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Treatment of S455 for bankrupt director

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Hello

Please can someone confirm for me the treatment of potential S455 tax / including the write off dividend on the director’s tax return, for a director that has gone bankrupt.

The director of a company has built up an o/d director’s loan account during the course of the year, which will not be able to be repaid. Therefore, I plan to show the loan as written off in the accounts / tax return, and show the related dividend on the director’s tax return.

My question is, as the bankruptcy is currently going through at what point will the director know that the income tax liability has been written off (he has informed the official receiver the o/d loan account is part of the bankruptcy) and at what point and by who will this be confirmed?

Thanks for any help or pointing in the right direction

 

 

Replies (20)

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By SXGuy
02nd Nov 2018 19:53

If the dla is being repaid by way of declaring a dividend on the tax return then the receiver should be informed of this.

The tax due isn't written off, its included in the petition and gets added with other creditors.

It's written off when your discharged from bankruptcy. Until then it's handled the same as any other debt.

What hmrc usually do is issue a new UTR and keep the old one strictly for the purpose of bankruptcy proceedings.

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Replying to SXGuy:
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By rae10000
05th Nov 2018 10:02

Thanks for your response, this has confirmed what I thinking.

Do you know - when the bankruptcy is discharged is there confirmation sent to the bankrupt (presumably from the official receiver) of confirmation of the debts which have been off? Or does the bankrupt just assume all remaining debts, the official receiver was informed of, have now gone?

Thanks again

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Replying to rae10000:
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By SXGuy
05th Nov 2018 12:33

The length can depend on the reason for bankruptcy, but last time I checked discharge is about a year. They are notified of the discharge but will need to apply for the official discharge letter for a small fee I believe.

Not sure about a list of debts but the receiver may do this. Been so long since I dealt with insolvency I can't remember. However once notified of discharge all debts included in the petition are wiped.

Howecer saying that, in terms of credit, the bankruptcy will be visable on reports for 6 years after discharge.

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Replying to SXGuy:
Photo of Peter Windatt Accountant
By Peter Windatt
07th Nov 2018 10:51

From 1 April 2004, most people have received an automatic discharge from bankruptcy after 12 months. There is no letter/certificate but, for a fee, one can be obtained.
Anyone having a second Bankruptcy Order made against them after 1 April 2004, may be subject to a Bankruptcy Restriction Order (or Agreement)(BRO or BRA). If you are subject to a BRO/A then you will still get your discharge but the disabilities of bankruptcy will remain for the period of the BRO/A (up to 15 years).
If the debtor doesn't cooperate with the Official Receiver/Trustee (if appointed) then the discharge can be suspended until they do cooperate. This could be for an indeterminate period.
Agree with the point re visable for 6 years following discharge 'though the Government Website showing all B'cies and IVA take them off 3 month after discharge/completion. Also, if asked the question in a credit application "have you ever been subject to a Bankruptcy Order/IVA etc" the answer will always be "yes" irrespective of how long after...
Sorry if this is all getting a bit too detailed and off the initial tax question point.

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By bernard michael
03rd Nov 2018 10:27

Are you sure the dividend is lawful ie there are revenue reserves to cover it

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Replying to bernard michael:
By Ruddles
03rd Nov 2018 11:30

I don’t think the OP is considering an actual dividend. But he’s confusingly referred to tax being written off -I assume that he means the loan.

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Replying to bernard michael:
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By rae10000
05th Nov 2018 10:03

Thanks for your response.

I believe a deemed dividend there is no requirement for the company to have available profits for distribution?

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Caroline
By accountantccole
05th Nov 2018 09:56

I had an client in an IVA and the tax for that tax year was included in the IVA, clock stopped. New UTR for following tax year, so for them I think the loan write off wouldn't have had tax to pay as it was bundled in IVA. Not 100% sure if bankruptcy follows the same process?

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Replying to accountantccole:
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By rae10000
05th Nov 2018 10:21

Thanks for your response

Yes, a new UTR has been issued.

I'm now confident the following treatment is correct:

A deemed dividend is recorded for the loan w/o (with no corporation tax relief), which when submitted on the directors tax return forms part of the bankruptcy (HMRC on longer being a preferential creditor). As the bankruptcy started in 17/18 the deemed dividend will need to be included during 17/18.

When the bankruptcy is discharged any remaining income tax will no longer be owned for that period / periods before.

The last question I have is, the deemed dividend will create negative reserves, the other side of this is a corporation tax liability. Is there any way to include the corporation tax liability as part of the bankruptcy? I can’t see how it can be, but just in case there is something I am not considering.

Thanks

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By bernard michael
05th Nov 2018 10:12

Nothing is sent by the OR. The bankrupt has to apply to the Court that issued the discharge to obtain a copy of the order

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By bernard michael
05th Nov 2018 10:37

I suspected this.
No you can't create a dividend that produces negative reserves
The Director is Bankrupt - not the company - so no the CT is not part of the
bankrupt liability

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Replying to bernard michael:
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By rae10000
05th Nov 2018 11:42

Hi, thanks again for your reply.

I think this is a special case and dividends can be issued that produces negative reserves.

Please see point 9 on the following link: https://www.accaglobal.com/uk/en/technical-activities/technical-resource...

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Replying to bernard michael:
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By rae10000
05th Nov 2018 11:47

Thanks again for your reply.

I think is a special case and a dividend can be issued that produces negative reserves.

Please see point 9 on the following link: https://www.accaglobal.com/uk/en/technical-activities/technical-resource...

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By bernard michael
05th Nov 2018 13:59

I can't access the link. However this link also from the ACCA may clarify matters
https://www.accaglobal.com/uk/en/technical-activities/technical-resource...

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Replying to bernard michael:
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By rae10000
05th Nov 2018 16:33

I don't think the link worked again!

Please see reference copied and pasted below:

9. Can a DLA be written off?

The company can write off a loan given to the director. The loan must be formally waived as the liability will technically remain if the company just agrees not to collect the outstanding balance. The amount written off is treated under Income Tax (Trading and Other Income) Act 2005 as a deemed dividend. Because it is a deemed dividend there is no requirement for the company to have available profits for distribution and the dividend does not need to be paid to all shareholders of a particular class of shares. However, an important feature of a loan being written off is that in most cases HMRC will argue that writing off a loan comes under the definition of ‘emoluments from an office or employment’ and as a result will seek to collect Class 1 NIC from the company. The amount of loan written off will have to be included in the director’s self assessment tax return on a specific box on the ‘additional information’ pages. For income tax purposes the amount is treated as dividend with the usual tax credit. The company will not receive corporation tax relief on the amount of the loan written off.

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By hall_simon
05th Nov 2018 23:25

The (former) director (as you know bankrupts cannot hold office), will record a deemed distribution on their Self Assessment tax return in the tax year in which their overdrawn loan account is released by the company. The date of the release is determined by reference to either:
• the point at which the debt becomes irrecoverable (ie the bankrupt is discharged), or
• earlier if the company chooses to write-off (waive) the debt.

If the company writes off the debt, then this may cause it to become insolvent. The OP does not mention what is happening to the company but if it is a close company then there may be an issue for the former director in terms of their conduct and potential disqualification.

The subject line refers to s455 but there is no mention of whether this has already been paid by the company with reference to the unpaid former director’s loan, although presumably not, given reference is made to the loan being built up over the course of a year. If the company is continuing to trade, regardless of the former director’s bankruptcy, it will be liable for the s455 tax on the unpaid loan (assuming the former director is also a ‘participator’). This tax will be repaid to the company once the loan is released so there may be a timing issue to consider. The s455 tax is not credited to the former director’s Self Assessment – there would seem to have been some confusion on this point. The former dividend tax credit is no longer relevant and is in any case not the same as or related to the s455 tax charge on the company.

The company will also incur Class 1 NIC liabilities on any part of the loan that is written off.

If the loan is released at the point that the former director exits bankruptcy, then the deemed distribution occurs at this date. Potentially therefore, this income will be recorded on the former director’s Self Assessment tax return under their new UTR since it did not occur during the bankruptcy and the tax liability arising on it cannot be added to the insolvency at that point. If the former director had chosen an IVA route, there would have been a part release of the loan at the start of the arrangement, ie the point at which creditors (including the company) agreed to a discount on the debt owed to them. Professional advice from an IP should be sought on the above.

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By bernard michael
06th Nov 2018 09:33

We live and learn. I suspect that HMRC might get uppity about the company paperwork and timing of the deemed dividend apropos the date of bankruptcy

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By DianeLockhart
07th Nov 2018 12:38

I am an IP. In this instance the HMRC debt in the bankruptcy which would be admitted by a Trustee would be for tax arising in the periods prior to the bankruptcy order. So whilst it may not have been evident at the date of the bankruptcy order or a value attributed to it by the bankrupt in his submissions to the OR, it remains a debt in the bankruptcy. Just ensure all the relevant dates are pre the bankruptcy order. The bankruptcy system is to end the debts arising pre bankruptcy (not for their survival) there are some exceptions to this (ie tax on pre paid gain in film scheme) but this isn't one of them.

Most bankrupts do not bring thier pre bankruptcy tax submissions up to date after the making of the order, unless it causes a tax refund/problematic in their conduct and could cause a restriction of the discharge or a prosecution/applying for an annulment/they are subject to a detailed investigation by the OR/a dividend will be paid in their proceedings. (Do NOT apply this to IVA's - they are totally different).

It would be unusual for the HMRC to pursue such a point where the director is bankrupt for the relevant period. I would concentrate on making it minimally financially impacting on the company as is possible but creates the effective write off (not forgetting that the company should prove in his bankruptcy - in particular where a dividend is to occur).

On a separate note, I would strongly recommend that at the automatic discharge your client pay the small fee to obtain a discharge certificate.

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Replying to DianeLockhart:
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By hall_simon
07th Nov 2018 14:35

thanks for the insight.

are you therefore saying the company should write-off the loan before the bankruptcy ends as this will bring the income tax charge into account at that point?

otherwise, the tax charge on the loan write-off (ie deemed distribution) will not materialise until after the bankruptcy ends because that is the trigger point. I'm not sure how it could be included in the bankruptcy if it doesn't exist?

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By Duggimon
07th Nov 2018 12:45

edit: wrong thread

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