NIC on write off of loan account- borrower deceased

[rachelah]

I know that HMRC generally class the write off of a directors loan account as earnings for NIC (despite schedule F treatment for income tax purposes) but I have a case with slightly different facts and would welcome opinions on this. The loan was created by a director shareholder who died and the loan was effectively inherited by the spouse with the shares when the estate was settled. It was then written off. HMRC are seeking NIC on earnings, but whose earnings are these? The cash was drawn from the company by the deceased not the spouse although spouse was a shareholder, but not an employee at that time. At the time of the write off spouse was taking a salary although probably didn't have an employment contract. The loan was not formally written off and I have read somewhere that for NIC purposes it is perhaps then not yet earnings as strictly speaking the debt remains?

Any thoughts/comments on this would be appreciated, especially as I am not entirely sure that the loan account should have been transferred to the spouse in the first place.

[AvocadoK]

The loan can be transferred to the spouse. The executors would have had the choice of either repaying the loan using estate assets (which may have meant selling assets); or agreeing with the widow that she would take over the loan, and passing all the assets to her intact.

Has a write off occurred? The fact that the company has written it off as an asset in its accounts does not mean it has actually written off the loan. It would need to have entered into a formal deed of release to write it off in the sense of releasing the widow from the obligation to repay it. If a formal release has not happened, you should argue strongly that no write off has occurred, and no income arises.

If a write off did occur, it cannot be earnings of the deceased, for obvious reasons, so HMRC must be regarding them as earnings of the widow. The fact that she has received a salary would seem to be sufficient evidence that she has some form of employment, regardless of whether a written contract exists.

AK

[rachelah]

Thanks AK. The write off has gone through the accounts but no formal release, deed or otherwise has taken place. Does this give us scope to recharacterise it at all? It should have just been cleared by way of a dividend in the first place really and we could do this as there were sufficient reserves at the time but is it too late now it has gone in the accounts as a write off?. I agree that there is scope to argue no earnings as no formal write off but presumably we can't defer this and the corresponding NIC forever!

[AvocadoK]

If it has not been released, then the accounts treatment is merely an "impairment" of a debt, so you could easily write back the provision that has been made and then clear the debt with a dividend. There will then be no NIC charge. The first thing to do though is to get HMRC to accept that the loan has not actually been released, in the absence of any formal deed of release.
AK

[rachelah]

If we assume the write off has already been declared on the individuals tax return as sch F income, can we still claim it's not yet earnings for NIC purposes because the debt has not been formally released? The dichotomy between income tax and NIC here is somewhat confusing!

[AvocadoK]

If it has not been formally released, the tax return should not have shown it as income, so it should be amended.

But you are right in saying that the NIC treatment does not follow the Sch F treatment. Under income tax rules, the Sch F rules 'trump' the earnings rules, but this has no relevance to NIC. So HMRC can assess NIC on a loan write off even if it is subject to income tax under Sch F.

AK

[anon123]

Don't give in too easily on the NIC charge. I have had two cases where HMRC have sought NIC on the loan written off and in each case they decided not to pursue the matter. Taxation Magazine has some useful articles on this topic which you could use to form an argument.

[AvocadoK]

Yes - Taxation Magazine dated 12 May has an excellent article ("Plain Vanilla") by Mark McLaughlin which covers the NIC issue.

[RAH]

Just to update on this HMRC did agree in the end that no NIC was due as this was not earnings, the director having been fully remunerated for their services. Thanks to everyone for their helpful advice.