Convert DLA to Shares or Exceptional Item on P&L?

What's the best option to improve balance sheet

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My 10 year old business, after a bumper few years, ended up with a small loss 21/22 (our tax year is Sept-Aug) - we converted 10,000 from the DLA (DLA currently £240k) to share capital to make it solvent. For 22/23 the loss is £127k - largely due to a high liquidation of stock and some investment to cover costs in a slow year. Firstly, does it matter if the balance sheet looks that bad? We are hoping to sell in the next 2-3 years once profitable again (should be profitable 24/25 onwards following a smaller loss this current year approx £50k). Secondly, if the answer is yes, what are our best options? Accountants have advised either converting to share capital again, or converting £127k of the DLA to the P&L as an exceptional item, essentially writing it off. £160k of the DLA is from when we changed from sole trader to Ltd, so isn't money actually invested in the company. I want to be sure we make the right decision and don't mess things up in the future, if we were to look for a loan, investment or sell. All thoughts appreciated taking into account I'm the Director and not an accountant! 

Replies (5)

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By Ruddles
15th Feb 2024 19:18

If you’re happy to forego £127k of tax losses that may have mitigated future tax liabilities, go for it.

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By Leywood
15th Feb 2024 19:42

But if you want a second opinion, pay for one.

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paddle steamer
By DJKL
15th Feb 2024 20:39

" For 22/23 the loss is £127k - largely due to a high liquidation of stock and some investment to cover costs in a slow year"

Afraid that makes little sense to me, not sure why company making "investment to cover costs in a slow year" in itself occasions a loss?

If business is being supported by loans from directors then providing these loans are not being called the company is likely not trading insolvently.

Also not sure about the meaning of the stock liquidation comment.

Frankly I suspect any investor or purchaser will be more interested in profits earned over how business funded, and will value previous loans forgiven increasing profits at nil in that calculation.

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By Bobbo
15th Feb 2024 21:17

Obviously the 22/23 financial year finished almost six months ago for your company so the 'that bad' balance sheet as at the August 2023 year end will be filed whatever you might do now in terms of issuing new shares or waiving director loans.

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By Tax Dragon
16th Feb 2024 06:16

I agree all the responses so far. I'd add that you haven't said whether you'd sell the company (good luck with that!) or the company sell its trade and associated assets; surely a key point.

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