Hi all,
I have a limited company client that has accumulated lossses of around £68k. This was funded by the director and is showing as credit to his DCA. In the current financial year to September 19, the existing director who put in the money resigned and my client was appointed the director/shareholder. The agreement is to write off the loan that the previous director gave to the company. Can anyone please suggest the best way to write off the loan account together with any tax implications for either parties?
Appreciate your help and comments
Kind regards
GJ
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Replies (29)
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Just write the loan off in the same way you do with any other balance in your balance sheet.
Once it's written off, you need to declare the value of the write off in box 13 of the "additional information" pages of the director's tax return. This will be taxed at the same rate as a Dividend would have been.
Thanks. It is a credit balance in DCA. So there should not be any tax liability for the director I believe.
I think the director may get a capital loss provided he didn't control the company but you will need to check
The company can't "write off" the loan. Only the former director who made it can, but only if he wants to of course.
Is there any scope to assign the DLA credit to the new director?
OP, what's the background? Are these directors connected? Spouses, perhaps? Have shares changed hands?
The directors aren't connected. The outgoing director was a shareholder and is share were transferred to my client at nil value. Because the company is loss making and there isn't enough cash they decided to write off the loan.
Hope this helps.
Thanks
As I have said before “they” can’t have decided to write off the loan. Only the creditor can. If he is still willing to do so, you need to find him and ask him to execute a deed of waiver, which I would imagine he will want you to have drafted at your expense.
@ G JAin (OP). Assuming the Agreement has been finalised and is now binding (please confirm whether such assumption is correct) then the taxation treatment will depend on the terms of that Agreement (in which case the taxation treatment must accord with those terms, hence there would be no “best way” option to consider).
There must however have been terms in the Agreement [or, less likely, in another separate Agreement] re the transfer of the Shares. One would need to thus know the terms of that Share Transfer, since such terms could impact upon the overall position. Perhaps you would kindly enlighten in that regard.
Basil.
In other words, could you kindly fully populate the currently significantly underpopulated fact matrix, that seems to be sucking people blindly in.
There was no agreement in place but it was verbally agreed that the company wouldn't pay the loan back because it didn't have the resources.
Thanks
So is the creditor just waiting until it has got the resources, or did he agree to waive his entitlement formally for all eternity. If the latter, why didn’t he do it at the time?
A verbal agreement is worthless. He will need to formally waive his entitlement in writing (assuming that is what he wants to do - it is not my place to question the wisdom or otherwise of doing so).
However, based on the scant information available, it seems that a capital loss might just be in point.
OP, given that you're acting for the new director / shareholder:
A verbal agreement is worthless. He [the outgoing director] will need to formally waive his entitlement in writing
Otherwise...
So is the creditor just waiting until it has got the resources...
... he [the outgoing director / shareholder] may well come back later on with his hand out.
Why is everyone focusing on whether or not the non-client ex-shareholder has a capital loss, and not discussing whether the client company has/could have a taxable receipt or whether securing the receipt of free shares and the undertaking to waive the loan gives any tax issues to the client shareholder?
Of course, there's no information provided to be able to answer those questions - this is Aweb - but a mention of those potential charges nevertheless seems appropriate.
Agreed.
My main concern is tax implications on the company if we write off the debt. As previously mentioned, the outgoing director's share were transferred for nil value as the company has no value due to accumulated losses.
As an alternative to writing off, could we capitalise this debt? Are there any advantages/disadvantages to this route?
Appreciate your help
As has been said above, debtors can't write off debts. So please explain your "if" point.
It was mutually agreed to write off debt. They directors aren't accountants hence didn't know at the time how to do that and what tax implications it would have. But the agreement is that the company wouldn't be paying the outgoing directors loan.
Hope this clarifies the situation.
How many times does this have to be said? They can't mutually agree to write off the debt.
Well, they can, but such agreement is of no effect unless and until the creditor formally releases the company of its obligation in writing. At which point the company would have a taxable credit.
Per Wilson (et al), plus... I'm still not getting the "if" (still less the capitalisation 'alternative'). One more thing: if there is an agreement (which, following this thread, gets acted on) to write off the debt... is the company as worthless as you say? Your client, for one, must see something in it.
... is the company as worthless as you say? Your client, for one, must see something in it.
So, OP, what does the balance sheet look like with the DLA stripped out?
Separately, is there any I.P., customer base, or other intangible of value?
You said earlier there isn't enough cash [to pay off the DLA] but just how much is there?
What are the prospects of the company turning things around and making future profits?
With DLA stripped out there is net liabilities of £7k. There is overdraft of £8K and stock of £14k. Future prospects aren't great and the client is thinking of closing the company in future.
Why not capitalise it by issuing new shares ,presumably will be negligible value due to losses and transfer shares to new guy at nominal £1
I fail to see how you can resolve this issue without looking at the disposal of the shares which seem to be part and parcel of the loan write off. Ie it would appear to be a single transaction, albeit its very hard to tell based on your post.
Anything like this which sits outside the norm you will benefit from a peer or specialist review. If you don't have such systems in place then develop them ASAP, its a fundamental part of being in practice to bring in specialist knowledge when required. Often something like this will be solve within an hour. You don't expect your GP to give you surgery.
A credit balance on the DCA doesn't have tax implications. A debit overdrawn balance does. Where would the balance be written off to? That's unusual.
A credit balance on the DCA doesn't have tax implications.
As it stands, agreed. But what you do with it might do.