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Winding up w/ overdrawn directors loan acc. <£25k

Can the DLA stay overdrawn?

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Hi,

I have a client that wants to wind up their Company. They have an overdrawn DLA of £5,000 at June 2019 year end. They went into this year end in credit so no historic s455 to consider. The capital and reserves of the Company is £18,000 at year end. 

Can the Company be struck off, essentially leaving the DLA overdrawn, and the £18,000 be treated as a capital distribution? Or do I have to do anything with the DLA?

Thanks in advance for your help.

Kind regards,

Kelly

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16th Jul 2019 22:50

The company needs to collect all its debts and pay out all its creditors. Once that's complete, the shareholders get the share-out in proportion to their holdings.

You say "they", so I'm assuming there's more than one. On the other hand, you say "client" in the singular.

However, there is an element of double-speak in your query. You say the DLA is overdrawn at June 2019 but they're in credit. Which is it ?

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By k3lly89
to lionofludesch
17th Jul 2019 10:55

Hi lionofludesch,

'They' does not automatically mean multiple, 'they' can also be a way of referencing someone without saying 'he' or 'she'.

When I say they went into this year in credit, I mean the year I am discussing (year end June 2019), not literally this current year.

Thanks

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to k3lly89
17th Jul 2019 11:37

k3lly89 wrote:

Hi lionofludesch,

'They' does not automatically mean multiple, 'they' can also be a way of referencing someone without saying 'he' or 'she'.

Thanks

Or - you could say "he" or "she".

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By k3lly89
to lionofludesch
17th Jul 2019 13:33

Why? Why is their sex relevant?

Honestly, this is why I don't usually post on sites like this.
This should be a community of accountants, here to help one another....I do not come here to have my English ability questioned? What an utter waste of energy.

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By JoF
to k3lly89
17th Jul 2019 13:48

Surely its about clarity?

Nothing to do with gender.

One verus several.

I dont think everyone here is out to help each other. There are a fair few 'takers'.

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to JoF
17th Jul 2019 13:57

JoF wrote:

I dont think everyone here is out to help each other. There are a fair few 'takers'.

That's a fair point. Kelly's asked three questions and never posted on any thread other than her own.

When are you going to get round to helping someone, Kelly?

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By k3lly89
to lionofludesch
17th Jul 2019 15:09

When I stop working 70 hour weeks :)

Don't you worry, I will make up for the help I have received.

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to k3lly89
17th Jul 2019 13:52

k3lly89 wrote:

Why? Why is their sex relevant?

Apologies - I didn't realise it was a secret.

Or an embarrassment. Whichever.

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16th Jul 2019 23:13

If events proceed as you explain, the loan won’t be overdrawn when the company is struck off, as the shareholder will have repaid it upon receiving only £13k of assets for his £18k distribution.

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By k3lly89
to johngroganjga
17th Jul 2019 10:56

Great, this makes sense and was along the lines I was thinking. They are essentially paying tax on a capital distribution of £18,000 but only receive £13,000 has they have already had that benefit.
Thanks for the info.
Kelly

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By GR
17th Jul 2019 06:37

Just do some paperwork/minutes to say that the director's loan was distributed in species to the shareholders after trade has ceased. Use this date to complete the CT600A. Distributed the remaining £13k as John has already said.

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By k3lly89
to GR
17th Jul 2019 10:58

Thanks for your reply GR. When you say about the CT600A should I report the loan and then 'write off' the loan in the same period?
Thanks,
Kelly

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to GR
17th Jul 2019 11:11

The loan won’t be being distributed in specie, it will be being repaid out of the shareholder’s distribution.

I am not a fan of advising one man companies to hold meetings with themselves.

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to johngroganjga
17th Jul 2019 11:23

One needs to be mindful of HMRC's view of such matters. I don't know where the test case has got to, but HMRC consider the 'distribution' of such DLAs to be taxable as income and not as capital.

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to Wilson Philips
17th Jul 2019 11:44

I'd be much happier if folk didn't take shortcuts.

Sure - a "meeting" is over the top but what's the problem with a written memorandum recording the decision and the date upon which it was made ?

And why can't the director repay his loan before the distribution is made ? Is he utterly potless ?

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to Wilson Philips
17th Jul 2019 12:14

As I have already pointed out, the loan won’t be being distributed, it will be being repaid.

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to johngroganjga
17th Jul 2019 12:30

Repaid how? In order to put the shareholder in 'funds' to 'repay' the loan you need to first of all distribute the assets to him - it is the assets of the company, reflected in capital and reserves, that are distributed. Take the example where the only asset is an overdrawn DLA of £x (with capital and reserves of £x). The distribution of £x, with is then set against the amount of £x owed by the director-shareholder, involves by definition a distribution of the DLA.

(I am treating share capital as negligible)

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to Wilson Philips
17th Jul 2019 13:48

So if you owe me £18,000 and I owe you £5,000, and you offer, and I accept, £13,000 in full and final settlement of all outstanding matters, you are saying I haven’t repaid my loan?

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to johngroganjga
17th Jul 2019 14:40

Fair point. I think the notion of winding-up or dissolution was clouding my judgement. Simple case of Dr dividend £18k Cr DLA £5k Cr cash (or whatever) £15k, sorry, £13k. Job done.

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to Wilson Philips
17th Jul 2019 14:01

Errrrm ........

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to lionofludesch
17th Jul 2019 14:34

?

Edit - OK, so I can't add up (or type properly). But I can take away, times and share :)

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to Wilson Philips
17th Jul 2019 14:39

Wilson Philips wrote:

?

Edit - OK, so I can't add up (or type properly). But I can take away, times and share :)

[chuckle]

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to johngroganjga
17th Jul 2019 14:45

johngroganjga wrote:

So if you owe me £18,000 and I owe you £5,000, and you offer, and I accept, £13,000 in full and final settlement of all outstanding matters, you are saying I haven’t repaid my loan?

I may be wrong, but I suspect that is the very question being addressed in Wilson's test case.

Your debt to Wilson of £5,000 might no longer exist; it might even have been "satisfied"; that may not be to say it has been "repaid".

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to Tax Dragon
17th Jul 2019 15:24

I don't know the details of the test case, but from what I understand it is a simple matter of HMRC saying that a distribution of an overdrawn loan in a liquidation is an income distribution, not capital. The issue is not whether or not the loan has been repaid (it will be treated as such, as far as I know), but simply the tax status of the distribution. As I now agree, though, this particular thread does not [need to] involve such a distribution.

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to Wilson Philips
17th Jul 2019 15:30

I'm now lost. What does the Dr £18,000 dividend comprise if not £13,000 cash (or whatever) and £5k DLA? In what sense is that not "distributing" the DLA (bearing in mind that there isn't £18K distributable cash)?

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to Tax Dragon
17th Jul 2019 15:46

Arguably, a bad debt of £5,000 which counts as an income distribution and a £13,000 capital repayment on a winding up.

Repaying the loan would provide clarity.

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to Tax Dragon
17th Jul 2019 15:47

That's where I initially got myself confused. At the time of declaration, it doesn't really comprise anything - it's merely an intention to pay £18k in some form or other to the shareholder. After paying cash (or whatever) of £13k the company is still due £5k to the shareholder (and in the old days might have been shown as a creditor in the accounts).

In crediting the DLA with the £5k the debt has simply been reduced to nil - I would not go so far as to say that it has been repaid although it's an academic point.

Take the example of a company with reserves of £200k, represented by £50k of tangible fixed assets and £150k cash. A dividend of £100k is declared and credited to the DLA. What does that dividend consist of? Nothing in particular. On the one hand, it hasn't actually been paid, although on the other - for tax purposes at least - it has been. Subsequently the company might transfer £100k in cash to satisfy its debt, or perhaps the fixed assets plus £50k cash, Who knows?

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to Wilson Philips
17th Jul 2019 15:55

With you now, thanks.

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17th Jul 2019 06:54

Check the tax too.

It might, or might not, be better to repay the DLA.

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By k3lly89
to Tax Dragon
17th Jul 2019 11:04

Hi Tax Dragon,

Thanks for your reply. The client would've already had their £2000 dividend at 0%. In the 2019/20 year they will use up their BRB on PAYE income so further dividends would be taxed at 32.5%.

If I strike off the Company and the client pays 10% tax (as they meet the critera for ER), so would only be paying a small amount of CGT as their annual allowance covers most of the distribution.

Would there be circumstances where it would be better for them to repay the loan?

It hardly seems worth putting £5,000 back into the Company if they are going to pay the CGT on it anyway?

But I could absolutely be missing something here so please fire away with suggestions/information.

Thanks,
Kelly

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to k3lly89
17th Jul 2019 11:31

The danger is that HMRC currently take the view that 'distributions' of DLAs, particularly where an MVL is involved (I'm not sure that they take the same view with informal dissolution, although I can't imagine why they would not) should be taxed as income not as capital. Repaying the loan only to have the cash paid back out should lessen the risk of a successful challenge by HMRC. (Although some commentators think that there is still a risk that HMRC could challenge the repayment as being artificial.)

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to Wilson Philips
17th Jul 2019 11:59

Wilson Philips wrote:

Some commentators think that there is still a risk that HMRC could challenge the repayment as being artificial.

Seems a bit depressive to think that doing things properly would be attacked as artificial.

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to Tax Dragon
17th Jul 2019 13:51

Indeed. I personally find it difficult to imagine how HMRC could successfully argue that repayment of a repayable loan is in any way artificial even if the cash is then immediately "re"-distributed on winding up/dissolution (notwithstanding the fact that there is specific provision to deal with other short-term 'repayments'). I know that some commentators can be overly cautious, but the fact is that those have been the comments. We'll need to wait and see the outcome of the test case (unless anyone has already seen it).

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17th Jul 2019 11:17

I presume you are referring to a solvent winding up?

If a solvent MVL is required the DLA does not have to physically be repaid (assuming the Director is a shareholder) - the Lqr can treat the DLA as been having repaid from the shareholder distribution.

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By JoF
to Insolvency Practitioner
17th Jul 2019 12:01

Sorry for my ignorance, In the case of a solvent windin up (albeit not the case here given the amount) would you not be approaching HMRC for prior approval?

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to JoF
17th Jul 2019 12:18

Hi

No - The Lqr will deal with the assets/liabilities and distributions. HMRC approval is not needed for an MVL or for permission to treat the DLA being virtually repaid.

Some IPs might obtain tax clearances from HMRC before issuing distributions to shareholders - others will rely on indemnities from Shareholders and the figures in the Declaration of Solvency form and will issue distributions in advance of receiving HMRC clearance.

I hope this answers your query?

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By JoF
to Insolvency Practitioner
17th Jul 2019 12:29

Thank you, yes it does.

Only one Ive seen in practice was a rather large DLA (£000s) and clearance was obtained on that one.

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17th Jul 2019 11:18

Sorry I have just realised your post seems to indicate the assets are less than £25k so an MVL will not be required and an ordinary dissolution would be suitable.

You can therefore ignore my previous post!

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