Balance Sheet & Solvency

[Blackford Biz]

I have a small client who has a small cash balance and a three figure directors loan financed by capital and reserves. Making small profits. I have asked him to write a "to whom it may concern" letter to append to the accounts so that if required his statement of guarantee proves the business is still solvent. I've asked him to repay the directors loan asap and certainly before next year end. I've also told him he should be taxed for arms length interest on the loan.
Are these correct actions to take?

 

[Lisa Thomas]

What is your role?

 

[Blackford Biz]

What is your role?

In this case a friend doing the books.

 

[Newchodge]

I have a small client who has a small cash balance and a three figure directors loan financed by capital and reserves. Making small profits. I have asked him to write a "to whom it may concern" letter to append to the accounts so that if required his statement of guarantee proves the business is still solvent. I've asked him to repay the directors loan asap and certainly before next year end. I've also told him he should be taxed for arms length interest on the loan.
Are these correct actions to take?

When you say 3 figure director's loan, do you mean under £1,000?

 

[Blackford Biz]

When you say 3 figure director's loan, do you mean under £1,000?

Yes. Sorry if that wasn't clear.

 

[Lisa Thomas]

I've never heard of a statement of a guarantee being used to prove solvency before but perhaps some accountants will come along and elaborate.

As far as I'm concerned, the accounts themselves should prove the company's solvency/insolvency status.

 

[Argentum Tax]

I've never heard of a statement of a guarantee being used to prove solvency before but perhaps some accountants will come along and elaborate.

As far as I'm concerned, the accounts themselves should prove the company's solvency/insolvency status.

Neither have I heard of a statement of guarantee being used in that way.

I agree that the Balance Sheet will show whether a company is solvent or insolvent as a matter of fact. Any statement attached to the Balance Sheet will surely not change that status, I would have thought.

 

[japancool]

It strikes me though that if he has a need to take out a director's loan for under £1000, what are the chances of making good on that guarantee?

 

[Blackford Biz]

Neither have I heard of a statement of guarantee being used in that way.

I agree that the Balance Sheet will show whether a company is solvent or insolvent as a matter of fact. Any statement attached to the Balance Sheet will surely not change that status, I would have thought.

OK. So it's over the top and not required, as by signing the accounts the guarantee of paying the debt is implied?

 

[STDFR33]

If the company thought that the likelihood is that the loan won't be paid, it should be written off.

 

[Argentum Tax]

OK. So it's over the top and not required, as by signing the accounts the guarantee of paying the debt is implied?

No. Signing the Balance Sheet (accounts) doesn't imply anything other than approval of the accounts by the director(s) on the date stated.

Attaching a copy of the 'guarantee' only shows that, presumably, the director has undertaken to repay the loan. The Balance Sheet still shows that the company was insolvent as at the date of that Balance Sheet.

 

[Lisa Thomas]

I think you are confusing two different things. As AT says, the signing of the accounts confirms the directors approves the accounts. It has nothing to do with their ability or intension to repay the DLA.

 

[Lisa Thomas]

If that really has to be documented, I would expect it to be referred to in minutes of a board meeting.

 

[PCD]

You note that the loan was under £1,000, if it never went above £10,000 there is no need to pay tax on the beneficial interest. Assuming that he is a shareholder as well as a director Section 455 tax will need to be considered and the loan repaid within nine months of the year end to avoid this tax charge.