Write off of loans between associated companies
It has now become apparent that the loan will not be repaid and, there betseen no assets, I think that Z Ltd will soon be struck off. The health of X Ltd is a little better and small profits have been made in recent years. Can readers advise what the tax implications of the loan write-off might be?
My main concern is whether this will have an adverse effect on dividend payments. Will the loan write-off llans problems in this regard? Query 18, — To as rolling paper Off Reply from Larry Laffer If X Ltd impairs the debt in its books or otherwise writes off or releases the debtthe resultant debit in its profit and loss account will reduce its profits available for distribution.
The recent dividends would have been lawful only if the company had available accumulated realised profits to make those dividends. In doing so, the directors should have considered the latest statutory accounts under CAloanz and s as well as the fortunes of the intervening period since under common law and possibly s and s In both cases, account should have been taken of the need for any impairment of the amount owing by Z Ltd.
If those dividends were unlawful, any person receiving a dividend that knew or should have known that it was unlawful is liable to repay it to the company under common law and CAAs As such, any amount so received is held on constructive trust for the company. That may not be correct in a simple case; the amount cannot, in the first instance, be received both as trustee and as debtor.
However, once the recipient wrige applied the funds so received for their own purposes, it is the inevitable conclusion that a loan or advance to a participator has been made, such that a charge does arise under CTAs for a close company.
And security loans off write between companies of associated this
The other issue is then the corporation tax treatment of the impairment or write-off or release. If the companies do have such a relationship, then no such corporation tax relief will be available for X Ltd, by virtue of CTAs However, it does not follow that Z Ltd must make any entry in its accounts simply because X Ltd has impaired the amount owed in its own accounts. Indeed, all the time that Z Ltd continues to legally owe the money to X Ltd, it should continue to recognise the liability in its accounts.
For this latter purpose, HMRC used to consider that two companies were connected if they were under the control of the same single person. Reply from ANA It is assumed that the inter-company loan is a loan relationship and is dealt with under CTAPart 5. Normally, the tax treatment of loan relationships broadly follows the accounts, but there are important exceptions for inter-company transactions that need to be considered.
If X Limited is a close company, the writing off of loans to its directors, who are also shareholders, would be treated as dividends for taxation purposes but class 1 contributions would still apply. Assuming it has not, the loss should companiees recognised in the profit and loss account in the ,oans accounting period. There was no written evidence of an enforceable obligation between Corp and any of the Companies, much less a provision for a fixed maturity date or a fixed rate of interest. The health of X Ltd is a little better and small profits have been made in recent years. Back to top Loans between connected parties The situation, however, becomes more complicated where the parties are connected. Although impairment losses are generally tax deductible under CTAsCTAs requires loan relationships between connected parties to be taxed on an amortised cost basis. In general, relief is not available to a lender for an impairment loss ie bad debt or a loan waiver arising from a loan made to a connected company. No corporation tax return deduction is permitted for the write off by virtue of CTAsA.
Accounting standards require companies to assess their financial assets at each balance sheet date to see whether there is objective evidence that a financial asset is impaired. Assuming it has not, the loss compsnies be recognised in the profit and loss account in the current accounting period.
Although impairment losses are generally tax deductible under CTAsCTAs requires loan relationships between connected parties to be taxed on an amortised cost basis. This means that no deduction is available for the loss in X Ltd and equally no tax charge arises on the corresponding profit arising as a result of the release of the debt in Z Ltd, in accordance with CTAs 1.
Some loans write between companies associated of off all
The loss in X Ltd as a result of the write-off of the loan will be recognised in its profit and loss account and this will reduce distributable reserves. It appears that X Ltd has paid an interim dividend on the basis of expected profits, but the loss on the write-off of the loan may result in there being no fompanies reserves for the period.
- And yet Corp continued to provide financing to the Companies after the tax year for which the bad debt deduction was claimed.
- This gain will be deemed to accrue to Company B for tax purposes in terms of section 24J 4.
- If a exceeds b , the excess is a loan relationship credit and charged to corporation tax.
In that case, the dividend will become ultra vires and will be considered void for both tax and company law purposes. Under these circumstances, the shareholder is under an obligation to return the dividend or that part of it which was unlawful to erite company and in the meantime he holds the funds paid out as constructive trustee for the company. Written Off should suggest his client take legal advice as to his obligations in this area. Reply from Paul Steward The corporation tax rules for loan relationships apply here because, under general law, X Ooff has made a loan to Z Ltd.
X Ltd is a creditor and Z Ltd is a debtor. Because the loan has not been made for the purpose of companeis trade of X Ltd, because it is not trading in making loans as say a bank would, it is a non-trading loan relationship. If a loss is made on a non-trading loan relationship, then this is pooled with any other profits and losses for the same accounting period and can writr rise to a deficit, which can be relieved associatde CTAPart 5, Ch The basic rule under CTAs is to carry forward this deficit and offset it automatically against the next non-trading profits arising in the next accounting period s.
Who loans of between companies write off associated are chpions
However, under CTAs it is possible to restrict this relief to any amount desired including nil for the next period. Under CTAs a claim can be made to set off the deficit against profits for the same accounting period subject to s 5 and s 7. Under CTA, s loahs claim can be made to set off the deficit against profits of earlier accounting periods with CTAs defining the profits available for relief and the order of priority for loss relief claims.
There is an anti-avoidance rule relating to loan relationships where a loan has been made between connected companies as defined in CTAs In general, relief is not available to a lender for an impairment loasn ie bad debt or a loan waiver arising from a loan loanss to a connected company. If they do, the companies are connected.
Are write of between companies off associated loans and Contrast
If they do not, then the companies are not connected and relief will be available for corporation tax purposes. When thinking about whether dividends could be validly paid, the onus was on the directors to look initially at the last annual accounts. If this was not the case, then a set of interim accounts should have been used and the bad debt should have been provided for as an expense in them. Reply from Chelsea Under the loan relationships rules, the click to see more associated connected because they are controlled by the same persons.
Control of a company can be by ownership of shares, voting power or other rights whereby compabies is conferred by the articles of association or other document regulating the affairs of the company CTA s 2. Because the companies are connected, X Limited will not be eligible for tax relief for the write off of the bad debt and Z Limited will not be taxable on the corresponding credit. Ideally, this should have been supported by interim accounts, especially if profits brought forward were minimal.
The bad debt need only be taken into account in the reckoning of sufficient distributable profits if, at the time of payment of the dividend, it was more likely than not that the loan to Z Limited would prove irrecoverable. Should there be insufficient distributable profits to cover the payment of the dividend, the payments should be treated as loans to the respective directors, as opposed to remuneration, which would have issues regarding go here payment of PAYE and late reporting under RTI with consequent penalties.
If applicable and appropriate, interest at the official rate could be charged in respect of the loans in order to avoid any benefit in kind tax charge. Going forward, priority should be given to building up meaningful distributable profits in X Limited so that these can be extracted as salaries subject to the National Insurance and personal allowance thresholds plus dividends to minimise the overall tax and National Insurance liabilities.
Subject to availability of funds, a commercial level of remuneration could be taken by the directors of X Limited instead of dividends where there are insufficient distributable profits, but that will incur Class 1 National Insurance. However, this is still more tax efficient than remunerating the directors by making loans to them and writing off the loans subsequently. If X Limited is a close company, the writing off of loans to its directors, who are also shareholders, would be treated as dividends for taxation visit web page but class 1 contributions would still apply.