DLA - Director writing off money owed

Rachel
Rachel FMAAT, AAT Licensed Accountant Posts: 349 Dedicated contributor ? ? ?
Hello

I wonder if you can help. I have a client who has been developing software and never sold anything as yet. It has built up costs and funded by the Director. He is looking for investors and now doesn't want the company to be in debt so wants to write it off. Is this as simple as it seem or are there any implications of basically wiping the balance sheet clean?

Thanks

Rachel

Comments

  • reader
    reader MAAT, AAT Licensed Accountant Posts: 1,037
    Interesting question.......

    It does seem as if it is as simple as Dr'ing the DLA and CR'ing loan write off in the P&L.

    However when the potential investors ask about the CR balance in the loan write off account the director would have to say it was money owed to him by the company that he's chosen to write it off in order to eliminate the debt in the company. At this point the investors will realise that the company was in debt, is loss making and that the director in a desperate attempt to get a cash injection has just flushed a whole load of his own money down the drain. Also, the investors would probably worry about the director reversing the loan write off journal in a future year.

    Does the director really want to write off the loan? Either way the investors will find out about the debt in the company and the director's desperation. I think it is completely normal for a company to be in debt during the development stage.
  • burg
    burg Moderator, FMAAT, AAT Licensed Accountant Posts: 1,441
    Can they not just convert the dla to share capital?

    This will help the balance sheet look better but will mean its harder to get the cash back personally but if they were looking to write off then it won't matter anyway.
    Regards,

    Burg
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    What Reader and Ian said.
  • stevo5678
    stevo5678 Registered Posts: 325
    From a tax perspective I don't think it is as simple and straight forward as possibly suggested if the value of the shares are deemed to be neglible.

    http://www.taxationweb.co.uk/forum/convert-directors-loan-into-share-capital-t30443.html
  • hunterhouse
    hunterhouse Registered Posts: 17 Dedicated contributor ? ? ?
    You may wish to consider that "wiping the balance sheet clean" is likely to have the opposite effect to that desired. Any potential investor will wonder why they are being asked to invest when the owner-director does not seem to carry a material, vested, interest.

    Debt is a common feature of early stage companies but is always unattractive.

    Ian's response is the key; not only is conversion to equity "clean", "transparent" and maintains the owner's vested interest but it is the suggested difficulty in "getting the cash back" that provides a potential investor some assurance that the owner is committed to the project.

    I hope this is useful.

    Hunterhouse
  • villapb
    villapb Registered Posts: 357
    I wouldn,t write off the director debt but put in writing that he would allow the investor to be first to be paid back if the investment came good, and the director to be at the bottom of creditor list..........also it can be put in the notes in the accounts that the directors loan is bottom of the creditors list. If it all went pear shaped nobody wont get paid paid anyway so thats the risk, but at least if it all goes wel,l the director will be showing he will be the last to profit form it, so showing goodwill.
  • villapb
    villapb Registered Posts: 357
    ps the reason i say not to write it off is because that is a focus on the negative, what if the business flourished with an investement, how will the director get their return.
  • Newbie
    Newbie Registered Posts: 229 ? ? ?
    Write off loan

    s455 tax is repaid to company 9 months after the accounting end date in which the loan is written off
    If the director is a participator in a close company, the loan is treated as a distribution grossed at the dividend tax rate (s415 ITTOIA 2005). Declare it on the Box 13 Additional Information pages on the directors personal tax return; the director is liable to higher rate tax if appropriate.
    HMRC’s view is that the write off is earnings and Class 1 NIC should be accounted for (CWG2 (2010) page 82 and National Insurance Manual 12020); try to argue that write off made to the individual in his or her capacity as shareholder, not as employee.
    No Corporation Tax return deduction for the write off (s321A CTA 2009 as inserted by FA 2010 s4)3)
    It’s advisable to make a note to the accounts to formally waive, otherwise technically the liability will remain.
    No charge if write off occurs on death
  • villapb
    villapb Registered Posts: 357
    Isnt that a writing off a loan made to the director or employee..............the director made the loan to the company.
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