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HMRC‚ a targeted approach to Directors Loan Accounts (DLAs)
HMRC are taking a more proactive and joined up approach in identifying directors who benefit from the write off of DLAs by seeking additional cooperation and disclosure from third parties.
In a corporate insolvency process the recovery of assets is dealt with by the Insolvency Practitioner (IP), which includes overdrawn DLAs. The IP is required to seek recovery of a DLA, which will either be recoverable in full, in part or irrecoverable, subject to the prevailing circumstances and any professional advice obtained as part of the DLA realisation process.
The IP is able to enter into a compromised settlement of a DLA with the relevant director and in such circumstances the IP will consider the balance of the DLA as irrecoverable, with the irrecoverable amount considered as being written off by the corporate entity as part of the insolvency process.
The full value of the DLA and the value of the DLA realised as part of the insolvency process should be disclosed in the IPes reporting requirements to creditors, but this requires HMRC to review the available documentation to identify the write off of any DLA.
There is now a voluntary directive for IPs to follow as part of a corporate insolvency process. HMRC have introduced the new voluntary process to allow a targeted approach in the identification of DLA write offs, which specifically applies to the scenario where DLAs are written off as part of a corporate insolvency process.
Although the directive is currently voluntary, it may be adopted further as best practice by Insolvency Regulatory Bodies leading to a direct and consistent disclosure to HMRC on all DLA write offs.
What are the consequences of writing off a DLA?
S455 Tax (Corporation Tax Act 2010)
Where the company has paid S455 tax to HMRC in relation to the DLA then repayment can be claimed within four years under S458 (CTA 2010) but to do so the loan must be either released, repaid or written off.
If a proportion of the loan has been released, repaid or written off it follows that only that apportionment can be reclaimed.
The reclaim of any S455 tax may be made by a company nine months and one day after the end of the accounting period in which the loan was released, repaid, or written off.
DLA write offs and corporate insolvency
Where a DLA has been written off in a period prior to a corporate insolvency process, such a transaction may be challenged as voidable by the IP. Subject to the prevailing circumstances, the general grounds to seek to overturn the write off transaction will usually be as a transaction at undervalue, as an asset of a company will have been disposed of for a value less than full consideration. Directors are legally connected to a company and the relevant period to challenge the transaction is two years prior to the date of the commencement of the insolvency process.
Whether a DLA has been written off prior to the commencement of an insolvency process, is shown as outstanding in the insolvency process, or both; the IP will initially need to seek recovery of the full DLA.
Where there is an eventual write off of a DLA, the relevant individual benefiting from the write off must disclose the value of the write off on their individual Self-Assessment (SA) return as HMRC will view any write off money received by the relevant individual as income without deduction of tax at source. The time of write off will determine which financial year the SA disclosure should be made in and the relevant individual will be required to pay tax on the amount written off the DLA, which may result in a significant personal tax bill.
Can personal tax on a written off DLA be avoided?
Where a DLA is compromised under a personal insolvency procedure for the relevant individual benefiting from the DLA write off, then there is no personal tax payable on the written off amount of the DLA.
Where a company enters into a formal insolvency process resulting in an overdrawn DLA, it is not uncommon that the director has also provided personal guarantees to banks, finance providers, suppliers, etc. which may leave the director in a vulnerable position in trying to deal with their personal financial circumstances.
An Individual Voluntary Arrangement (IVA) is a personal insolvency process that allows the relevant individual benefiting from the DLA write off to pay no tax on the written off amount.
An IVA allows an individual to compromise (i.e. pay in full or in part) all their personal debt including an overdrawn DLA, personal guarantees, personal HMRC debt, loans, etc. into one orderly repayment proposal. Subject to the IVA being approved by creditors and subject to the IVA being successfully completed, all the individuales debts will be legally paid in full and final settlement. An IVA, once agreed, also prevents creditors bound by the IVA from commencing or continuing recovery action or enforcement of a debt, whilst the IVA remains in force.
An encompassing approach
Leonard Curtis recognises the vulnerability of the director as part of the overall process and considers not only the corporate advice and solutions, but also seeks to identify an alternative solution for a director to resolve their personal financial issues to minimise disruption at what may be very difficult time.
LC Advisory is the personal insolvency division within Leonard Curtis and is headed by Amy Mehers. LC Advisory specialises in assisting individuals personally to review an individuales options and achieve a solution to their personal financial position in an orderly and protected manner.
LC Advisory contact details
Amy Mehers can be contacted on:
Office: 0161 413 4940
Mobile: 07713 385 625
Email: amy.mehers@leonardcurtis.co.uk
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