Loan Write off

zephyr

Help

I am preparing company accounts where there is a loan on the balance sheet to another company (same shareholders) which has ceased trading during the year. The owner/shareholders have decided to write off the loan (£30500). What is the accounting treatment?

I am thinking a profit & loss exceptional item -write off loan debit, credit to balance sheet.
What are the tax implications?


My first posting to the forum, so I hope someone can help!

groundy

As this is a transaction with a related party, I do not think it can be written off as a Profit and Loss adjustment, my gut feeling would be that it should be written off to the directors loan account.

zephyr

Thank you, that makes sense. It is really another form of distribution isn't it?

The Director's loan account would then be overdrawn, so they would then have to pay tax on it.

Bluewednesday

It is a loan write off through the p and l but you have to add it back in the tax computation as it is not allowable against profits.

I wouldn't write it to the directors loan at all

Monsoon

Bluewednesday wrote: »

It is a loan write off through the p and l but you have to add it back in the tax computation as it is not allowable against profits.

I wouldn't write it to the directors loan at all

Yep, I'm with BW on this one.

zephyr

Thank you for your replies but now I am confused.

My initial thoughts were to write it off the P & L and disallow for tax, which is how I had read it on the HMRC website.

But

The related parties does make sense- as the directors/shareholders own both companies- so this could be another way to get money out of the main company without calling it a dividend, and therefore not paying tax.

On the accounts I had taken over, the amount is showing as a separate debtor other than the overdrawn director's loan account (which they have paid tax on).

I should be grateful for your thoughts/comments.

Monsoon

The other Co is a separate legal entity.

Presumably if Co A lent the money to Co B, and Co B lent it to the directors, they would be taxed on it there. If that happened, to tax it again on the directors when co A writes off the loan would be wrong.

If Co B spent it on business expenses and then went bust, that's not taxable on the directors when Co A writes it off.

groundy

Agree with Monsoon, sorry for my initial reply causing confusion. Of course of the directors had drawn the money from the second company it would be taxed as income at that point.

Apologies again