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Creditor conversion to equity

Tax implications for converting a creditor to equity

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Hi,

I've got a creditor on my balance sheet that is offering to convert their outstanding balance to equity in my business due to financial stress.  I currently have accounted for their invoice in my previous year-end and would need to reverse in this year to reflect the updated view.  Presumably, my only tax implication would be the corporation tax due on me this year due to an increase in my profit?

Additionally, I'm assuming that if the creditor were to account for both the invoice and conversion in the same financial year there would be no additional tax implications for them.

If there is any guidance I could be directed to, it would be greatly appreactiated.

Thanks,

Replies (5)

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By johngroganjga
14th Oct 2019 19:14

How can your company both increase its profit and its share capital at the same time?

By asking this question you are showing that you are not an accountant.

There are no tax implications either for your company or its creditor, about to become a shareholder. Your main concern is not tax, but about this other person becoming a shareholder, and the consequent dilution of your shareholding.

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By jcace
14th Oct 2019 19:43

Suppose.... a year ago I sold your company a piece of equipment for £10,000, but you haven't paid me. I agree to take shares in your company instead of cash for the outstanding debt.
You still have the equipment, that hasn't changed, but instead of owing me £10,000, I now own £10,000 worth of shares in your company.
If you value your company, you will take professional advice before you (potentially) give away more than you might intend.

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By Accountant A
14th Oct 2019 20:30

Will you be going DIY on the share sale, as well as the tax and accounting, or were you thinking maybe involving a solicitor might be a good idea?

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Replying to Accountant A:
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By WhichTyler
14th Oct 2019 21:54

And the shareholders agreement

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Replying to Accountant A:
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By Clinton Lee
15th Oct 2019 10:31

In my experience, most small business owners don't need all that lawyer / accountant nonsense when selling shares.

I mean, how difficult can it be? Take money, give shares, file a piece of paper at Companies House.

There are a lot of unnecessary questions that people ask but which any amateur can skip altogether. Like...

At what valuation are the shares being sold?
How can we improve on that price?
What's the best way to structure the deal?
What percentage of the business does the buyer get and what powers does that give him?
Should the shares be a different class?
What are the implications of the warranties and guarantees we are agreeing in the investor's SPA?
What are the tax implications of the deal?
etc.

Nah! Outside help costs money. Why pay that when you can download any contract off the internet now? You don't need no lawyer.

What generally happens with business owners who proceed without professional advice is that in a few months they tend to end up at AccountingWeb's sister forum, UKBF, to say it's all gone pear shaped.

Here's the link for any future readers of this thread, it might be worth bookmarking it: https://www.ukbusinessforums.co.uk/

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