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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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 ?
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.
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?
Ask them why they want to do something so pointless, and if they are not thinking straight put them right.
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 ?
It wouldn't be a credit to wages - it would be a credit to "loans from shareholders waived", or words to that effect.
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.
... 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.
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.
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.
..... 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.
So...DR 'DLA' and CR' Loans from Shareholders Waived' (Both BS accounts)?
Obviously the credit is to the P&L NOT to the BS.
Yes but you are exploring the tax consequences for the company of the directors acting irrationally, which hopefully with your advice they won't.
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?
I would say that they have had the wages, perfectly allowable for Corporation tax deduction.
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.
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.
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.
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".