Writing off a close company loan - s. 455

Writing off a close company loan - s. 455

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I understand that a section 455 charge paid by a close company that makes a loan to a participator can be reclaimed by the close company when that loan is written off, repaid or released.

Must the close company follow any prescribed/formal process to "write off" the loan on might this happen, for instance, where a debtor becomes bankrupt and simply fails to pay?

Replies (56)

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By Ruddles
04th Nov 2015 13:57

Nothing more formal than a written note to the shareholder relieving them of their obligation to repay the debt. (And of course the writing off of the debt in the company's books.)

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By Portia Nina Levin
04th Nov 2015 14:08

You are aware, of course, of the tax charge that then arises on the participator under ITTOIA 2005, section 415?

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By nickgaul
04th Nov 2015 16:11

the other way around?

what happens if the director no longer wants his loan repaid - can he forgive the company and if he does would that then count as income for the company?

 

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Replying to bernard michael:
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By chardri100
09th Nov 2015 14:33

nickgaul I think that would be treated a capital contribution.  Not very common but essentially a gift to the company of capital.  Not taxable in the company but likewise not deductible for the director.  Better would be to issue some shares in satisfaction of the loan as looks a bit cleaner and should get some base cost in the shares.

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By johngroganjga
05th Nov 2015 08:51

No-one has answered the OP's second question, about what happens in the event of the debtor's bankruptcy - i.e. where the debt is irrecoverable but is not waived.

In one sense the question of whether a tax liability arises in the debtor's hands as a result of his insolvency is academic - if he is unable to repay the loan he will also be unable to pay any tax liability that arises as a result of him not repaying the loan, so he will be no worse off. 

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Replying to Tax Dragon:
paddle steamer
By DJKL
05th Nov 2015 12:30

Like comedy will timing be everything here ?

johngroganjga wrote:

No-one has answered the OP's second question, about what happens in the event of the debtor's bankruptcy - i.e. where the debt is irrecoverable but is not waived.

In one sense the question of whether a tax liability arises in the debtor's hands as a result of his insolvency is academic - if he is unable to repay the loan he will also be unable to pay any tax liability that arises as a result of him not repaying the loan, so he will be no worse off. 

Like comedy will timing be everything here? Is the income tax point for the released loan when the loan is released?  Delay the writing off  too long and does a discharged bankrupt need to enter bankruptcy again as now cannot pay the tax on the released loan; released post the period of bankruptcy?

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By Ruddles
05th Nov 2015 12:14

Bankruptcy

In that case, John, I imagine that most companies would choose to write off the debt in order to release the s455 tax.

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By johngroganjga
05th Nov 2015 12:24

You mean waive?

So you think S455 tax is not recoverable if the company merely "writes off" (i.e. in accounting terms) an irrecoverable debt on grounds of prudence?

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By Ruddles
05th Nov 2015 15:44

No, John - I mean write off, and I'm not sure why you should think that I mean anything else.

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By johngroganjga
05th Nov 2015 15:53

Because many people say "write off" when they mean "waive" as well as when they mean "make an accounting adjustment to recognise the irrecoverability of" - leading to ambiguity and confusion.

So S455 tax can be recovered when an accounting adjustment is made to recognise that the debtor is unable to repay, without it being necessary to waive the loan.

But it is only a waiver that triggers the income tax charge on the debtor? 

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By Portia Nina Levin
05th Nov 2015 16:13

As opposed to impairment of the debt, which is what John is talking about.

An no John, section 455 is not recoverable if the debtor company just impairs the debt in its accounts. It needs to write the frigging thing off!

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By johngroganjga
06th Nov 2015 12:51

You mean it needs to waive it?

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By Ruddles
06th Nov 2015 13:11

I don't want to put words into Portia's mouth, but I suspect that she meant the same as I did - to write off the debt.

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By johngroganjga
06th Nov 2015 13:22

So Portia thinks there is a difference (for the purposes of recovering S455 tax) between making a provision against a doubtful debt, and writing the debt out of the books entirely (but without waiving it in either case of course).

So if a debtor is insolvent and unable to pay, the S455 tax can be recovered by the company if it writes the debt out of its books (as it will be obliged to of course) but does not waive it?

And. as a matter of interest, is the trigger for the income tax charge on the debtor the same (again assuming no waiver)?

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By Ruddles
06th Nov 2015 13:27

Got it

On a practical note, of course, the company should ensure that the participator is made aware of the write-off, so that he can correctly complete his self assessment tax return.

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By johngroganjga
06th Nov 2015 13:47

Insolvency tax

So my suspicion that a debtor's insolvency creates a tax liability for him is right. How bizarre and counter-intuitive. Adding insult to injury you might say.

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By Ruddles
06th Nov 2015 14:32

Only if the loan is written off (or released). Insolvency itself does not create a tax liability, although it will inevitably follow that agreement between the trustee and company is likely to give rise to one. In practice, the company is likely to write off the debt sooner to secure a refund of the s455 tax - that is what gives rise to the tax charge, not the insolvency per se.

I'm not sure that I agree that insult is being added to injury. And it is neither bizarre nor counter-intuitive. The debtor has had the use of funds extracted from the company on which he has paid no tax. Last time that I looked, bankrupts were not exempt from income tax.  

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By johngroganjga
06th Nov 2015 14:50

But what I mean is that the insolvency itself triggers the necessity for the company to write off the debt which triggers the tax liability. So in effect the insolvency triggers the tax liability.

But the anomaly is that unless the loan has been waived the debtor is still under an obligation to relay it, even if the creditor company has written it off in anticipation of him being unable to do do, yet he is taxed as if he wasn't. The only saving grace is that the liability may be washed out in the bankruptcy process.

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By Ruddles
06th Nov 2015 15:02

In the real world

Although a strict legal obligation to repay the debt may continue to exist, if the company has written off the debt then it is never going to be repaid. That is the effect of writing something off - as far as the company is concerned, the debt no longer exists. (Which I suppose begs the question - can there be a continuing legal obligation to repay a debt that doesn't exist?)

Why does insolvency require the company to write off the debt? Impairment recognition, yes, perhaps - but until it is clear that the debt will never be repaid I wasn't aware of any provision whereby the debt had to be written off.

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By johngroganjga
06th Nov 2015 16:09

I disagree. The company writing off a debt is simply an accounting recognition of its judgement that it is unlikely to be repaid. It may remove the debt from its accounting records but it certainly does not extinguish the debt.

Insolvency requires the creditor to write off the debt because in nearly every case the insolvency will be a strong indicator that the debt will never be repaid and not to recognise that in its accounts would result in the accounts being wrong.

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By Ruddles
06th Nov 2015 16:22

In which case we do disagree

There is a fundamental difference between recognising an impairment in the value of a debt (or other asset) and writing the debt off.

Client goes into liquidation/sequestration. "B*gger, that means I'm probably not going to get paid. I'd better put in a claim and an impairment adjustment in the accounts."

Liquidator/trustee issues final report. "Sorry, guys, there's nothing left in the pig - you're going to get diddly squat in respect of your claims." "Double b*gger, I may as well write the whole thing off."

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By johngroganjga
07th Nov 2015 00:01

The difference is slight, not fundamental. The accounts are identical in each case. The difference is a book-keeping nuance, often a matter of personal preference.

But you are side-stepping what I said was not right in your penultimate post. I say that when a creditor writes off a debt that he has given up hope of ever being paid the debt still exists. You say it has been extinguished by the writing off. So if the debtor wins the lottery and brings round a cheque to pay his debt you say the creditor should refuse to accept it because the debt no longer exists.

Have you never seen a set of accounts with bad debts recovered in it.

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By Carl Barwick
09th Nov 2015 11:16

Beware of NICs!

Note that HMRC will probably seek to charge Employer's NICs on any director's loan written off, on the basis that it is remuneration. This is notwithstanding that it is not treated as such for tax purposes; the tax and NICs treatments not yet being aligned.

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By tonycourt
09th Nov 2015 12:20

I agree with..........

...........John.  Not trying to reignite the argument, just adding my three-halfpence worth.

The writing-off of a debt in the accounts doesn't mean you have released/waived it. While I'm not a lawyer I believe that legally the debt remains alive until the lender formally waives it. HMRC recognise this - see, for example, its IHT manual on the subject. Also S.415 ITTOIA refers to a charge on the debtor where the company "releases or writes off"  a loan or advance. While naturally if it releases the debt it will/should also write it off, but by implication a write off doesn't mean it releases it.

John's example of a bad debt made good is a good one. If a loan was released/waived and a debtor rolled up and said I want to pay you what I owe, you ought to say "don't bother because legally you no longer owe me anything as I waived the debt" Of course, you ought to have told him so when you did.

Conversely, if you just wrote off the debt assuming you weren't going to get paid and later the debtor coughs up you can write it back match it against the payment.   

 

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Replying to Cheshire:
By johngroganjga
09th Nov 2015 12:24

Preaching to the converted

tonycourt wrote:

...........John.  Not trying to reignite the argument, just adding my three-halfpence worth.

The writing-off of a debt in the accounts doesn't mean you have released/waived it. While I'm not a lawyer I believe that legally the debt remains alive until the lender formally waives it. HMRC recognise this - see, for example, its IHT manual on the subject. Also S.415 ITTOIA refers to a charge on the debtor where the company "releases or writes off"  a loan or advance. While naturally if it releases the debt it will/should also write it off, but by implication a write off doesn't mean it releases it.

John's example of a bad debt made good is a good one. If a loan was released/waived and a debtor rolled up and said I want to pay you what I owe, you ought to say "don't bother because legally you no longer owe me anything as I waived the debt" Of course, you ought to have told him so when you did.

Conversely, if you just wrote off the debt assuming you weren't going to get paid and later the debtor coughs up you can write it back match it against the payment.   

I agree entirely of course.

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By Ruddles
09th Nov 2015 14:33

It's a little worrying that some seem unable to see the distinction between impairing the value of an asset and writing it off. It's far more than nuance - one may care to consider what was said in Greene King.

And as for putting words into my mouth is concerned, I never said that writing off the debt fully extinguished it (I raised the possibility of such treatment, no more). The point is that in writing a debt off (rather than making a provision) one takes the view, by definition, that the debt will not be paid and will therefore take no action to recover it (how/why do you chase a debt that doesn't exist in the company's records?) Of course should the debtor actually offer to pay up the creditor is unlikely to refuse, but that is beside the point. It is the act of writing off the debt that triggers the income tax charge, putting through an impairment provision does not - I consider that difference to be far more than a nuance.

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Replying to Paul Crowley:
By johngroganjga
09th Nov 2015 14:50

Words into mouth?

Ruddles wrote:

And as for putting words into my mouth is concerned, I never said that writing off the debt fully extinguished it (I raised the possibility of such treatment, no more). 

You said "that is the effect of writing something off - as far as the company is concerned, the debt no longer exists".

You do not seem to understand the difference between:

the debt itself, andaccounting entries made to record the debt in the books of the creditor.  

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Replying to Paul Crowley:
By johngroganjga
09th Nov 2015 15:17

Nuance

Ruddles wrote:

It is the act of writing off the debt that triggers the income tax charge, putting through an impairment provision does not - I consider that difference to be far more than a nuance.

If you mean that the tax consequences of the accounting treatments are different then I see what you mean. What I meant was that the accounting entries per se achieved identical results (in terms of the figures in the accounts etc.) so that the difference between them is literally imperceptible even with a powerful microscope.

PS (EDIT) And why accounting entries that all accountants know achieve identical results have such different tax results is a perplexing question for another thread perhaps.

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By Ruddles
09th Nov 2015 15:03

I stand by my words

As far as the company is concerned, the debt no longer exists. That is what writing something off means - the debt has been removed from the company's records. I did not say that the debt had vanished entirely, certainly not in hands of the debtor. You might consider the distinction to be trivial from an accounting point of view - but the original question was about the tax treatment, the difference in which is far from trivial.

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Replying to bernard michael:
By johngroganjga
09th Nov 2015 15:12

Exists

Ruddles wrote:

As far as the company is concerned, the debt no longer exists. 

If you had said " the debt has been removed form the company's records but still exists" you would have been correct.  A debt can only fail to exist "as far as the company is concerned" if the company is unfortunate enough to be advised by someone who does not understand the difference between the debt itself and the accounting entries to record the debt, and takes that advice on board.  

 

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Portia profile image
By Portia Nina Levin
09th Nov 2015 15:24

This is just frigging idiocy.

There is no accounting concept of writing off. Either you impair the debt, because you are dubious as to its recovery or it has as a matter of fact (legally) been written off and has no further place in the company's books. There are no other alternatives.

It has been written off, by waiver or release. It has ceased to be. It is pushing up the daisies. It is just frigging dead!

What it is not doing is simply pining, in frigging limbo, as John seems to think is a third alternative.

While it exists legally, the company should be keeping a record of it in its books, but might consider that it needs to be impaired. When it ceases to exist legally, it get written out of the books.

While the debt exists, but is impaired, there is no "provision against it" and it has not been written off. Those are nonsense notions by idiots that know no better.

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By johngroganjga
09th Nov 2015 15:47

Provision
So how do you recognise an impairment in your accounts if you don't create a provision to deduct from the debt?

And if you think there is no accounting concept of "writing off", as an accountant I have news for you. It's what accountants do with bad debts, obsolete stock, scrapped fixed assets etc. etc.

Not sure why you say I think there is a 3rd state. For accounting purposes a debt is either unimpaired or it is not.

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By Portia Nina Levin
09th Nov 2015 15:52

Trust me John, you only used to be an accountant. Now you are just a dinosaur.

All of those things that you mention are impaired these days.

"Writing off" and "making a provision" are archaic (and inaccurate) ways of describing impairment.

Writing off means writing it off - not just in the accounts, but in the eyes of the law - and a provision is a liability of uncertain timing or amount.

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By johngroganjga
09th Nov 2015 16:04

You write as someone who buries their head in books and never interacts with real accountants in the real world.  I assure that I do that all day and every day.

All accountants know what a bad debt provision is. What would you call it?

How do you "impair" the book value of a fixed asset you do not have any more because you have thrown it in the dustbin?

Ruddles says writing a debt off (for accounting purposes) has a different tax effect from merely impairing it. You say they are the same thing? How do you decide what the tax result is then?

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By Ruddles
09th Nov 2015 16:27

What I actually said was that writing a debt off has a different tax effect from merely impairing it.

 

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By johngroganjga
09th Nov 2015 16:58

But you meant writing it off for accounting purposes rather than waiving it?

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By Ruddles
09th Nov 2015 17:19

No, I meant writing it off.

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By Carl Barwick
10th Nov 2015 12:42

Bloody hell

Ye Gods!  I am waiving this thread goodbye, having written off any hope of a conclusion.  It reminds me of an old joke about a man in a balloon who lost his way.  He lowered his altitude to the point where he was able to shout a request as to where he was to a passer-by.  "You're about 50 feet up in a balloon", the passer-by said.  "Are you an accountant?" he replied.  "Yes, why do you ask"?  "Well, the information you gave me was 100% accurate, but utterly useless..."!

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By tonycourt
10th Nov 2015 12:51

@ portia
My understanding is that a debt legally exists until it is repaid or is released/waived/forgiven or whatever terminology you want to use.

Impairment of a debt in the accounts doesn't eliminate its existence.

You can't impair a debt unless there are grounds to assume full our partial non payment, but you can release it and then write it off.

It might seem that John is nitpicking, but he's not.

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By Portia Nina Levin
10th Nov 2015 13:15

@ Tony My understanding accords entirely with your understanding.

John is being pedantic where pedantry is inappropriate. He is suggesting that writing off is some piece of accounting hocus pocus that differs both from impairment and the legal formalities of release/waiver/forgiveness. It is not. Writing off means that the debt has been formally released or waived, and is accordingly removed from the company's books, as you say (and as I said earlier in the thread, if you look).

For accounting purposes the debt can only be impaired.

Now he wants to throw fixed assets in dustbins and say that, because they cannot still be impaired, they have been written off. They have not. They have been disposed of for nil proceeds by being scrapped; when the dustbin gets taken away by the proper authority, legal title passes to that proper authority (anyone else taking things from dustbins or skips is technically stealing though).

We are all forced to live in John world, where a word means whatever he wants it to mean. Personally, I wish he would fall off his bloody wall.

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Replying to Cheshire:
By johngroganjga
10th Nov 2015 13:19

Impaired

Portia Nina Levin wrote:

For accounting purposes the debt can only be impaired.

So what words do you use when having impaired it you want to take the further step of removing the debtor balance from your books altogether?

Accountants for many years have called that writing it off.  In the world I inhabit they all still do.  What do the books you have read tell you accountants should now be calling that step?

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By Portia Nina Levin
10th Nov 2015 14:04

What Carl said

Unless the debt has actually been written off, then an accountant has no business removing the debtor balance from the company's books altogether.

Only when the debt has actually been written off (by release or waiver) should it be removed from the company's books altogether. Writing the debt off is writing the debt off. Removing the debtor from the company's books altogether is the consequence (not the act) of writing the debt off.

Perhaps that is why all those accountants over many years have called it writing off. Because before they removed the debtor from the company's books altogether, the debt had actually been written off.

Perhaps former PKF partners become confused when PKF writes them off?

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By Ruddles
10th Nov 2015 15:47

My thoughts exactly, Portia

The accounting/book-keeping entries are nothing more than a reflection of what has happened.

Tony - you refer to a debt being released and then written off. Whereas HMRC seems to think that you can do either (ie not both). Your thoughts?

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By Justin Bryant
10th Nov 2015 17:17

I agree with John

The legislation uses the expression "writing off" and we all know what that means for accounting purposes, even if it's now called something different. A formal waiver of the debt by deed would only be needed if HMRC wanted hard evidence that it had been "written off". If the debtor repaid the loan after the write-off then so what? You would just write-back the loan. A formal waiver is only needed for certain situations like this:

http://www.hmrc.gov.uk/manuals/cfmmanual/cfm41060.htm

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By The Minion
10th Nov 2015 17:04

so what happens when

the company goes into solvent liquidation and the loan is distributed to the sole shareholder/director, is that classed as being repaid and s455 comes back?

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By Justin Bryant
10th Nov 2015 17:20

That would extinguish the loan

See similar situation here:

https://www.accountingweb.co.uk/anyanswers/question/llp-liquidation

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By Ruddles
10th Nov 2015 18:56

Justin

I don't see the point that you are trying to make, and it doesn't even begin to address the contentious issue - namely the difference between writing something off, and recognising an impairment in the accounts. People keep talking about writing off something "for accounting purposes" as if the accounting treatment was somehow relevant to s458 or s415.

As I've already said, and will not be repeating again, the accounting entries ought to reflect what has happened in fact - if the debt is considered to have been impaired, an impairment adjustment should be made in the accounts. If the debt has been written off, it should be removed from the accounts.

Regardless of what the accounts show, s458/s415 depend on what has happened in fact. It's really not that difficult a concept. I guess that's what happens when accountants try to get involved in tax.

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By Justin Bryant
10th Nov 2015 18:55

Ruddles

I do not disagree with anything you say, so I am not sure what else to say. Many thanks.

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By tonycourt
11th Nov 2015 13:11

@ Ruddles

To answer your question - if a debt is released, i.e. waived, then the corollary is that the company must the write it off (or fully impair it - if you prefer that term).

 

BTW - I think this thread is dead and buried R.I.P , but above comment just tidying up a loose end.

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By Ruddles
11th Nov 2015 13:46

@ Tony

How can a company write off a debt that no longer exists? I guess by "write it off" you are referring to the action of recording the event, which has already happened, in the company's records.

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