Write off of loan between companies with common directors

HcksawJimDuggan

Just looking for some thoughts on the following situation:

Mr. X owns 50% of Company A & 50% of Company B

Mr. Y also owns 50% of Company A & 50% of Company B

Company A & Company B are not part of a group but as can be seen from above have common directors.

Company A loans Company B €50K. 3 years later Company B is liquidated and the debt of €50K to Company A is written off.

What would the tax implications be in the above situation? Is the write off of the loan in Company A an addback in the CT comp or would it be allowable?

dbran

Hi

It is an add back and not allowed as an expense because the debt is not a trade debt, it is a loan.

Presumably the receiving of the loan in company B was not accounted for as income.

Regards

dbran

ants09

Where a company provided a loan to another group company and it is clear that
this loan is capital in nature, any forgiveness of this loan should not be taxable in
the hands of the recipient company on the basis that the loan was capital in
nature and is the release of a liability. Equally, the group company that forgave
the loan would not be entitled to a corporation tax deduction for the amount
forgiven

Alan Shore

I would argue that its not a loan between two companies it is in fact a Loan by Company A to the directors of Company A. If this loan is in breach of 10% assets rule then it is a breach of company law. The directors owe this money back to the company the fact that company B can't pay them back is irrelevant.

The directors of company B have provided a loan to company B, if that loan is written off then its a directors current reduction.

To lend money between companies you need a group structure to avoid these problems.

HcksawJimDuggan

Cheers for the feedback.

Alan,

Was kind of thinking that to be the case when I first came across it but can't find anything online that states it is for definite i.e. that it should be treated as a director's loan as opposed to a loan from Company A to Company B.

dbran

Alan Shore wrote: »

I would argue that its not a loan between two companies it is in fact a Loan by Company A to the directors of Company A. If this loan is in breach of 10% assets rule then it is a breach of company law. The directors owe this money back to the company the fact that company B can't pay them back is irrelevant.

The directors of company B have provided a loan to company B, if that loan is written off then its a directors current reduction.

To lend money between companies you need a group structure to avoid these problems.

Hi Alan

Perhaps but a bit too aggressive for me.:)

Firstly, there is a gross up of the loan by the standard rate of income tax 20/80 and withholding tax paid over to the revenue on the outstanding directors loan from Company A to the directors. So in this case 20/80 x 50k is 12.5k paid at the time of the companies CT1 return.

Secondly, there is a BIK on the notional interest on the loan outstanding at a notional rate of 13.5%. This woudl be payable through PAYE system or via the directors personal return if not.

Thirdly, if the loan is deemed written off, there is a personal tax liability in the hands of the directors as it is deemed a salary. This would be via PAYE system or directors personal return if not.

Also note that as proprietary directors, the above would need to be reflected on their personal form 11 returns and the taxes paid even if the company does not pay them through the PAYE system. This effectively means they are personally liable for the tax.

Whereas if you take the addback in the tax comp the most that is lost is a 12.5% CT charge. And if there is no profit in the company then there may not be a CT charge at all.

So the question is, could the revenue deem the loan written off if it is clear that there is no intention by the directors to repay it.

I would think it is better to take the addback in the accounts and additional CT at 12.5% depending of course on how the numbers are?

Also, it is already a breach of section 31 and a company law issue anyway because Company B is connected to the directors of Company A

Regards

dbran

Alan Shore

Dbran,

I agree with all that but tax treatment can't be used to justify not dealing with it properly.

If the director took €50k and bought a boat would you argue that the write off of the loan should be added back in the tax comp and not treated as a director current account.

dbran

Hi Alan

I agree that you cannot switch things round to suit yourself. It is either a loan to the director or a loan to anther associated company and the tax treatment follows on from that.

A boat is clearly personal and a directors loan, but loan that is used by that other company for cashflow etc can easily be argued that it is a loan to that other company directly. It does not have to be a loan to the director just because it is not in a group.

Best Regards

dbran