Accountants Question..

[nekrum]

Hi

Wondering if any accountants could give a view on the following..

I have a company which I would like to wind down and cease trading. It has minimal creditors so all debts will be paid off including the VAT man. There is currently an overdrawn directors loan account that has incurred some additional corporation tax which is yet to be paid and ideally we would rather not pay this. If the company ceased trading what would happen with regards the corp tax liability, would this become due as part of the directors next self assessment?!..

For the record we're not trying to diddle out of paying to corp tax but our current accountant is very vague on what the implications are and would like a second opinion.

Thanks in advance..

[mybrainhurts]

Why would Corportion Tax have anything to do with the director's personal tax...?

[wattsm666]

If the loan was formally written off, which you are possibly suggesting then it would be treated as a distribution in the director's hands and would therefore be taxed like a dividend. The Corporation Tax levied on overdrawn loan accounts is to ensure HMRC have a payment on account, until such time as it is taxed on the individual.

[Eric Mc]

mybrainhurts said:

Why would Corportion Tax have anything to do with the director's personal tax...?

Because it does - Section 419 Corporation Tax.

If the company decides to effectively write off the loan it has made to the director, that loan now becomes income in the hands of the director and will be assessable to Income Tax and will need to be declared on the director's personal Self Assessment Tax return.

In the company accounts, the loan balance will be transferred from its current location as a Current Asset in the Blalnce Sheet to a Director's Loan Account Written Off heading in the profit and loss account. However, this particular bad debt write off will not be allowed as a tax deductable expense in the company's Corporation Tax computation and will need to be "Added Back" as a disallowable expense in that computation.

Regarding Section 419, the copmpany will already have paid the Section 419 Corporation Tax on the illegal overdrawn loan account and, with it now being permanently written, will never be able to recover this Section 419 penalty Tax.

If the loan account exceeded £5,000, the loan account balance should have been declared in the P11d so that a tax charge could be raised on any "beneficial interest" cahrged - or not charged - by the company to the director.
The write off also needs to be declared on the P11d of the director for the tax year in whichn the write off occured. This is how the Revenue are initially informed about the fate of the overdrawn loan account but the same information also gets botified to them again in the Self Assessment form.

[mybrainhurts]

Thanks, Eric, I didn't RTFQ properly.

[nekrum]

Thanks guys - on basis that it would be due on the self assessment if the company ceased trading today, would it be due immediately or declared on the next self assessment?!.. Thanks

[Eric Mc]

If the writing off occured today (2 August 2008) it would have occured in the 2008/09 tax year - and therefore would need to be declared on the 2008/09 Self Assessment tax return.

There will also be the requirement to dcelare it on the 2008/09 P11d and in the notes to the company accounts in which 2 August 2008 fall.