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Writing off overdrawn DLA – informing the tax office?

Writing off overdrawn DLA – informing the tax...

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Client company is owned by 3 directors with equal shareholdings.  Each of them has an overdrawn director’s loan account with little possibility of repaying the amounts.  It has therefore been decided to write off the loans within 9 months of year end to avoid the S419 charge. 

 

My question is do we have to write to HMRC specifically to inform them of this or is it enough to disclose the write off on the CT600A.  I read in one of Indicator’s publications that you have to write but I don’t see the point of waving red rags at HMRC unnecessarily.

 

Grateful for any advice.

 

Regards

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By Anonymous
28th Apr 2010 13:12

No need to tell them explicitly...

You'll have to record the information on the form CT600A obviously, as well as process the written off loans through payroll for NIC purposes, and declare them as dividends on the individuals' tax returns.

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By Anonymous
28th Apr 2010 13:15

Written off directors loan account

I don't know too much about the CT side of things but... you should note that if the loan was overdrawn by more than £5K AT ANY TIME during the tax year (April to April) a beneficial loan attracting S175 interest will arise which should have been declared on form P11D (expenses and benefits) up to the date the loan was written off, with the written off portion being treated as salary under S62 ITEPA 2003 and subjected to PAYE income tax and Class 1 NIC... or have you done that already?

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By JulietW
28th Apr 2010 13:42

Thanks so far, but...

Thanks for the answers so far.  I’m aware of the need to declare the write off on the directors' tax returns as well as the benefit in kind implications of the loans.  My only real concern is this apparent requirement to write to HMRC specifically to inform them of the write off.

 

I have a pro-forma of the letter to HMRC in front of me but I’d rather not send it if it’s not necessary.

 

Regards

 

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By Anonymous
28th Apr 2010 15:01

Dont forget that.......

legislation was introduced by FA10 to deny the corporation tax deduction on write of's or releases after 24.3.10.

Jim.

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By JulietW
28th Apr 2010 15:21

Can I have a link please?

Hi Jim

Do you have a link to this? Ta very much.

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By Anonymous
28th Apr 2010 15:33

clarification

If directors are shareholders treatment as a distribution ALWAYS takes priority over ITEPA 2003 earnings provisions thus the only implication for directors is ee/er NIC and this an interesting area. HMRCs "view"  is that  NIC is payable at the point the loan is written off. Thus if the director was on the usual £5700 pa then there will be loss to the company that is strictly due back from the director for the ee NIC element.That date also determines the tax point date for their tax returns. Also goes on the Ct600 as stated elsewhere. Do not know otherwise of any requirement to inform HMRC as will be self evident from the payroll records and CT SA.

Regarding the last point the CT relief restriction only applies to write offs after 24 03 10 thus if before and you can construct an "allowable purpose" argument you could go for it. Tricky though and only ever had one allowed and the circumstances were unusual. Inability to pay is not sufficient.

pembo

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By Anonymous
28th Apr 2010 15:43

The budget note also explains....

hopefully a little easier to follow than the legislation http://www.hmrc.gov.uk/budget2010/bn15.pdf

Jim.

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By Brian Gooch
30th Apr 2010 10:21

s419 recovery

The need to write to HMRC is to claim repayment of any s419 amounts paid in previous years, which is not repayable until 9 months after the end of the year of the write off.  HMRC will often reject claims made before the 9 months is up and ask you to reclaim it later. 

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By Ian Kent
01st May 2010 11:32

Legal issue?

Problem may be there is legal issue arising if directors' loans cancelled and creditors lose out in favour of directors whose debt is written off if subsequent liquidation/ bankruptcy of company.  Directors' loans are company assets.    Directors may not be able to repay debt but they may well have future earnings or illiquid assets e.g. home which can be realised to do so.  Not my field however so a more qualified opinion or confirmation would be welcome as I am sure many have clients in this position.

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By Anonymous
05th May 2010 11:54

NIC?

The first respondent states "as well as process the written off loans through payroll for NIC purposes".

I have been unable to locate a reference to an NIC implication where the amount of the write off is treated as a distribution. Please provide.

Thanks.

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By Ian Kent
05th May 2010 12:18

NICs on directors' loans written off

Try this link www.hmrc.gov.uk/manuals/nimmanual/nim12020.htm

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By Anonymous
05th May 2010 13:21

I am confused

Thanks Ian.

I am a bit confused, so can you clarify something for me please?

Where a loan is written off, the company will get relief under ICTA88/S419 (4). Chapter 6 of Part 4 of ITTOIA05 then applies to the participator, with effect from 2005-06 onwards (before the rewriting of the legislation under Tax Law Rewrite, the legislation was at ICTA88/S421). By virtue of ITA2007/S19, this is treated as dividend income.

Where does it say that a loan to a director/shareholder which is written off is treated as earnings, not as dividend income, for NIC purposes?

Thanks.

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By Anonymous
05th May 2010 13:55

ITEPA 2003

The loan write off is (assumed to be) by virtue of the director's employment and so is earnings under ITEPA 2003 and, therefore, under S.3(1)(a) Social Security Contributions and Benefits Act 1992 (SSCBA 1992).  However, where the director is also a participator, there is an income tax charge on it as a diistribution that "trumps" the income tax charge on it as earnings.  That doesn't stop it being earnings though, so NIC still applies unless you can demonstrate that it wasn't written off by reason of their employment.

SSCBA 1992 S.3(1)(a) says, "earnings includes any remuneration or profit derived from an employment".  A director's loan being written off is a profit to the director that is prima facie derived from the employment.

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By Anonymous
05th May 2010 14:35

"By reason of employment"

How to "demonstrate that it wasn't written off by reason of their employment", that is the million dollar question.

In reality, it was written off because it made good tax planning sense. Is this by "reason of employment"? Surely not, and surely "good tax planning sense" can't be wrong-doing?

Cheers.

 

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By Anonymous
26th May 2010 12:18

Yes

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