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S419 P&L charge or debtor ?

S419 P&L charge or debtor ?

Didn't find your answer?

I know this topic has been discussed in the past but looking at the previous comments I still can't find a definitive answer which is just incredible to believe. Surely the Revenue must have guidance regarding the accepted treatment or the topic raised by them before ?.

On the one hand I agree with the previous view that it should NOT be treated as a debtor and therefore charged to the P&L, until such time as the overdrawn DCA is repaid, as otherwise a conditional debtor is being reported that in fact is not realisable until such time as the director satisfies the condition i.e. repays the overdrawn DCA.

I can see the argument for treating the S419 as a debtor on the basis that it is expected to be realisable but when you consider this in the light of other disclosed debtors, the fundamental difference is that all other assets are tangible and do exist without condition i.e. stock is tangible and physically exists, debtors are as a result of completed sales, etc. but the S419 debtor is not realisable until the point that the DCA is settled.

The dilemma is that if the S419 is treated as a P&L charge then the profits available for distribution as dividends (adjusted to DCA) are reduced, thereby increasing the overdrawn DCA balance on which S419 is charged.

If treated as a debtor then available profits/dividends are greater thereby reducing the overdrawn DCA and thus the S419.

It just seems hard to believe that HMRC would allow the S419 liability to be reduced by virtue of treating it as a debtor, increasing available dividends, and reducing the overdrawn DCA on which the very S419 is calculated.

Any further comments or answers as to the accepted treatment.

Many thanks.
Paul Dorrington

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By AnonymousUser
22nd May 2009 09:03

Consistency required
I have been reviewing this thread recently and encapsulate my thoughts:

One way or another the company will recover the s.419 tax, either on repayment of loan or on writing it off as irrecoverable. The justification for debiting the s.419 tax to the balance sheet will be based on one or other of those premises, which are mutually exclusive (OK you could argue that it will be partly recoverable and partly written off but it essentially makes no difference).

To the extent that a bad debt is anticipated, that should be reflected in the accounts by making a provision for the doubtful debt. The corresponding depletion of reserves arising from the debit entry in that provision will outweigh the amount of section 419 tax by about 3:1 depending on the rate of corporation tax to which the company is liable in the year in which it claims the bad debt relief. So, if there is pressure to preserve the P&L account (ie to fund dividends) it is very much in the company's interests to conclude, if justifiable, that the loan account is recoverable and to use that as the justification for debiting the section 419 tax to the balance sheet.

But either way, consistency is required. I don't think that it is right to use as justification for the balance sheet treatment an anticipated write-off of the bad debt without actually accounting for that anticipation as a provision.

This may lead to an interesting chicken-and-egg problem. Suppose the company currently has a £nil balance on its distributable reserves, and an overdrawn participator's loan account that will not be repaid within 9 months but which ultimately you expect will be repaid albeit out of future company dividends, from future profits, which dividends will be credited to the loan account as settlement. You might reasonably conclude that the expectation of future profits is sufficiently uncertain that it is appropriate to make a provision for the doubtful debt. But the very act of making that provision would make the prophesy self-fulfilling by putting the P&L account into the red and so render dividends unlawful.

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By Dave Paveley
27th Jan 2009 16:54

Debate moved on Mick..

Where have you been?!

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By skylarking
27th Jan 2009 14:46

I don't think
anyone is disagreeing with you, Penny.

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By Anonymous
27th Jan 2009 14:27

Euan may be correct
with regard to that particular circumstance, but I was of course referring to the rather bold assertion that

"There is no circumstance in which s.419 tax can be recovered within 1 year"

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By skylarking
27th Jan 2009 14:11

Euan is correct
In terms of how to account for a loan granted in the accounting period.

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By Anonymous
27th Jan 2009 12:37

Correct, Mick
Euan is incorrect.

If s419 loan is repaid then the balance sheet at the end of the period of account in which the loan is repaid should show a debtor recoverable < 1 year.

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Euan's picture
By Euan MacLennan
27th Jan 2009 10:10

Not within 1 year
Dave, how can a debtor for s.419 tax possibly be recoverable within 1 year? If the loan is repaid within 9 months of the year-end, no s.419 tax is payable in the first place. If the loan is repaid after 9 months, but within a year, the s.419 tax refund is not due until 1 year, 9 months and 1 day after the year-end. There is no circumstance in which s.419 tax can be recovered within 1 year.

I do not agree with treating the s.419 tax paid as a debtor, but if it is, it must be disclosed as not being due within 1 year.

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By Dave Paveley
27th Jan 2009 09:29

Interesting..

..that this thread has been a P&L or BS thread (I fall squarely on the BS side by the way).

I thought the only area of contention amongst practitioners was whether it was disclosed as an amount recoverable within 1 year or after 1 year.

Let the debate continue..

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By AnonymousUser
26th Jan 2009 18:35

I was beginning to...
...think I was on a different plannet. Mick, thanks for being the other voice to say that s419 is always recoverable even if written off.

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By Brian Gooch
26th Jan 2009 16:45

Control...
Euan said "the company has no control over when the loan will be repaid."

Surely, in the absence of an agreement to the contrary [and how many of those have you seen] the company is entitled to require the loan to be repaid at any time. Certainly if it ended up in the hands of an administrator then he/she would be looking to enforce the company's right to recover the debt asap.

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By martinfoley07
26th Jan 2009 13:24

assuming we are talking ......
.....SMEs here, I would not w/o the S419 tax to be irrecoverable.
I would get the offending director to confirm in writing he will pay the debt on such and such terms.

I would also shoot the director who gets into this situation, since I will have told them not to do so under pain of death!!

And use both barrels if it happens a second year. (which, sadly, has been known, despite best efforts).

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By AnonymousUser
26th Jan 2009 14:10

FRS 5 definition of control
"Control in the context of an asset:- The ability to obtain the future economic benefits relating to an asset and to restrict the access of others to those benefits"

It doesn't mean the ability to control at what point in time the asset is converted into cash. If this were the case then it wouldn't be possible to recognise trade debtors etc

The company has control of the asset through the ability to make a claim for repayment to HMRC and it's entitlement to that repayment under the legislation. It doen't matter if the DLA is repaid or if it is written off as long as a claim is made the company will receive the repayment. Discounting considerations aside, it doesn't matter if this is at some indeterminate date in the future. You don't know exactly when you will sell an item of stock either.

The refund of a rent deposit cannot be made unless the property is returned in good condition. The cash repayment is not triggered until this happens. However we still recognise it as an asset because it is within the entity's contol to ensure that the it receives the future economic benfits by complying with the terms of the lease.

Another way of looking at it is that if you are recognising the DLA as an asset you must therefore have control over it. If you have control over the DLA you must also therefore have control over the S419 repayment.

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By Euan MacLennan
26th Jan 2009 13:03

Post-balance sheet event
At the balance sheet date, the loan to the director exists and must be included, subject to any assessment that it is a bad debt.

The refund of s.419 tax cannot occur until after the loan has been repaid and therefore, does not exist at the balance sheet date. It cannot be recognised as an asset of the company under FRS5 because the company has no control over when the loan will be repaid.

Nor can it be an adjusting post-balance sheet event. FRS21 refers only to events occurring between the accounting date and the date when the accounts are approved. So unless the accounts are approved and the loan repaid more than 9 months after the year-end, the repayment would not even qualify as a post-balance sheet event under FRS21, let alone be an adjusting one which sheds light on the value of an asset or liability existing at the accounting date because the asset simply did not exist.

I still think that it is a charge to the P&L when the loan is made and a credit when the loan is repaid.

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By Brian Gooch
26th Jan 2009 11:54

Consistency
Surely, if you were to treat the s419 as not recoverable and so write it off, are you not then saying that the directors "loan" account is itself not recoverable? Either the DLA is recoverable and so the s419 is also, or the DLA isn't recoverable. Since they are linked you cannot have one without the other.

If the DLA isn't believed to be recoverable then it can no longer be carried as an asset at full value and must be provided against. This could only be on the basis of director can't pay or debt can't be enforced, rather than won't pay because the loan will be written off, because if the company has already taken the decision that the loan will be written off then can it justify still carrying it as an asset at all, so shouldn't it actually write it off in the accounts? This would then trigger a tax liability on the individual.

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By AnonymousUser
24th Jan 2009 18:02

In the olden days....
...if the loan was written off, section 419 was not recovered and so it could hit the P&L then. As Penny says, s 419 is now always recoverable. Why would it hit the P&L as an expense?

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By Anonymous
23rd Jan 2009 19:23

The point is......
That we are supposed to prepare accounts in line with GAAP, and unless their are special rules to the contrary, the tax treatment follows the accounting treatment.

HMRC do employ accountants to review financial statements to ensure that they comply with GAAP. Consequently, they may seek to adjust tax liabilities if there is non-compliance and it is in their favour.

Therefore, it is naive to assume that the taxman does not know or understand accounting standards.

As mentioned earlier, I would carry S419 tax forwards as a debtor, unless there was a compelling reason not to do so.

I must admit that I have been in the profession for twenty odd years now, and appreciate that the FRS's issued in recent years tend to have a conceptual approach in terms of how and when assets, liabilities, income and expenditure should be recognised. I, for one, am a great believer (still) in the matching and prudence principles. I know I am going off at a tangent here, but I long for the days when proposed dividends could be included as liabilities in balance sheets. Ahhhh, the good old days!

Yes, I do also listen to Terry Wogan in the mornings on my ride into the office and do consider myself to be a TOG (just in case you wondered).

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By martinfoley07
23rd Jan 2009 16:43

It just seems hard to believe that HMRC would allow the S419 lia
Paul,
Do you not advise / guide HMRC as to what is the appropriate accounting treatment, rather than them advise you??

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By martinfoley07
23rd Jan 2009 16:18

Surely the Revenue must have guidance regarding the accepted tre
Paul
Why on earth do you think HMRC should be telling (or even guiding) accountants how to account?

We fought for eighty years to get HMRC to accept that accountants could account, and eventually it came to pass that HMRC, Parliament and the Courts sort of accept we can.

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By Anonymous
23rd Jan 2009 15:48

I'm with James
the s419 charge is ALWAYS recoverable (either on repayment or release) and should NEVER hit the P&L

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By AnonymousUser
23rd Jan 2009 14:23

I vote asset
I don't see where the uncertainty about the repayment is. The only uncertainty is when the payment will be made.

If the DLA is shown as an asset then by definition the directors must be of the view that it is recoverable, therefore at some point in the future the S419 will be returned.

If the DLA is not recoverable then it will be written off and the S419 will be repaid.

The situations where s419 is not recovered are very rare and usually result from badly planned company dissolutions. Hence an inflow of economic benefits is virtually certain.

I would say the S419 payment therefore meets the definition of an asset and should be recognised as such.

If the repayment is likely to be a fair way into the future then perhaps it should be discounted, but I don't see the argument for it forming part of the current year tax charge.

If it were a tax charge then presumably it would technically be a deferred tax asset anyhow so the net effect is the same either way.

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By AnonymousUser
23rd Jan 2009 16:36

Our CT software package ...
... always writes it off to P&L by default. It doesn't really give you an option to treat it otherwise, although with a bit of jiggery pokery you can force it into line. I took this up with them a while back and may resurrect it after January is over with.

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Euan's picture
By Euan MacLennan
23rd Jan 2009 13:59

P&L Charge
I take the view that the s.419 tax cannot be treated as recoverable until the act of repaying the loan has occurred.

Yes - it is an iterative calculation, but not too difficult as the s.419 charge is 25% of the loan balance. Besides, you don't work it out absolutely accurately to leave zero retained profits, do you? Take a stab and if it comes within a hundred or two, that should be good enough.

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By alandawson61
23rd Jan 2009 13:48

Include in debtors recoverable in more than one year
What you have is a 'conditional' debtor but a debtor nontheless.

I think you need to make an assessment as to whether this will be recoverable in the future. What are the chances of the director introducing external funds to clear the outstanding balance on the loan account? Or, will the company be profitable in the future so that dividends or remuneration can be paid out to the director and so enable the loan account to be cleared?

If there is real doubt that the loan account can be repaid at some time in the future then provide for it, otherwise I think it is appropriate to include it in the balance sheet.

I have never had HMRC come back and challange the validity of S419 ICTA tax being included as recoverable in the balance sheet.

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By geoffwolf
23rd Jan 2009 13:41

depends
In your scenario it would appear that there is very little likelihood of the overdrawn account being repaid either because the client coesn't unmderstand the situation' has not had it explained to him properly' or just chooses to ignore the explanation or advice given.

In those circumstances I would agree that the correct treatment is charging the P & L account.

A debtor is in order and easier to keep a record of if an attempt is made to reduce the overdrawn loan over time.

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By sally2bus
01st Jul 2011 10:21

I don't think so....

The most convenient treatment in the accounts is certainly to include the S419 figure as a debtor. However, the fact remains that repayment depends on the uncertain future events. It is contingent on something that that might but also might not happen. We don't bring contingent gains onto the balance sheet do we? We might like to but we don't. 

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By PennyC
01st Jul 2011 10:48

Uncertainty

The only uncertainty is the timing of repayment. There is therefore no contingency. Whether as a result of repayment or release, the s419 tax will be repaid - whether next year or in 100 years' time. I agree that its proper place on the balance sheet is in debtors recoverable > 1 year - until the loan is repaid/released (once repaid/released the debtor should be moved to current assets, since it then becomes repayable 9 months after the period end).

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