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Investment that doesn't convert to Equity

Accounting and Tax Treatment?

I have a client who secured an equity investment for their company. The equity investment was supposed to be £250k for 20% of the company. They received a part payment up front of £100k.

The agreement was that the remaining balance of £150k was payable within a specific time limit. If this was not paid then the £100k up front would not be repayable and no equity was required to be released for this. The time limit passed, so my client now has £100k investment without the requirement of giving away any equity in the business. He has a signed legal letter which confirms this.

The question is how is this £100k now treated for accounting and taxation purposes. I assume it becomes taxable income, and was thinking it would be treated in the same way as a grant or subsidy would?


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25th Sep 2017 09:22

Please clarify whether the contract was with the company or the shareholder.

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25th Sep 2017 19:53

Subject to TaxDragon's comment I would consider whether this is forfeiture of shares, in which case check whether the Articles of Association have any remedies to follow. If so and taking into account whether they are reissued or not there is likely to be a credit required either to Forfeiture of Shares account or more relevant Share Premium Account - am sure that is Frank Wood's recommended treatment. I believe the Companies Act also contains provisions for consideration for shares to include a future payment. Check whether any other FRS compliance required.

This would make it more difficult for the funds to become distributable.

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