s419 relief on divs from restated accounts

[Jantra]

a company files its 2007 and 2008 accounts (May year end). HMRC investigate the returns (CT600). (Not by me I'll hasten to add, they were a right dogs dinner). Both HMRC and company agree to redraft and resubmit accounts and tax returns as there is some confusion surrounding tax treatment of certain items.

accounts are redraft and laid before directors in December 2009. At the same time the May 2009 financial statements are also presented.

The directors agree to dividends payable in 2007, 2008 and 2009 based upon available reserves at that time. The book entries show these payments being made at 31st May 2007, 31st May 2008 and 31st May 2009.

At each year end there is an (increasing) balance on the directors account.

HMRC are stating that no s419 relief is available in respect of the divs (the directors are the shareholders) as they were not voted on until December 2009 and thus relief can only be claimed in the year to 31st May 2010.

i thought s419 relief was available as soon as the loan was repaid and you informed HMRC. If this is the case then at best HMRC can only claim interest on the dividend amount of the loan as this part of the loan would be considered repaid.

HMRC are stating that my assumptions are incorrect. am i mistaken?



Is this correct?

[AvocadoK]

The dividends were voted in December 2009, and so cannot be treated as paid on a date earlier than that. The overdrawn directors' loan accounts for the earlier years must therefore be shown as outstanding, and s419 tax assessed. HMRC are correct in stating that relief is due 9 months after the end of the year in which the loan is repaid. You may be able to get them to agree not to assess the tax, but just collect the interest, if the company has no means to pay the tax.
AK

[RAL]

You may be able to get them to agree not to assess the tax, but just collect the interest, if the company has no means to pay the tax.
AK

Hi AK

How do you get HMRC to agree to charge just an interest? Local CT office?

Regards

[Jantra]

how about s454 CA2006

http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_27#pt15-ch11-pb1-l1g454

which states you can now re-submit the accounts at any time if they do not comply with the act. The reason for amendment would be they do not give a true and fair view (s393 CA2006)

on this basis the accounts need to be revised. If the dividends need to be amended to reflect this then the book entries are in fact the date of the year end and not the date of general meeting where the vote was carried to pass the divs. There isa case law that states book-entries are acceptable.

you say relief is given 9 months and 1 day from the year end the divs were voted. Lets say all the divs were voted for May 31st 2009 financial year end. The vote took place in December 2009 when the accounts were prepared. Are you saying that it is 9 months from 31st May 2009 or 9 months from 31st May 2010 (the year which the divs were voted). If it is the former then why can a company vote for divs (and get relief) after the event for FY2009 but not FY2007 or FY2008?



Rgds
Jan

[Jantra]

would another option be to write off the loans outstanding at the end of each period. The participator would then be liable to tax on the benefit as if it was a dividend and CT relief would be available on the loan written off...

is this not the same result but via a different method.

[AvocadoK]

Hi RAL
I did recently agree with the local office to collect the interest without assessing the s419. It should be possible to agree the same with the business payment support service.

Hi Jantra
Relief is due 9 months after the year in which the loan is repaid. The loan is repaid when the dividend is paid, which is December 2009 at the earliest. The dividend may be declared in respect of an earlier period, but it is the date when paid that counts for tax.

The accounts are not "wrong" in this respect - if the dividend was not declared in the earlier period, the accounts are correct in not showing a dividend.

A loan write off would potentially face two problems. One is that the loan is likely to be to a connected person, so a deduction for a write off would be denied. Second, the loan may be for an unallowable purpose per s442 CTA if the making of the loan was " not amongst the business or other commercial purposes of the company."

Regards
AK

[Jantra]

what if the cash payments were made during the FY in question but the book entry was made after the year end?

many tx during the FY
Dr Directors Account
Cr Cash

after balance sheet date reflecting divs declared
Dr Divs
Cr Directors Account


does the payment of the dividend relate to the date of the resolution or the date the cash payment was made?

[RAL]

Thanks AK

Regards

[AvocadoK]

Jantra,
The initial cash payment is a loan. The later declaration of a dividend repays the loan. In between those dates, the loan is outstanding, and s419 tax (and benefit in kind) is chargeable.
Regards
AK

[Jantra]

thanks