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Specific bad debt disallowed for CT?

HMRC are trying to disallow a specific bad debt for CT purposes but are they right

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Hi all

We are currently in dispute with HMRC on behalf of a client over the CT deductibility of bad debt relief. The basis of the HMRC argument is that the creditor has not taken all legally available steps to recover the debt.

Over a period of 3 years, our client worked with an offshore company and sent them monthly invoices. None of these invoices were ever paid and bad debt relief was claimed in the company accounts (and CT return). During this period the company did work profitably with other clients but these accounted for a very small percentage of total billings (c15%). Unsurprisingly, if bad debt relief had not been claimed for these invoices (being 85% of turnover), the corporation tax liability would have been substantially higher than the total income actually received.

Lawyers were instructed to send a letter to the customer warning of impending legal action. The response to this was that the customer declared they would move all assets out to another foreign jurisdiction on receipt of any further legal documents. Our client then felt he was unable to proceed with legal action as to do so would remove any possibility of recovery.

We understand the customer has indicated intention to pay the invoices once they successfully raise finance. For this reason, our client has maintained contact with the customer and monitors their finances where he can.

I can see HMRCs point of view. The debt is not yet bad, there is still the possibility of payment and legal action has ceased so no CT relief is available. However, as I alluded to above, without the relief the company would simply go bankrupt as it does not have the funds to meet the liabilities. Does anyone have any experience with this? Surely HMRC can see that if they insist on adding back the bad debt, the company will simply fold and the CT they are looking for will remain unpaid anyway?

Thanks

 

Replies (36)

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Hallerud at Easter
By DJKL
12th Dec 2019 12:46

Is there any connection between your client and this company?

Frankly it is not the role of HMRC to advise a business how it ought to operate, it is not their money which would need to be expended pursuing matters via the courts, but I wonder if there are aspects here you are not telling?

I decide on occasion whether to pursue matters via the courts as part of my job, frankly it is a risk /reward business decision and whilst not material I think if queried by HMRC I might be asking them to demonstrate their experience of actually operating a business and their grasp of commercial reality.

The obvious question to ask them is when a company is dissolved not having paid its final CT do they, HMRC, in all cases have it restored to extract paymen,- take all necessary steps- if not, why not?

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Replying to DJKL:
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By MarkKing
12th Dec 2019 18:02

No connection we are aware of. I agree it is an unusual commercial decision to continue working with a customer who never pays and HMRC have said similar by claiming the continuing communication between my client and the customer indicates the debt may be repaid and hence not bad.

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Psycho
By Wilson Philips
12th Dec 2019 13:46

HMRC are wrong. The stance taken regarding taking all reasonable steps etc might have had some validity before trade debt impairment fell within the loan relationship code. Provided that the debt is specific and properly recognised in GAAP-compliant accounts then tax simply follows the accounts. End of.

Refer the Inspector to the manual that begins "CFM" rather than "BIM"

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Replying to Wilson Philips:
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By The Dullard
12th Dec 2019 13:36

Seconded.

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Replying to The Dullard:
RLI
By lionofludesch
12th Dec 2019 14:36

Thirded.

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Replying to Wilson Philips:
By johngroganjga
12th Dec 2019 14:23

But the question of “taking all reasonable steps” is also relevant to the question of whether the impairment has been “properly recognised in GAAP-compliant accounts”.

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Replying to johngroganjga:
Psycho
By Wilson Philips
12th Dec 2019 14:51

The requirement is that the directors take an objective view of whether or not a financial asset is impaired, based on the evidence in front of them.

There is no requirement, as far as I am aware, under FRS102 or any other standard that the company must take all legally available steps to recover the debt before it can be considered to be impaired. HMRC's own guidance reflects this.

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Replying to Wilson Philips:
By johngroganjga
12th Dec 2019 14:56

But, playing devil’s advocate, they wouldn’t be being objective if they had not taken all reasonable steps up to that point. So I still think that the question is the same.

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Replying to johngroganjga:
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By The Dullard
12th Dec 2019 15:25

But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and only theirs, to make

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Replying to The Dullard:
By johngroganjga
12th Dec 2019 15:41

Yes I know HMRC are not the arbiters.

But it would be open to them to argue before a tribunal that directors had fallen short of the standard of diligence required and that their judgement about whether to impair a debt was not sound, and that their accounts were therefore wrong.

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Replying to johngroganjga:
Psycho
By Wilson Philips
12th Dec 2019 15:33

If you look at one of HMRC's examples, you will find that they will accept an impairment loss properly calculated in accordance with empirical data, without any attempt whatsoever to recover the debt.

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Replying to Wilson Philips:
By johngroganjga
12th Dec 2019 15:50

But surely, only if it is reasonable in all the circumstances for them to have made no attempt.

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Replying to johngroganjga:
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By The Dullard
12th Dec 2019 15:56

Are we assuming reasonably prudent directors here?

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Replying to Wilson Philips:
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By MarkKing
12th Dec 2019 18:05

Thank you for the response.

I believe HMRC are entirely ignoring the commercial reality of the situation. Which manual section would you recommend I refer them to?

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By Roland195
12th Dec 2019 14:43

Running up unpaid invoices over a period of three years without any payment does seem an unusual commercial decision, especially for an "offshore" company that legal action against would prove difficult if not impossible and represents 85% of the turnover, so you can see why HMRC would be wary, even if their approach so far is flawed.

You seem to still be holding the view that the debt is not yet irrecoverable though - does recognizing the bad debt not make the company insolvent?

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Replying to Roland195:
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By MarkKing
12th Dec 2019 18:11

Recognizing the bad debt does not make the company insolvent. The 15% "good" turnover comfortably covers minimal directors salaries and travel expenditure so we still have a solvent balance sheet but a P&L showing very high turnover with high bad debt.

As for recoverability of the debt, your guess is as good as mine. Personally I would not accept a client telling me they'd pay me once funds come in and certainly not for 3 years but the client has kept to their 3 year contract with the customer despite the lack of payment so it can be argued he acted in good faith whilst hoping for payment.

The cynical accountant in me says that a customer who is offshore and hasn't paid you a penny in 3 years is never going to pay so the debt is bad but that isn't to say I would instantly burn my bridges and walk away. HMRC seem to want the director to cease all contact with the client rather than maintain a professional relationship in case the debt can be recovered no matter how remote the possibility.

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Replying to MarkKing:
Hallerud at Easter
By DJKL
12th Dec 2019 19:23

I carried one lot of fees that built up for eight sets of accounts and nine partnership returns ,but it was a small annual fee and I knew the parties very well, notwithstanding that I did ,as the years went by, start providing . (And I did, early in 2019, actually receive payment for all of them)

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RLI
By lionofludesch
12th Dec 2019 15:47

I'd probably just ask HMRC for their authority for their eccentric view.

That'll probably end the matter as they won't have one.

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Replying to lionofludesch:
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By MarkKing
12th Dec 2019 18:18

HMRC are citing Income Tax Act 2005 S35 and that the creditor has not taken all the legally available steps to recover the debt. However, the legislation ends with "where appropriate" and we would argue that if the assets are offshore and could be moved, further legal proceedings are not appropriate.

They are also citing BIM42705 and arguing the debt was not bad at the balance sheet date (of any year apparently).

Thanks (1)
Replying to MarkKing:
Psycho
By Wilson Philips
13th Dec 2019 10:17

Ask the Inspector to explain why he is referring to a statutory provision dealing with income tax. (Out of interest, where are you reading the words "where appropriate"?)

If he insists on citing BIM42705, direct him to the opening sentence.

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By whitevanman
12th Dec 2019 18:49

I don't think we have heard of HMRC expressing an "eccentric" view, rather they are simply challenging the claim (and the OP, at least, sees the point).
They are not the arbiters but they are entitled to ask the director(s) to explain their views and to challenge them if there are apparent inconsistencies. It is for the directors to make their case and as others have already commented, there are some areas that look odd.

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By fawltybasil2575
12th Dec 2019 20:55

@ MarkKing (OP).

Your 18.18 post today states:-

“They (HMRC) are also citing BIM42705 and arguing the debt was not bad at the balance sheet date (of any year apparently)”.

In not disagreeing the PRINCIPLES espoused in the guidance in BIM42705, I cannot readily see that they support the HMRC’s interpretation of that guidance.

However, HMRC are entitled to put forward the view (regardless of your view, and that of your client company, to the contrary) that, as appears to be the case from your posts, the Financial Statements have NOT been prepared in compliance with the relevant accounting standards.

I would respectfully disagree a viewpoint, which appears to have been expressed by a couple of posters above (if I understand them correctly) that HMRC are compelled to accept that the inclusion of a Bad Debts debit (in the Financial Statements) CANNOT be challenged by them as an allowable debit in determining the CT taxable profit, simply because the Directors have made a judgment call that the Debt has been written off as "Bad" or that a Specific Provision has been made for it.

HMRC ARE entitled to dispute the validity of that judgment call.

Frankly, I feel that you should (in intending no offence) take a more proactive role in establishing the exceptional circumstances which MUST exist, to explain WHY the client company has allowed the customer such a massive period of credit – if you do not identify those exceptional circumstances, then I envisage a difficult path if the client were to take the dispute (with HMRC) to appeal (a request for a formal review by HMRC should be requested before allowing the matter to proceed to tribunal).

My major concern, as per my previous paragraph above, is founded partly upon your words, in your post at 18.11:-

"As for recoverability of the debt, your guess is as good as mine".

[Your ethical OBLIGATION is, with all due respect, to INVESTIGATE, with the client, whether the debt is or is not likely to be recovered, since you can only support the client company's viewpoint if you, following such investigation, are satisfied that the debit claim is valid].

Basil.

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Replying to fawltybasil2575:
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By MarkKing
13th Dec 2019 09:34

Hi Basil

Thank you for your thorough response.

My client was operating under a 3 year minimum terms contract with his customer to provide financial and business analysis services across a range of potential investment opportunities for the customer. The intention was identify the most promising projects and then raise investor finance to take those projects forward.

Said investor finance would also be needed to settle my clients fees. The reason for the exceptional credit terms was because the customer was often on the verge of obtaining funding that did not come to fruition.

I am satisfied that at the present time, the customer is not in a financial position to settle the debt.

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Replying to fawltybasil2575:
Psycho
By Wilson Philips
13th Dec 2019 10:22

I don't think that anyone is saying that HMRC are not entitled to challenge the deduction. However, they would need to be able to demonstrate that the directors view that the debt was impaired is unreasonable. There are no prescribed steps that the directors must take in arriving at their objective view of the recoverability of the debt.

Put it this way - if you were auditing the company accounts, what would be your view of debts that had remained unpaid after 3 years, despite at least some attempt to recover them? Would you consider suggesting to the directors that an impairment provision might be in order? Yes, I know, it will depend on the precise facts and circumstances.

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By richard thomas
15th Dec 2019 18:08

I post here as the person who when working in the Inland Revenue* was responsible (by getting Dawn Primarolo to agree the policy and instructing Parliamentary Counsel) for the rewriting of s 100 FA 1996 to make mere money debts and not just loan relationships subject to the impairment rules in the LR legislation, and to repeal s 74(1)(j) ICTA 1988 (bad debts) in relation to CT (see para 1 Sch 4 FA 2005).

I am shocked, but unfortunately not surprised, that 14 years after s 74(1)(j) was repealed in relation to CT , an officer of HMRC dealing with a CT return can think it correct to refer to s 35 ITTOIA and BIM for support of their position.

Had this officer actually read the last section (CT) of BIM 42701 as well as the opening para of BIM 42705 they would have realised the concept of provisions or write offs of bad debts can only apply to (if at all) to non-money debts of companies.

Worse than that though is that this officer thinks that s 35 ITTOIA (or indeed any section of ITTOIA) can have any application to companies within the scope of CT. They should get 100 lines, and be required to copy out 100 times the words of section 1 ITTOIA.

This is a shocking example of either poor training or allowing an untrained officer loose on CT returns and of poor management. The OP should be complaining, not going along with the charade.

The OP has not pointed out that BIM 42705 relates only to post-balance sheet events. It may be that the position set out in the para beginning "On the other hand ..." in that BIM page applies in this case given the point HMRC make about the debt being good at the BS date, but of course it is, as already mentioned, the CFM which HMRC should be referring to.

That said I of course agree with other posters who have said that while HMRC are not the arbiters of accounting principles, they are entitled to query whether the accounts have been drawn up in accordance with GAAP, and in this case in accordance with the appropriate impairment rules in the relevant SSAP, FRS (or even IAS/IFRS). There are several cases in the Tribunals where HMRC has successfully argued this issue (including against the Big 4).

*The timing here is slightly tricky. The IR ceased to exist at a quarter to 6 in the evening of 7 April 2005 (Art 2(2) SI 2005/1126). Finance Act 2005 is treated as coming into effect at the stroke of midnight on the 6 April even though almost certainly Her Majesty did not give Royal Assent before daybreak and possibly after 5.45 pm. But it is nevertheless correct to say that all the work I did on the Bill was done before IR ceased to be.

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By The Dullard
16th Dec 2019 10:22

On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently.

The impairment loss is then deductible under the loan relationship rules, and any subsequent recovery will be correspondingly taxable.

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By paddy55
16th Dec 2019 12:05

When I worked in the U.K. many years ago, C.I.R (as it then was) had a rule that the following were allowable deductions a) debts proved to be bad b) a Provision for specific doubtful debts. A general provisions for doubtful debts such as 5% of the total debtors was not allowable.

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Replying to paddy55:
Psycho
By Wilson Philips
16th Dec 2019 12:13

The point being that legislation has changed from what it was "many years ago".

If you no longer work in the UK, you can be excused for not being up to date. HMRC Inspectors cannot.

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By The Dullard
16th Dec 2019 12:10

I've got a big bucket full of scorn and don't know what to do with it.

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By fawltybasil2575
16th Dec 2019 14:14

I would have to respectfully disagree the second of the following two comments by The Dullard, as follows:-

(i) “But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and ONLY THEIRS (my emphasis), to make.” [his post at 15.25 on 12 December 2019]

(ii) “On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently. The impairment loss is THEN DEDUCTIBLE (emphasis added) under the loan relationship rules, and any subsequent recovery will be correspondingly taxable” [his post today at 10.22].

Yes of course the Directors are obliged, under Companies Act legislation, to prepare Financial Statements which reflect THEIR interpretation of that legislation (and thus, IPSO FACTO, the tax legislation). However, it remains open to HMRC to challenge that “interpretation” (ie to thereby claim that such interpretation is INCORRECT). In terms therefore of the TAXATION position, it is as incorrect to say that the interpretation/decision can ONLY be made by the Directors as it is to say that the decision can ONLY be made by HMRC. Each side (the Company, represented by its Directors; and HMRC) are equally obliged to apply the legislation and, if they disagree, then of course the ARBITERS are the Courts.

My above comments are also effectively a response to Wilson’s post (at 10.22 on 13 December 2019).

The agents charged with submitting the Corporation Tax Return are also obliged to form a judgment of whether the Financial Statements and, ipso facto, the Corporation Tax Return, are correct, since they must not associate themselves with those Financial Statements if they believe them to be incorrect, nor submit a Corporation Tax Return which they believe to be incorrect.

On the "ITTOIA" point, as alluded to above, then of course HMRC's attempt to claim that it is relevant is bizarre. Whether, however, it is appropriate to NOW castigate HMRC over it, or whether it is better to "keep it up one's sleeve", is a judgment call to be considered in the overall "negotiations" with HMRC.

Basil.

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By fawltybasil2575
16th Dec 2019 14:17

I would have to respectfully disagree the second of the following two comments by The Dullard, as follows:-

(i) “But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and ONLY THEIRS (my emphasis), to make.” [his post at 15.25 on 12 December 2019]

(ii) “On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently. The impairment loss is THEN DEDUCTIBLE (emphasis added) under the loan relationship rules, and any subsequent recovery will be correspondingly taxable” [his post today at 10.22].

Yes of course the Directors are obliged, under Companies Act legislation, to prepare Financial Statements which reflect THEIR interpretation of that legislation (and thus, IPSO FACTO, the tax legislation). However, it remains open to HMRC to challenge that “interpretation” (ie to thereby claim that such interpretation is INCORRECT). In terms therefore of the TAXATION position, it is as incorrect to say that the interpretation/decision can ONLY be made by the Directors as it is to say that the decision can ONLY be made by HMRC. Each side (the Company, represented by its Directors; and HMRC) are equally obliged to apply the legislation and, if they disagree, then of course the ARBITERS are the Courts.

My above comments are also effectively a response to Wilson’s post (at 10.22 on 13 December 2019).

The agents charged with submitting the Corporation Tax Return are also obliged to form a judgment of whether the Financial Statements and, ipso facto, the Corporation Tax Return, are correct, since they must not associate themselves with those Financial Statements if they believe them to be incorrect, nor submit a Corporation Tax Return which they believe to be incorrect.

On the "ITTOIA" point, as alluded to above, then of course HMRC's attempt to claim that it is relevant is bizarre. Whether, however, it is appropriate to NOW castigate HMRC over it, or whether it is better to "keep it up one's sleeve", is a judgment call to be considered in the overall "negotiations" with HMRC.

Basil.

Thanks (0)
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By fawltybasil2575
16th Dec 2019 14:18

I would have to respectfully disagree the second of the following two comments by The Dullard, as follows:-

(i) “But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and ONLY THEIRS (my emphasis), to make.” [his post at 15.25 on 12 December 2019]

(ii) “On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently. The impairment loss is THEN DEDUCTIBLE (emphasis added) under the loan relationship rules, and any subsequent recovery will be correspondingly taxable” [his post today at 10.22].

Yes of course the Directors are obliged, under Companies Act legislation, to prepare Financial Statements which reflect THEIR interpretation of that legislation (and thus, IPSO FACTO, the tax legislation). However, it remains open to HMRC to challenge that “interpretation” (ie to thereby claim that such interpretation is INCORRECT). In terms therefore of the TAXATION position, it is as incorrect to say that the interpretation/decision can ONLY be made by the Directors as it is to say that the decision can ONLY be made by HMRC. Each side (the Company, represented by its Directors; and HMRC) are equally obliged to apply the legislation and, if they disagree, then of course the ARBITERS are the Courts.

My above comments are also effectively a response to Wilson’s post (at 10.22 on 13 December 2019).

The agents charged with submitting the Corporation Tax Return are also obliged to form a judgment of whether the Financial Statements and, ipso facto, the Corporation Tax Return, are correct, since they must not associate themselves with those Financial Statements if they believe them to be incorrect, nor submit a Corporation Tax Return which they believe to be incorrect.

On the "ITTOIA" point, as alluded to above, then of course HMRC's attempt to claim that it is relevant is bizarre. Whether, however, it is appropriate to NOW castigate HMRC over it, or whether it is better to "keep it up one's sleeve", is a judgment call to be considered in the overall "negotiations" with HMRC.

Basil.

Thanks (0)
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By fawltybasil2575
16th Dec 2019 14:19

I would have to respectfully disagree the second of the following two comments by The Dullard, as follows:-

(i) “But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and ONLY THEIRS (my emphasis), to make.” [his post at 15.25 on 12 December 2019]

(ii) “On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently. The impairment loss is THEN DEDUCTIBLE (emphasis added) under the loan relationship rules, and any subsequent recovery will be correspondingly taxable” [his post today at 10.22].

Yes of course the Directors are obliged, under Companies Act legislation, to prepare Financial Statements which reflect THEIR interpretation of that legislation (and thus, IPSO FACTO, the tax legislation). However, it remains open to HMRC to challenge that “interpretation” (ie to thereby claim that such interpretation is INCORRECT). In terms therefore of the TAXATION position, it is as incorrect to say that the interpretation/decision can ONLY be made by the Directors as it is to say that the decision can ONLY be made by HMRC. Each side (the Company, represented by its Directors; and HMRC) are equally obliged to apply the legislation and, if they disagree, then of course the ARBITERS are the Courts.

My above comments are also effectively a response to Wilson’s post (at 10.22 on 13 December 2019).

The agents charged with submitting the Corporation Tax Return are also obliged to form a judgment of whether the Financial Statements and, ipso facto, the Corporation Tax Return, are correct, since they must not associate themselves with those Financial Statements if they believe them to be incorrect, nor submit a Corporation Tax Return which they believe to be incorrect.

On the "ITTOIA" point, as alluded to above, then of course HMRC's attempt to claim that it is relevant is bizarre. Whether, however, it is appropriate to NOW castigate HMRC over it, or whether it is better to "keep it up one's sleeve", is a judgment call to be considered in the overall "negotiations" with HMRC.

Basil.

Thanks (0)
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By fawltybasil2575
16th Dec 2019 14:21

I would have to respectfully disagree the second of the following two comments by The Dullard, as follows:-

(i) “But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and ONLY THEIRS (my emphasis), to make.” [his post at 15.25 on 12 December 2019]

(ii) “On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently. The impairment loss is THEN DEDUCTIBLE (emphasis added) under the loan relationship rules, and any subsequent recovery will be correspondingly taxable” [his post today at 10.22].

Yes of course the Directors are obliged, under Companies Act legislation, to prepare Financial Statements which reflect THEIR interpretation of that legislation (and thus, IPSO FACTO, the tax legislation). However, it remains open to HMRC to challenge that “interpretation” (ie to thereby claim that such interpretation is INCORRECT). In terms therefore of the TAXATION position, it is as incorrect to say that the interpretation/decision can ONLY be made by the Directors as it is to say that the decision can ONLY be made by HMRC. Each side (the Company, represented by its Directors; and HMRC) are equally obliged to apply the legislation and, if they disagree, then of course the ARBITERS are the Courts.

My above comments are also effectively a response to Wilson’s post (at 10.22 on 13 December 2019).

The agents charged with submitting the Corporation Tax Return are also obliged to form a judgment of whether the Financial Statements and, ipso facto, the Corporation Tax Return, are correct, since they must not associate themselves with those Financial Statements if they believe them to be incorrect, nor submit a Corporation Tax Return which they believe to be incorrect.

On the "ITTOIA" point, as alluded to above, then of course HMRC's attempt to claim that it is relevant is bizarre. Whether, however, it is appropriate to NOW castigate HMRC over it, or whether it is better to "keep it up one's sleeve", is a judgment call to be considered in the overall "negotiations" with HMRC.

Basil.

Thanks (0)
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By fawltybasil2575
16th Dec 2019 19:12

I would have to respectfully disagree the second of the following two comments by The Dullard, as follows:-

(i) “But, the point is that HMRC are not the arbiters. The directors, acting diligently, are, and they might have formed the view that pursuing an overseas debt beyond point X isn't economic, despite the quantum of the debt. That decision, as to what steps are reasonable, is theirs, and ONLY THEIRS (my emphasis), to make.” [his post at 15.25 on 12 December 2019]

(ii) “On the HMRC are not the arbiters point, the issue is that under GAAP, whatever steps the directors may or may not be taking to recover the debt, if they consider it unlikely that they will recover the debt GAAP requires them to impair it to the amount they expect to recover, viewed prudently. The impairment loss is THEN DEDUCTIBLE (emphasis added) under the loan relationship rules, and any subsequent recovery will be correspondingly taxable” [his post today at 10.22].

Yes of course the Directors are obliged, under Companies Act legislation, to prepare Financial Statements which reflect THEIR interpretation of that legislation (and thus, IPSO FACTO, the tax legislation). However, it remains open to HMRC to challenge that “interpretation” (ie to thereby claim that such interpretation is INCORRECT). In terms therefore of the TAXATION position, it is as incorrect to say that the interpretation/decision can ONLY be made by the Directors as it is to say that the decision can ONLY be made by HMRC. Each side (the Company, represented by its Directors; and HMRC) are equally obliged to apply the legislation and, if they disagree, then of course the ARBITERS are the Courts.

My above comments are also effectively a response to Wilson’s post (at 10.22 on 13 December 2019).

The agents charged with submitting the Corporation Tax Return are also obliged to form a judgment of whether the Financial Statements and, ipso facto, the Corporation Tax Return, are correct, since they must not associate themselves with those Financial Statements if they believe them to be incorrect, nor submit a Corporation Tax Return which they believe to be incorrect.

On the "ITTOIA" point, as alluded to above, then of course HMRC's attempt to claim that it is relevant is bizarre. Whether, however, it is appropriate to NOW castigate HMRC over it, or whether it is better to "keep it up one's sleeve", is a judgment call to be considered in the overall "negotiations" with HMRC.

Basil.

Thanks (1)
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By Arcadia
21st Dec 2019 14:32

May be too late, but should the revenue have been recognised in the first place? Assuming FRS 102 is in point, para 23.14 only recognises revenue when it is probable that economic resources will flow to the entity.

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