.html

Or it could simply be taxed on the director as s62 earnings under the wide Rangers redirection principle ("don't pay me, pay my mum" or "friend" in this case, as JGQC would put it). There might then be CT relief re that.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
16th Feb 2021 16:49

There is so much wrong in that post that I really don't know where to start.

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Replying to Wilson Philips:
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By Justin Bryant
16th Feb 2021 17:38

The dumb new edit block that you delight in does not help and if friend is shadow director there can be BIK on him directly (if he was relative then loan w/o taxable for usual reason on employee I should have clarified per link below).

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim26150

Other than that, it is correct (unlike all your comments - as usual).

Care to explain why the Rangers principle cannot apply to the link below (it's the same section i.e. section 62 in case you don't know)?

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim01490

If I were wrong it would be a pretty easy way around that SC judgment wouldn't it (i.e. "don't lend & write off to me, lend & write off to my mum/mate etc.", as JGQC would put it)?

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Replying to Justin Bryant:
Psycho
By Wilson Philips
16th Feb 2021 18:27

You are imputing facts and circumstances of which there is no evidence. There is nothing, anywhere in this thread, to even imply that the individual in question is a participator, an associate of a participator, a director, a shadow director or having any other connection with the company (or the client). You appear to be looking beyond the facts presented and inventing circumstances to suit your argument. Which makes further discussion pointless

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Replying to Wilson Philips:
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By Justin Bryant
17th Feb 2021 09:42

EH? We were discussing suggested so-called scheme above by:
"By bernard michael
16th Feb 2021 09:12"

Incidentally, such transactions involving sham intermediate loans would obviously also be artificial, uncommercial and pre-ordained steps that would be ignored under Ramsay in any event.

The distribution point applies to the original question regardless.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
17th Feb 2021 11:19

I agree that Ramsay could be in point were it not for s459. But as I've already said, Bernard's 'proposal' would already be squarely within the statutory provisions of s459 so no need to even consider Ramsay.

You still haven't explained exactly which distribution point you think applies to the original question.

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