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Writing off DLA

Implications of directors writing off debt owed to them by company

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My client operates as a limited company with husband and wife taking a small monthly salary as directors. Recently the directors have chosen not to transfer monthly salary to personal accounts but include it within DLA.

Trading has slowed in recent years and at the year-end date of the most recent accounts the company was technically insolvent, albeit by only a matter of pounds and the largest creditor being the directors.

Husband and wife are now considering retirement and a credit balance exists re the DLA i.e. the company owes the directors.

They have instructed that the DLA balance be written off as the company has insufficient funds/assets to clear the debt.

Please could anyone advise on the implications of this action? Will the accounting entries be Debit - DLA, Credit - Wages/Other Income, thereby creating a corporation tax liability? 

 

Replies (36)

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By Paul Crowley
10th Jul 2020 10:47

Why bother. If all other creditors paid just get struck off

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Replying to Paul Crowley:
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By BayTree
10th Jul 2020 12:34

I guess my issue is that the company's profit (and therefore corporation tax liability) has been reduced by the inclusion of the directors wages...now, by writing off the DLA, the company has claimed for an expense that will never be realised.

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Replying to BayTree:
RLI
By lionofludesch
10th Jul 2020 13:23

BayTree wrote:

I guess my issue is that the company's profit (and therefore corporation tax liability) has been reduced by the inclusion of the directors wages...now, by writing off the DLA, the company has claimed for an expense that will never be realised.

What's done is done.

Potentially, they could end up paying corporation tax on the income they're never going to get.

Just pay everybody else off, apply for strike off, don't object to the strike off. Job done.

What are the numbers like ? Big ? Small ? More than the losses available ?

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Replying to lionofludesch:
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By BayTree
10th Jul 2020 15:14

The numbers aren't particularly big and the company does have some b/fwd losses, that can be set against any 'profit' generated....but am I correct in thinking that, should the directors right off the wages owed to them, that a 'profit' will be generated?

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Replying to BayTree:
By johngroganjga
10th Jul 2020 16:08

Yes of course if your clients waive their loans the entry in the company's books will be a credit to the P&L - AKA a profit.

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By johngroganjga
10th Jul 2020 12:34

Indeed. What is the point? And have they factored in the legal fees to get the deed of waiver drafted and executed? And are they sure about the tax consequences for the company of waiving their loans?

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Replying to johngroganjga:
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By BayTree
10th Jul 2020 12:37

Hi John. Yes, these are the issues that are of concern to me....do you have any advice?

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By johngroganjga
10th Jul 2020 12:40

Ask them why they want to do something so pointless, and if they are not thinking straight put them right.

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Replying to johngroganjga:
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By BayTree
10th Jul 2020 15:16

I apologise for my ignorance...why is it pointless?...if the company is unable to pay their salaries, what would be another option?

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By johngroganjga
10th Jul 2020 15:18

See the first response, from Paul Crowley, above.

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Replying to BayTree:
RLI
By lionofludesch
10th Jul 2020 15:43

BayTree wrote:

I apologise for my ignorance...why is it pointless?...if the company is unable to pay their salaries, what would be another option?

If you're thinking that it cancels salaries already declared, I'd respectfully disagree.

If you're not thinking that, could you say clearly what you see as the advantage ?

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Replying to lionofludesch:
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By BayTree
10th Jul 2020 16:03

I'm sure I am soon to feel very foolish...but, I guess, yes..I did imagine that the write off of wages owed would create a credit to P&L wages expense account. If, instead of wages, it were ...say...a supplier providing a credit for faulty goods then it would reduce a P&L expense account?

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By johngroganjga
10th Jul 2020 16:10

It wouldn't be a credit to wages - it would be a credit to "loans from shareholders waived", or words to that effect.

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Replying to johngroganjga:
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By BayTree
10th Jul 2020 16:22

So...DR 'DLA' and CR' Loans from Shareholders Waived' (Both BS accounts)?
...I am moving away from the actual circumstances of my client now, but given the following scenario...
An annual salary of say £12k is recognised in respect of a director...and then after the CT600 has been processed, the director says he will write of the salary due to him...
(Ignoring any personal NI/tax implications for the director)...
... The company has paid £2.28k less corp tax because of the salary expense (12k x 19%)...and there is no 'claw-back'?

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Replying to BayTree:
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By zebaa
10th Jul 2020 16:28

If the directors don't write off the DLA no claw back ( your term not mine). You are over thinking this. Don't. Just pay anyone other than directors and then strike off.

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Replying to BayTree:
RLI
By lionofludesch
10th Jul 2020 16:37

BayTree wrote:

... The company has paid £2.28k less corp tax because of the salary expense (12k x 19%)...and there is no 'claw-back'?

There's a taxable profit from the loan write-off - albeit that it may be covered by losses.

Still struggling to see why you think this will benefit your client.

If he does it, the company has a taxable profit. Assuming it's covered by losses, no tax cost. From the director's point of view, no benefit, no tax cost or relief.

Stop pussyfooting and tell us why you think this analysis is wrong.

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Replying to lionofludesch:
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By BayTree
10th Jul 2020 16:51

I apologise for taking so much of your time...I don't believe I have said your analysis is wrong?

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By lionofludesch
10th Jul 2020 17:07

BayTree wrote:

I apologise for taking so much of your time...I don't believe I have said your analysis is wrong?

No, you haven't. Neither have you said what's to be gained.

I'm just trying to help out here. As far as I can see, it doesn't matter whether the director writes his loan off or not. Though it's difficult to be sure without numbers.

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Replying to lionofludesch:
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By BayTree
10th Jul 2020 17:29

If the director chooses not to write off the loan prior to company closure, I see the 'gain' as a reduction in corporation tax of £2.28k in respect of of a business expense of £12k that was never realised...I suppose I thought an unscrupulous director might use this course of action to reduce corporation tax.
Again, thank you for your time, it is appreciated.

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Replying to BayTree:
RLI
By lionofludesch
10th Jul 2020 17:34

BayTree wrote:

If the director chooses not to write off the loan prior to company closure, I see the 'gain' as a reduction in corporation tax of £2.28k in respect of of a business expense of £12k that was never realised...I suppose I thought an unscrupulous director might use this course of action to reduce corporation tax.

Oh - ok.

I'm not seeing that myself.

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Replying to BayTree:
RLI
By lionofludesch
10th Jul 2020 17:21

BayTree wrote:
..... the director says he will write off the salary due to him..

He doesn't write off his salary.

He writes off the loan.

That's where your misconception lies.

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Replying to BayTree:
By johngroganjga
10th Jul 2020 16:50

BayTree wrote:

So...DR 'DLA' and CR' Loans from Shareholders Waived' (Both BS accounts)?

Obviously the credit is to the P&L NOT to the BS.

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Replying to johngroganjga:
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By BayTree
10th Jul 2020 17:00

Thank you for your time John. You have confirmed what I had anticipated...in the absence of any b/fwd losses...the £12k scenario would create a 2.28k corp tax liability in the next accounting period.

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Replying to BayTree:
By johngroganjga
10th Jul 2020 17:11

Yes but you are exploring the tax consequences for the company of the directors acting irrationally, which hopefully with your advice they won't.

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By Paul Crowley
10th Jul 2020 17:38

Have the directors reported under RTI the wages?
Were the wages made available to the directors by crediting DLA?
Will the directors accept that the wages are to be entered on their tax return?

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Replying to Paul Crowley:
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By BayTree
10th Jul 2020 17:56

Yes
Yes
Yes

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Replying to BayTree:
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By Paul Crowley
11th Jul 2020 00:04

I would say that they have had the wages, perfectly allowable for Corporation tax deduction.

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Replying to Paul Crowley:
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By Tax Dragon
11th Jul 2020 09:21

And perfectly taxable on the director, whether or not s/he gets (to keep) the money.

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Replying to Paul Crowley:
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By BayTree
11th Jul 2020 09:21

Hi Paul.
Thank you for your response.
I am doubtful that my previous post(s) correctly communicated my concerns with regard to what I perceived as a potential abuse by directors of the option to process a wage but not physically transfer the monies to a private account.
As you point out, if the substance of the transaction is that the directors have 'received' their wages upon submission of RTI and inclusion on self-assessment tax return, then an HMRC challenge seems less likely.

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Replying to BayTree:
Psycho
By Wilson Philips
11th Jul 2020 09:31

Not “less likely” - highly improbable.

The directors have been “paid” a salary which has been taxed, or should have been. The company is entitled to a tax deduction. End of. The fact that the directors have chosen (or been unable) to draw the net cash is entirely their loss and no loss to the Exchequer.

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By lionofludesch
11th Jul 2020 09:42

BayTree wrote:

Hi Paul.
Thank you for your response.
I am doubtful that my previous post(s) correctly communicated my concerns with regard to what I perceived as a potential abuse by directors of the option to process a wage but not physically transfer the monies to a private account.
As you point out, if the substance of the transaction is that the directors have 'received' their wages upon submission of RTI and inclusion on self-assessment tax return, then an HMRC challenge seems less likely.

The directors are the only ones with the complaint here. They've been taxed on wages - albeit that they may be covered by personal allowance -yet not received the money. By contrast, the company has claimed a deduction for wages that it hasn't actually paid in cash but that deduction hasn't been recognised in a tax reduction on account of losses.

What's the problem here ? Even if it is one of ethics. HMRC certainly won't come knocking on the door with an assessment for £0.00.

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Replying to lionofludesch:
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By BayTree
11th Jul 2020 10:21

Hi Paul
That is very helpful, thank you for all your time and trouble in responding so comprehensively.
...one last scenario and then I will be out of your hair!...
So, if instead, the company was in a position at cessation whereby there were sufficient net assets, there would be an obligation to transfer funds to the director to clear the DLA...or...the director could elect to 'write-off' the monies owed to him/her, thereby creating a taxable credit in the P&L and a corporation tax liability in the final CT600?

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Replying to BayTree:
Psycho
By Wilson Philips
11th Jul 2020 10:25

BayTree wrote:

So, if instead, the company was in a position at cessation whereby there were sufficient net assets, there would be an obligation to transfer funds to the director to clear the DLA...or...the director could elect to 'write-off' the monies owed to him/her, thereby creating a taxable credit in the P&L and a corporation tax liability in the final CT600?

Correct. But unless the directors have more £’s than brain cells the second option would be idiotic.

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Replying to Wilson Philips:
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By BayTree
11th Jul 2020 10:31

Thank you, and thank you to everyone for your patience and guidance that has enabled me to fully understand the implications of the different scenarios.

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By Paul Crowley
11th Jul 2020 17:08

Concur

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By whitevanman
11th Jul 2020 22:50

Just to grasp at the odd, passing straw:
Salary was transferred to personal accounts, which I take to mean it was paid into the personal bank accounts.
This then changed and instead, a credit made to DLA, seemingly because of downturn in business.
There is no doubt that payment can be made by crediting an account on which the director is free to draw. But was that the case? If the company was insolvent the director may not have been able to draw funds. It could be argued that errors have been made that should be reversed. No info as to how, if at all, that might prove "useful".

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