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bigduckontax, Accountant
Category: Tax
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Hello Sir, I bought a limited company trading in 2011. The

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Hello Sir,

I bought a limited company trading in 2011. The company had a loan from sister company when it was originally started in 2010 . When i bought it from them they written off the loan i did not had much knowledge of accounts that time i got the accounts filed with help from a friends of mine who had a little knowledge of accounts again. He carried forward the loan which was written off. This year the accounts were filled on the same pattern as well. Now i have got a VAT visit and i actually contacted a charted accountant. He goes to me that we will have to revise the accounts because the loan was not treated correctly! the loan amount was about 200k and he is saying me that we will have to pay corporation tax on this which will be with penalties over 45k. I am a running a small business the total profit i had this year was 6k. He said me that its something under non trading profit when the other company had written it off? Would you be able to help me out with the treatment of this kind of profit? and secondly if i will have to pay the tax and stuff on it , is it possible to pay in instalments?
Submitted: 4 years ago.
Category: Tax
Expert:  bigduckontax replied 4 years ago.

Hello, I'm Keith and happy to help you with your question.


It is bad news I am afraid. The written off loans to the company do create a Corporation Tax (CT) liability. Your accountant is correct, the write off is a non-trading profit which effectively makes an overall profit in the company's accounts for the relevant year. You add that to the trading profit to arrive at the profit for CT purposes. Any losses brought forward from the year(s) before may be written off against this as can any true trading loss in that year, but I suspect that the company is in for a heavy CT bill. Under the circumstances HMRC may be willing to assist in staged payments, there being little point in their driving the organisation to the wall for a few bob when they might get a lot more in the long term. They will, of course, be entitled to interest and may raise penalties also. However, it may be more economical to put the company into receivership as insolvent and transfer your trade to a new organisation. There is, of course, the adverse publicity this may generate to consider not to mention that, if you have taken moneys out of the company, you may have unwittingly created a fraudulent preference when large sums were due elsewhere (ie to HMRC). I do not enter this moral maze!


Fortunately VAT does not come into these transactions, they are outside the scope of the tax.


Sorry to be the purveyor of such gloomy news.