Conflicting advice from 2 Accountants
Discussion
The scenario is
Company A And Company B each owned 50/50 by a married couple
Company A lends B 150k
Several years later they are parting ways.
One is getting A, the other B
One accountant says they can write off the loan with no tax implications.
One accountant says not.
Anyone able to offer a tie breaker?
Company A And Company B each owned 50/50 by a married couple
Company A lends B 150k
Several years later they are parting ways.
One is getting A, the other B
One accountant says they can write off the loan with no tax implications.
One accountant says not.
Anyone able to offer a tie breaker?
Yes. There are tax implications for both the companies and the shareholders.
The accountant who (may) understand what they're talking about needs to discuss the corporation tax effects of the write-offs and also the potential distribution to shareholders.
Only the accountants can answer these questions as all facts need to be known.
The accountant who (may) understand what they're talking about needs to discuss the corporation tax effects of the write-offs and also the potential distribution to shareholders.
Only the accountants can answer these questions as all facts need to be known.
And I agree too.
Basically, if Company B received £100,000 from Company A as a loan, the transaction would have appeared as a liability in Company B's Balance Sheet i.e. it was money that Company B now owed back to Company A.
It would NOT have been shown as "Income" in Company B's Profit and Loss account as it is not income in the true sense in that it would eventually be paid back to the lender.
However, if Company A now decides that it doesn't want Company B to pay back the £100,000 loan it made to Company B, then as far as Company B is concerned, the £100,000 will now become genuine income in its profit and loss account and it is likely that Company B will have to pay Corporation Tax on the transaction.
Obviously, as far as Company A is concerned, the reverse is true and it my be able to write off the loan amount as a tax deductible cost in its own profit and loss account.
There could be other implications as there are disclosure rules regarding inter company loans when the companies are "connnected" i.e. share directors etc.
Basically, if Company B received £100,000 from Company A as a loan, the transaction would have appeared as a liability in Company B's Balance Sheet i.e. it was money that Company B now owed back to Company A.
It would NOT have been shown as "Income" in Company B's Profit and Loss account as it is not income in the true sense in that it would eventually be paid back to the lender.
However, if Company A now decides that it doesn't want Company B to pay back the £100,000 loan it made to Company B, then as far as Company B is concerned, the £100,000 will now become genuine income in its profit and loss account and it is likely that Company B will have to pay Corporation Tax on the transaction.
Obviously, as far as Company A is concerned, the reverse is true and it my be able to write off the loan amount as a tax deductible cost in its own profit and loss account.
There could be other implications as there are disclosure rules regarding inter company loans when the companies are "connnected" i.e. share directors etc.
MaxFromage said:
Yes. There are tax implications for both the companies and the shareholders.
The accountant who (may) understand what they're talking about needs to discuss the corporation tax effects of the write-offs and also the potential distribution to shareholders.
Only the accountants can answer these questions as all facts need to be known.
Thanks for all the answers The accountant who (may) understand what they're talking about needs to discuss the corporation tax effects of the write-offs and also the potential distribution to shareholders.
Only the accountants can answer these questions as all facts need to be known.
The company accountant seems to think there is no issue - The corporation tax act of 2010 has provisions for this and it is (or can be) seen as tax neutral as the loss is matched by a profit.
I appreciate it's complicated and I'd be inclined to allow the company accountant to do what he sees fit and proper and rely on that advice.
It is (possibly) neutral in that the write off (loss) in one company is compensated for as income (profit) in the other.
However, they are two separate companies and may have different rates of Corporation tax applying to their profits and loss reliefs. So, even though the written off amount may appear as the same amount in each company, the effect on the individual companies' Corporation tax liabilities may be different.
So possibly not "neutral" when it comes to actual tax.
However, they are two separate companies and may have different rates of Corporation tax applying to their profits and loss reliefs. So, even though the written off amount may appear as the same amount in each company, the effect on the individual companies' Corporation tax liabilities may be different.
So possibly not "neutral" when it comes to actual tax.
Eric Mc said:
It is (possibly) neutral in that the write off (loss) in one company is compensated for as income (profit) in the other.
However, they are two separate companies and may have different rates of Corporation tax applying to their profits and loss reliefs. So, even though the written off amount may appear as the same amount in each company, the effect on the individual companies' Corporation tax liabilities may be different.
So possibly not "neutral" when it comes to actual tax.
here's what chat GPT says:However, they are two separate companies and may have different rates of Corporation tax applying to their profits and loss reliefs. So, even though the written off amount may appear as the same amount in each company, the effect on the individual companies' Corporation tax liabilities may be different.
So possibly not "neutral" when it comes to actual tax.
Under the Corporation Tax Act 2009 (CTA09), section 354 (CTA09/S354) has implications for connected companies regarding impairment losses. Here are the key points:
Creditor Companies:
When a creditor company lends to a connected debtor company, it generally cannot claim debits for impairment losses related to that debt.
Exceptions exist for debt-equity swaps and insolvent creditors.
If the companies become connected after the loan, no write-back of impairment relief is allowed, but no further relief is granted either.
The starting point for impairment relief is the debt’s value in the accounts at the end of the accounting period preceding connection.
Debtor Companies:
A debtor company is not required to bring in credits when released from a liability by a connected creditor (unless it’s a ‘deemed release’).
This rule also applies if the debtor was connected to the creditor but ceased to be connected due to the creditor’s insolvency.
And Thanks for the input - I am not expecting any proper advice but I am grateful for the comments
That all seems rather generous.
Have you considered what the Income Tax implications might be for the individual director of the company that received the loan?
At some point the director of the recipient company might want to extract some or all of the loan their company received and which they are now allowed keep.
Have you considered what the Income Tax implications might be for the individual director of the company that received the loan?
At some point the director of the recipient company might want to extract some or all of the loan their company received and which they are now allowed keep.
Eric Mc said:
That all seems rather generous.
Have you considered what the Income Tax implications might be for the individual director of the company that received the loan?
At some point the director of the recipient company might want to extract some or all of the loan their company received and which they are now allowed keep.
The loan was used to buy a property in a limited company and as far as I know no cash has been extracted. Corporation tax will be due upon the sale of the property.Have you considered what the Income Tax implications might be for the individual director of the company that received the loan?
At some point the director of the recipient company might want to extract some or all of the loan their company received and which they are now allowed keep.
this is following a conversation with a frustrated friend who is going through divorce - it's all pretty amicable (in terms of financial settlement, indeed the husband should be snatching her hand off ASAP, and they have drawn up a separation order for both the business and personal assets and the company accountant agreed at the time this was an acceptable way forward.
They are finalising the agreement and one party's solicitor has advised further accountant input and it's this accountant that has cast doubt on the original advice. They have a clause in the agreement which says neither party will come after the other for any future tax liability.
I am not really party to their detailed financial history, just been the recipient of some frustrated ranting, so thought I'd ask here as I sit at my desk staring out of the window as I am the sort of sad case that finds this type of thing interesting.
TownIdiot said:
The loan was used to buy a property in a limited company and as far as I know no cash has been extracted. Corporation tax will be due upon the sale of the property.
this is following a conversation with a frustrated friend who is going through divorce - it's all pretty amicable (in terms of financial settlement, indeed the husband should be snatching her hand off ASAP, and they have drawn up a separation order for both the business and personal assets and the company accountant agreed at the time this was an acceptable way forward.
They are finalising the agreement and one party's solicitor has advised further accountant input and it's this accountant that has cast doubt on the original advice. They have a clause in the agreement which says neither party will come after the other for any future tax liability.
I am not really party to their detailed financial history, just been the recipient of some frustrated ranting, so thought I'd ask here as I sit at my desk staring out of the window as I am the sort of sad case that finds this type of thing interesting.
I would assume that company that made the loan still has the loan showing in its balance sheet as a "current asset".this is following a conversation with a frustrated friend who is going through divorce - it's all pretty amicable (in terms of financial settlement, indeed the husband should be snatching her hand off ASAP, and they have drawn up a separation order for both the business and personal assets and the company accountant agreed at the time this was an acceptable way forward.
They are finalising the agreement and one party's solicitor has advised further accountant input and it's this accountant that has cast doubt on the original advice. They have a clause in the agreement which says neither party will come after the other for any future tax liability.
I am not really party to their detailed financial history, just been the recipient of some frustrated ranting, so thought I'd ask here as I sit at my desk staring out of the window as I am the sort of sad case that finds this type of thing interesting.
Once the lending company makes the decision that it will not seek to recover the loan, then it MUST write that loan off in its profit and loss account. This is an accounting, not a Corporation Tax requirement.
It's not possible to say what impact this will have on the company doing the writing off but it could be quite severe regarding its solvency.
I don't expect that the lending company ever charged interest on the loan.
Eric Mc said:
I would assume that company that made the loan still has the loan showing in its balance sheet as a "current asset".
Once the lending company makes the decision that it will not seek to recover the loan, then it MUST write that loan off in its profit and loss account. This is an accounting, not a Corporation Tax requirement.
It's not possible to say what impact this will have on the company doing the writing off but it could be quite severe regarding its solvency.
I don't expect that the lending company ever charged interest on the loan.
Thanks EricOnce the lending company makes the decision that it will not seek to recover the loan, then it MUST write that loan off in its profit and loss account. This is an accounting, not a Corporation Tax requirement.
It's not possible to say what impact this will have on the company doing the writing off but it could be quite severe regarding its solvency.
I don't expect that the lending company ever charged interest on the loan.
Yes that's what happened and it was agreed that there would not be eligible to be included in any corporation tax calculation. The opposite happened with the borrowing company and no corporation tax deduction is to be claimed.
Any impact on future dividends is for each party to sort out post divorce
Eric Mc said:
Depending on the state of the company at the time of the write off, it could make one technically insolvent and block the ability of a director/shareholder from being able to remunerate themselves from their own company.
I haven't got the full accounts but the loan was made out of cash reserves.The lending company is a pretty simple trading company with very few assets or liabilities beyond what is effectively WIP for the owner and some sub contractors
It's effectively money in from contract, money out to subbies.
I *think* it might impact the ability to take dividends in the relevant year but I'm not sure, but that would be a relatively minor issue given the circumstances.
TownIdiot said:
I haven't got the full accounts but the loan was made out of cash reserves.
The lending company is a pretty simple trading company with very few assets or liabilities beyond what is effectively WIP for the owner and some sub contractors
It's effectively money in from contract, money out to subbies.
I *think* it might impact the ability to take dividends in the relevant year but I'm not sure, but that would be a relatively minor issue given the circumstances.
We do know, based on what you told us, that the lending company has one asset of £150,000 in its balance sheet i.e. the loan it made to the other company. It may have cash in its bank account as well - how much you haven't disclosed.The lending company is a pretty simple trading company with very few assets or liabilities beyond what is effectively WIP for the owner and some sub contractors
It's effectively money in from contract, money out to subbies.
I *think* it might impact the ability to take dividends in the relevant year but I'm not sure, but that would be a relatively minor issue given the circumstances.
This proposal will involve this company eliminating the entire asset of £150,000 from its balance sheet.
Based on what you have said above, writing off the asset of £150,000 could seriously undermine the company's balance sheet.
Eric Mc said:
We do know, based on what you told us, that the lending company has one asset of £150,000 in its balance sheet i.e. the loan it made to the other company. It may have cash in its bank account as well - how much you haven't disclosed.
This proposal will involve this company eliminating the entire asset of £150,000 from its balance sheet.
Based on what you have said above, writing off the asset of £150,000 could seriously undermine the company's balance sheet.
Yes it would take it from having 150k asset plus a few grand cash This proposal will involve this company eliminating the entire asset of £150,000 from its balance sheet.
Based on what you have said above, writing off the asset of £150,000 could seriously undermine the company's balance sheet.
To just a few grand cash.
Creditors / Debtors marginally positive but again nothing massive.
The company doesn't have any employees or other long term creditors.
Eric Mc said:
Sounds like he is wrecking his own company.
I presume before the loan was made the company must have had £150,000 plus "Cash in Bank" which it has more or less just given away.
Basically, it's made a gift.
They are getting divorced. It's not his company, it is their company, as is the company that borrowed the money. All owned 50/50. I presume before the loan was made the company must have had £150,000 plus "Cash in Bank" which it has more or less just given away.
Basically, it's made a gift.
They have to split the assets one way or the other, and the company that made the loan can continue to trade with zero impact.
Getting divorced is sub-optimal from a financial point of view, that's for sure, but it could be far worse if it all kicks off.
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