Member Since: 30th Apr 2009
21st Jul 2020
Apologies for the confusion. With regard to the payment of the loan, I was referring to the eventual repayment of the loan by the company who had received the loan (Company A) to the company making the loan (Company B). As Company B is 100% owned by Company A, I was assuming that they would write off the loan rather than repaying it.
As Director A's loan with Company B will have been converted to shares in Company A, I can't see a reason why he would necessarily want Company B to be repaid - as by that point the £120k portion of his director's loan in Company B is now shares in Company A.
Apologies if I have missed something obvious. I am finding the mechanics of the whole scenario rather confusing, and would far rather find a simple solution to suggest to my client!
21st Jul 2020
Thanks, that makes sense that the shares will have zero base cost for CGT.
17th Jul 2020
Thanks TaxDragon. I don't quite understand the mechanics of it myself, and I think you are right in that the only way to do it would be to end up with unpaid share capital in the UK company which is no help to anybody.
The directors are not trying to get investment on the strength of their balance sheet alone, but are of the view that a healthier balance sheet would be helpful in attracting investors to what they consider to be a very "investable" product. It remains to be seen whether this works but I am trying to respond to their many and varied queries on how to structure the proposed conversion of debt to equity in the UK company.
17th Jul 2020
The £125k is currently a liability in the French company. The director doesn't want the money back - he wants to convert it to shares. I believe this is fairly common, when directors wish to improve their balance sheet to attract investment?
While the £125k is currently debt, as soon as it is transferred to the UK company the debt will be written off by converting to equity.
The only difference with this particular part of this ever-more complicated issue is that part of the debt that Director A wishes to convert to debt in the UK company is currently sitting as a credit DLA balance in a French company wholly owned by the UK company. I am really going round in circles though about this whole problem now, so I am very happy to be corrected if what I have described is utter nonsense.
16th Jul 2020
The same could be said about the loan to the existing company. Neither company is currently making any sales hence there are significant accumulated losses. The directors plan to rectify this by achieving investment in the existing company - but for this they want the balance sheet to look better than it currently does, by converting the director's loan to equity.
Does the fact that the companies are loss-making impact on the ability to convert a loan to share capital / transfer the debt between companies and then convert to share capital? Or just the potential personal tax implications of the arm's length value of the shares on potential sale?
16th Jul 2020
I have now had some discussions with Director B, who would now like to find a way of making the proposed share issue fairer in respect of the capital introduced by each director.
Director B has now informed me that the company has just acquired another company (previously 100% owned by Director A) for the sum of 1 euro - the acquired company is French. The French company is loss-making, has no assets and also has a large director's loan credit balance - all owed to Director A.
Director B has suggested that £125k of Director A's loan balance in the newly acquired company could be transferred to their existing company and similarly converted to share capital. The directors would then have made total further investment of £200k (Director A) and £50k (Director A) which is proportional to their desired 80:20 shareholdings.
Is this a sensible way forward? My experience with debt restructuring between connected companies is as extensive as my experience with debt to equity conversions - absolutely none.
I would of course also suggest that the directors take advice from the French accountant of the French company with regard to any implications on that side.
15th Jul 2020
Thank you - that's really helpful. So most definitely not a possibility to retrospectively allocate this debt to the original share capital.
I think, if both directors are in agreement with a resolution in place and a written undertaking from Director B, I will suggest that the debt is converted to equity with 100 new shares being issued at the same proportions as the original shareholding - 80:20. This will not change the overall shareholdings nor the persons with significant control statements, and the nominal and paid values can be correctly reported on form SH01, with accounting entries being:
DR DLA Director A £75,000
DR DLA Director B £50,000
CR Share Capital £100
CR Share Premium £124,900
15th Jul 2020
Yes, the IN01 (registration application) states £100 nominal value of share capital with the respective shareholdings. The initial shareholdings are also shown as 80 shares (Director A) of which £80 is paid and £0 unpaid, and 20 shares (Director B) of which £20 is paid and £0 unpaid.
The IN01 refers to the nominal value of the shares, which would be £1 per share or £100 in total. I wouldn't necessarily have expected any premium paid to have been shown on this form - or should it have been if that was the intention at the time? (in other words, it would have said 20 shares (Director A) of which £80 is paid and £75,000 unpaid, and 20 shares (Director B) of which £20 is paid and £50,000 unpaid...
15th Jul 2020
Thanks to all for your replies - really helpful.
I have gone back to Director B to explain the position regarding him effectively giving much of his cash injection into the company to Director A, as he will never see any return on part of this investment. Director B has confirmed (and I would get him to do so in writing) that this is indeed his intention.
At the risk of complicating things even further, Director B has explained that it was always the intention for Director A to contribute £75k and Director B to contribute £50k, for the original shareholdings of 80 and 20 shares. He has asked if we can simply "allocate" these proportions of the directors' loans back to the original share capital, and not issue any new shares at all.
DR DLA Director A £75k
DR DLA Director B £50k
CR Share Premium £125k
The directors have stated that they do not wish to issue any new shares - they simply want to remove the debt from the company by treating this as their capital contribution for the original shares.
The original statement of capital states that there are £100 ordinary shares with an aggregate nominal value of £100. Would it be possible to create a share premium account to which the respective directors' loans values to be converted from debt to equity are credited? Can this be done retrospectively (i.e. by amending the already submitted accounts?)
I feel the situation is really becoming quite muddled, and I would like to propose a way forward to the directors to sort this out as simply and clearly as possible.
8th Jul 2020
She was employed during 2019-20, but is now self-employed. The training expense was incurred during her period of employment but also relates to her self-employment business. I have not yet completed self-employment accounts as she has not yet started trading, but I do think that the training expense may be allowable as a pre-trading expense in her self employment accounts, as it keeps her existing knowledge up to date.