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loan write off

allowable for tax?

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ltd company client had several directors, one resigned and left the company, but had an overdrawn loan account of approx £20k

the remianing directors have tried for a couple of years to find the guy who'd left and get the loan repaid, but he's gone Awol and cant be found

they now want to write off the loan, but will this be allowable for tax?

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By Abrar
26th Jun 2019 14:47

yes, the write off will be an allowable deduction for corporation tax. there will also be Class 1 NIC implication on the write-off. Class 1 S NIC will also be an allowable deduction.

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By Abrar
26th Jun 2019 14:47

yes, the write off will be an allowable deduction for corporation tax. there will also be Class 1 NIC implication on the write-off. Class 1 S NIC will also be an allowable deduction.

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Replying to Abrar:
Psycho
By Wilson Philips
26th Jun 2019 16:52

You have assumed that the director is not also a shareholder?

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Replying to Wilson Philips:
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By Abrar
26th Jun 2019 17:24

yes as the question asked is for a director only position not a shareholder

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Replying to Abrar:
Psycho
By Wilson Philips
26th Jun 2019 18:08

I agree that the questioner cannot complain if they get a misleading response due to inadequate information in the question. Although a non-shareholder is far from being the exception it is a fact that with small companies directors are also shareholders more often than not.

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Replying to Abrar:
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By Tax Dragon
28th Jun 2019 06:30

Even leaving Wilson's point aside, why do you think the write off would be earnings?

Apart from the issues discussed in the old thread, it's not clear whether the OP means the debt will be waived or restated at current value.

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By Tax Dragon
26th Jun 2019 14:59

It's an interesting question. Theft by a director is not allowable. Is this tantamount to that?

There's actually an old... very old (so old it uses pre-ITEPA section numbers!) thread on a not entirely dissimilar situation. https://www.accountingweb.co.uk/any-answers/tax-due-on-money-stolen-by-e... may be worth reading, despite the difficulty with the format and the age of the comments.

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By fawltybasil2575
28th Jun 2019 09:48

@ ohgoodgodno (OP).

Noting the "overdrawn loan account of approx. £20k" (in your opening question) I surmise that your later reference, in that question, to "the loan" is effectively "shorthand" for that "overdrawn loan account".

The point which I seek to make is that, key to determining the taxation, and indeed also the accounting, treatment is ascertaining precisely HOW that overdrawn DLA balance of approx. £20,000 arose. Regard may also have to be given to the "pattern" of movements on that DLA, in previous years, in terms of dividends (if applicable), salaries, withdrawals etc. etc.

Tax Dragon has (her 14.59 on 26 June 2019 post) helpfully provided a link to a previous thread in which the various possible taxation interpretations were debated.

If you could provide an answer to my above implied question as to "HOW that overdrawn DLA balance of approx. £20,000 arose", to include a reply to earlier posters' asking if the director was also a shareholder, this would assist in providing an answer to your question (suffice to say that the reply to such question is often open to different interpretations). Thankfully, the amount at issue in your clients' case is relatively small.

Apart from the taxation, and accounting, implications, the "is the director also a shareholder ?" question raises interesting LEGAL implications for the future of the company, if that director IS indeed a shareholder.

Basil.

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By ohgoodgodno
28th Jun 2019 09:56

to confirm the director is not a shareholder

the loan arose because the director withdrew the funds from the company and legged it

at that point he was removed as a director

the issue is, is the directors loan converted to a standard loan at the point he's removed and what are the tax consequences for writing the loan off

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Replying to ohgoodgodno:
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By Tax Dragon
28th Jun 2019 12:32

So it was no more a loan than when Ronnie Biggs and co "borrowed" £2.6m off of that train.

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By fawltybasil2575
28th Jun 2019 13:31

ohgoodgodno (OP).

I assume that we have now established YOUR belief that the “loan” was NOT a “loan” , but THEFT.

On that assumption:-

(i) Did the EX-DIRECTOR believe that he was entitled to receive any or all of the approx. £20,000 ? If so, on what grounds ?

(ii) Did the remaining directors believe (and do they still believe) that the ex-director was not entitled to receive any of the £20,000 ?

(iii) Did the remaining directors report the theft (if they so believed it) to the Police ? If so, what was the outcome, and if not, why not ?

(iv) Did the remaining directors enquire as to whether an insurance claim for any perceived theft was available ?

(v) If the remaining directors believe that the £20,000 taken was a theft then, of course, it should NOT be shown as an overdrawn Director's LOAN Account balance since, by definition, it is not a LOAN: and likewise should NOT be shown as a "standard" loan either.

As a reading of the previous thread to which Tax Dragon kindly provided a link helps one to understand, the correct tax and accounting treatment can hinge on fine points of law, hence the necessity for full facts -such comment is not to criticise you, but just to emphasise that minor nuances can materially affect the right answer to your question (on which, incidentally, HMRC might not agree anyway – as I mentioned in my last post, the amount at issue is relatively insubstantial).

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
28th Jun 2019 16:47

The OP would do well to pay attention to your contributions.

Answering (i) could be tricky though, since the fella's not in contact. Suppose though that s/he did believe it was "fair pay", would that belief matter?

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By fawltybasil2575
28th Jun 2019 21:10

@ Tax Dragon.

Thank you for your kind comments. To respond firstly to your two points:-

(1) I appreciate that the ex-director’s beliefs NOW would be difficult to obtain: however, in (i) of my last post I was contemplating [hence “Did”, not “Does” :)] that the ex-director may have expressed those beliefs previously [upon, or shortly after, he had extracted the £20,000 from the company].

(2) As to whether any belief by the ex-director would matter, it COULD matter. The tax treatment will depend largely upon what the company “thought” (effectively very probably what the officers of the company “thought”) the £20,000 payment represented”. In assessing the purpose of the payment, one would have to consider any factors (whether by way of roles within the company, seniority, length of directorship etc etc) which would point to which of the directors held the “correct” view (of the purpose of the payment).

Let us consider, therefore, ONE of several possible examples.

Let us imagine that the ex-director had previously notified his previously co-directors that he (the ex-director) was entitled to a Director’s Bonus for the accounting year which had just finished (in full accordance with a Director’s Bonus agreement, whether formal or informal, which had been in place for the previous 8 years). If (say) one or more of the remaining directors had instructed the “Salaries clerk” NOT to action that Bonus, with the result that the ex-director “took the matter in his own hands” by drawing a cheque for (or arranging a bank transfer of) his estimate of the Net Director’s Bonus due to him, then I believe that, if a Tax Tribunal were asked to intervene, it would probably (albeit not certainly) take the view that the £20,000 was a Net Director’s Bonus.

Without knowing the FULL circumstances, and again this is no criticism of the OP, it is not possible to determine what the correct accounting, and taxation, treatment should be, in his client company’s case.

I would surmise (we can do no more at this stage) that my above example probably does NOT accord with the facts of the OP’s client company’s scenario; and I suspect that the ex-director held no valid reason for withdrawing the £20,000, and indeed that the withdrawal was therefore effectively a theft – such indeed is why I asked the further questions in my last post.

As to whether such “theft” is an allowable expense for Corporation Tax purposes, I would respectfully disagree with the view expressed above that, purely because the £20,000 was taken by a (then) Director, then PER SE it cannot be allowable. In the case of a “one-director company”, or where there are two or more directors but the majority of (or all of) the shares are held by one director, and where that “controlling director“ has taken the £20,000, then I believe that such payment would be disallowable: but where (say) one of five directors “thieves” £20,000 from a company, without the agreement or knowledge of his co-directors, then I would regard the £20,000 as allowable: as I said in a previous post, I would be unsurprised if HMRC took a contrary view of that allowability but I believe it to be correct (and that, on balance in view of its relative immateriality, HMRC would probably not challenge the claim).

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
28th Jun 2019 22:59

Thanks. You express a state of unsurprise were HMRC to take a different view if furnished with the facts.

Given the guidance in e.g. BIM45855, I think such unsurprise would be entirely appropriate.

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By fawltybasil2575
29th Jun 2019 02:05

@ Tax Dragon.

The HMRC guidance at BIM45855 is, in its interpretation of the case law re company directors, materially misconceived [as indeed at least one knowledgeable poster, in the old thread to which you kindly drew our attention in your post at 14.59 on 26 June 2019, explained].

Each case will be fact-specific, but if one forms the view that a theft by a director is allowable (I indicated an example, in my last post, of a case where I believe that the theft is indeed allowable) then one submits a Corporation Tax Return which accords with that belief, notwithstanding knowledge that HMRC will hold a contrary view.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
29th Jun 2019 08:51

At least 3 other experienced contributors to this forum have (in other threads) made the same point as you in your closing remarks, with which I too agree. There is a need to have the thought process (and, where necessary, actions taken - as indeed were discussed in the old thread) recorded on the file.

In short, Abrar was way too certain in one direction and one or two of my one-liners too certain in the other. The position is likely more nuanced.

Thank you once again Basil.

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