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Newco paying creditors of co in administration

Accounting and tax treatment?

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Newco acquired a business from the administrator and over subsequent months, made voluntarily made payments to the creditors of the failed business.  The owners of Newco are former employees of Oldco but were not shareholders or directors.

Some of these payments were the result of arm-twisting – as in “if you don’t pay Oldco balances, we won’t supply Newco”; I’m told the others were freely made.  Aside from the obvious question of “Why?”, how to account for the payments?  I see two options:

  1. Treat as P&L expense but probably disallow in tax comp
  2. Treat as part of the cost of acquiring the business – so report as goodwill or other intangible assets

Thoughts?

Replies (14)

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Hallerud at Easter
By DJKL
12th Feb 2020 09:59

Methinks those paid to secure supplies are certainly business costs, but not sure why CT disallowance- whilst the sum paid possibly relates to o/s balance of old business in quantum, that is merely the metric of calculating its quantum, its purpose is surely W & E for purpose of current trade so why should it be disallowed for CT?

Other voluntary payments, made on whim of current directors- might these be considered loans to directors, they personally want to expend these sums so might these payments be considered as being made for their personal gratification?

Edit- one further thought- could the forced payments be considered "bribery", there is certain extant legislation regarding the making and receiving of bribes, can an entity be the briber/bribee?. Then again I have done property deals where we have told the other side we want a non returnable deposit to even entertain their proposals, so maybe it is more akin to one of these.

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By Accountant A
12th Feb 2020 11:23

My now famous gut feel.

Disallowable capital payment(s).

Is there any documentation to formalise payments made to secure access to suppliers? Could the supplier say "Right, I've now had what am owed, you can whistle; I'm not supplying Newco"? Is there an agreement that says "In consideration of you paying £x, being the balance owed by Oldco, I agree to extend supply arrangements to Newco for Y years."

I can't believe the payments are sufficiently 'well defined' to be treated as a cost of acquisition.

Maybe if goodwill/trading name was acquired, there might be an argument it's protecting that but ....

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Replying to Accountant A:
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By Tax Dragon
12th Feb 2020 13:15

Accountant A wrote:

My now famous gut feel.

I thought arose the morning after a Thursday session? If it's happening every day now... just, take care, yeah? Maybe lay off the suds for a while - dry what's-left-of February.

But I like your gut's feeling - surely there's documentation. And surely it's tripartite at that - the Administrator would want to know (and ensure) that the debt from OldCo to supplier had been extinguished.

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By johnt27
12th Feb 2020 12:21

Sounds like the cost of acquisition to me and pre-existing actual or contingent liabilities that have been acquired. Therefore these would sit in goodwill, unless you brought these liabilities onto the newco balance sheet at acquisition.

FRS 102 Section 19 would back up the above

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By GW
12th Feb 2020 12:42

By paying creditors on behalf of Oldco, isn't Newco making Oldco into one of its debtors so Newco takes the place of the original creditors in the liquidation? In which case, on the assumption that nothing comes out of the liquidation, it is then a case of dealing with the bad debt.

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By Manchester_man
12th Feb 2020 17:45

I encountered this whereby the supplier charged an amount equivalent to the “oldco” debt as an “account opening fee”, paid by newco. The newco duly paid it. The problem here is that, in The absence of any agreement/documentation to the contrary, the debt from oldco to supplier still exists, meaning that potentially the supplier could be paid twice, if there were to be any dividend payable from the liquidation estate.

I allowed it as it was invoiced separately to the newco.

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Replying to Manchester_man:
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By Accountant A
12th Feb 2020 20:31

Manchester_man wrote:

I allowed it as it was invoiced separately to the newco.

You mean it was claimed as a revenue expense? What was the technical thinking? My (admittedly not deeply researched) thought on the OP's question was that it was some kind of one-off payment for an "enduring benefit".

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By whitevanman
12th Feb 2020 21:28

Have a look at the HMRC Business Income Manual at BIM38330 and the related parts of the guidance ( referred to therein).

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By paul.benny
13th Feb 2020 06:28

Thank you all.
It appears that the payments relate to personal guarantees issued by the director of Newco while an employee of Oldco and by the former directors of Oldco.

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Replying to paul.benny:
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By johnt27
13th Feb 2020 10:45

Ahhh, in which case surely these are DLA payments?

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Replying to johnt27:
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By paul.benny
13th Feb 2020 19:54

Certainly as regards the current director.

Less clear cut as regards the former directors of Oldco, although I've no real idea why those payments were made.

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Replying to paul.benny:
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By johnt27
13th Feb 2020 21:13

Would depend on the terms of the guarantees provided - in my experience they're quite often joint and several so your client director suffers unless reimbursed by his/her fellow former directors.

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Replying to johnt27:
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By paul.benny
14th Feb 2020 06:57

Fair point. I suspect I've still not been told the full story.

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Photo of Peter Windatt Accountant
By Peter Windatt
19th Feb 2020 10:30

The answers already given cover off the majority of things and, as ever, the devil is always in the detail.
The point that occurs to me which has been made but not yet given a name, is the rights of subrogation - standing in the shoes of the creditor(s) being paid - in the event that anything does, in the future, come out of the Administration or subsequent Liquidation.
This would apply where a guarantor were required to pay as J&S liable too - they can claim - but what can they claim? If they only paid what they could afford and that wasn't all of the debt due to that creditor - does the creditor rank for their shortfall first and then anything over that flows to the person paying (whether as PG provider or just for commercial reality reasons...).
A lot of detail and quite a few devils in there - circumstances will vary from case to case. Always worth talking to an IP you know like and trust.

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