Closing down an insolvent company with a credit DLA

[Metic45]

Hi,

My company has been losing money for the last couple of years and I’ve decided to close it down after the end of this financial year (which runs until 31st October i.e. a few days from now). We effectively stopped trading 4 months ago with no transactions since then (the Confirmation Statement filing I did a week ago was paid out of my own account). The only thing left on the balance sheet now is a £70,000 Director’s Loan that I don’t want paid back.

I read on a few tax forums that HMRC might class this debt write-off as being a gift from me (the sole Director and shareholder) to the company and therefore in the final Corporation Tax return and accounts I would have to mark the whole £70,000 as having moved from the Director’s Loan Account to Profit and pay Corporation Tax on it - unless I had unused losses that I could use to offset it. Without sufficient outstanding losses, the suggestion was that the only way to avoid this charge would be to change the loan to new shares issued to me for the full £70,000 i.e. move the amount from debt to equity. But I have no idea what the nominal value of these shares would be as the company is effectively worthless?

Later, I found on this forum that there is a so-called ‘Spongebob Plan’ where, as I’m the only creditor and there is no tax outstanding (except this potential debt write-off) to HMRC for the current tax year, I could just complete the Corporation Tax Return and accounts for this financial year with the liability still on the books i.e. not move any of the loan to profit or equity and just apply directly for strike-off after year-end. I’ve seen this mentioned in theory a few times here, but I was wondering, does anyone have any practical experience of doing that and what the outcome was? I don’t want HMRC objecting to the strike-off or disqualifying me as a Director later down the road.

Also, if I go with the Spongebob Plan, should I use the HMRC website's Dormant Notification function to inform them that I stopped trading for Corporation Tax purposes 4 months ago (30th June) and therefore that this year’s tax return will be my last return, or would it be advisable to do that by letter to HMRC after October 31st instead?

If I was to use the Dormant Notification function, does that mean my CT return for this year should cover the period from the beginning of the financial year (1st Nov 2024) until cessation of trading (30th June 2025) or should it be until the end of the financial year (31st October 2025)? Also, should the micro-entity accounts that I send to CH and HMRC be made up to Oct 31st or 30th June? If they’re only made up to 30th June, does that mean I have to do another set of dormant accounts for the period from 1st July to 31st Oct?

Ideally, I would just like to use HMRC’s Dormant Notification function to let them know I stopped trading 4 months ago and then after Oct 31st this year, send in a CT return and micro-entity accounts for the full tax year (1st Nov ’24 – 31st Oct ’25) and then apply directly for strike-off without having to contact HMRC again. But not sure how practical or correct that approach is?

 

[numbersrule]

How does the £70k on the balance sheet compare with the accumulated losses?

Something doesn't add up.

Are you sure the losses have all been recorded correctly, including any Asset disposals at a loss during the winding down? For correct Asset disposal reporting the depreciation has to be run up to the end of the year prior. Then you can correctly record any loss relative to the depreciated value.

Or is it possible there is an Asset that you have overlooked?

 

[DWS]

I would wait until after 31st October, then submit end of year accounts and CT600 and then apply to dissolve the Company, and that should be the end of it.

 

[Metic45]

How does the £70k on the balance sheet compare with the accumulated losses?

Something doesn't add up.

Are you sure the losses have all been recorded correctly, including any Asset disposals at a loss during the winding down? For correct Asset disposal reporting the depreciation has to be run up to the end of the year prior. Then you can correctly record any loss relative to the depreciated value.

Or is it possible there is an Asset that you have overlooked?

The unused losses from this and previous years carried forward are around £65,000.

Regarding remaining assets, I actually lent the company £70,500 but there was £500 left in the bank account after we ceased trading a few months ago and so I paid that back to myself, leaving the DLA with a credit balance of £70,000.

 

[Metic45]

I would wait until after 31st October, then submit end of year accounts and CT600 and then apply to dissolve the Company, and that should be the end of it.

Do I need to contact HMRC (either by using the Dormant Notification function on their website or by writing a letter to them before or after applying for strike-off) to let them know I ceased trading in this financial year and not to expect any CT return for any part of next year?

Or is applying for the strike-off with Companies House sufficient notice to HMRC that I don't owe them any more tax and so they don't need to object to the strike-off?

 

[DWS]

Do I need to contact HMRC (either by using the Dormant Notification function on their website or by writing a letter to them before or after applying for strike-off) to let them know I ceased trading in this financial year and not to expect any CT return for any part of next year?

Or is applying for the strike-off with Companies House sufficient notice to HMRC that I don't owe them any more tax and so they don't need to object to the strike-off?

You can phone or write to HMRC if you wish or even send them a copy of the DS01 when you apply to dissolve.

 

[UK Contractor Accountant]

Different opinion here to consider:

I would formally write off the loan £70K and treat the income in the hands of the company as a taxable.

Company would be taxed on £70K - losses bought forward £65K = £5K @ 19% = £950.

You would establish a capital loss of £70K on your tax return which is available for carry forward and offset against any future capital gains.

 

[MyAccountantOnline]

Do I need to contact HMRC (either by using the Dormant Notification function on their website or by writing a letter to them before or after applying for strike-off) to let them know I ceased trading in this financial year and not to expect any CT return for any part of next year?

Or is applying for the strike-off with Companies House sufficient notice to HMRC that I don't owe them any more tax and so they don't need to object to the strike-off?

Send them a copy of the DS01 and confirm the company had no other income after the date it ceased trading.

 

[Metic45]

Different opinion here to consider:

I would formally write off the loan £70K and treat the income in the hands of the company as a taxable.

Company would be taxed on £70K - losses bought forward £65K = £5K @ 19% = £950.

You would establish a capital loss of £70K on your tax return which is available for carry forward and offset against any future capital gains.

Hi. Is this mainly just to be able to use the capital loss against future personal capital gains?

If, for argument's sake, I wasn't interested in using that loss, would you still suggest treating the loan write-off as income in the hands of the company, or would you in that case, also agree with the other opinions here that I should just leave the loan as an outstanding liability on the final set of accounts sent to HMRC and CH after Oct 31st and apply directly for strike-off?

 

[UK Contractor Accountant]

Hi. Is this mainly just to be able to use the capital loss against future personal capital gains?

yep - worth a bit of money in tax savings if you are likely to have future capital gains on say shares, properties, businesses etc.

Who knows RR may put CGT on private residences in the November budget!

 

[UK Contractor Accountant]

Should just leave the loan as an outstanding liability on the final set of accounts sent to HMRC and CH after Oct 31st and apply directly for strike-off?

Well IMO the route i would go down for a £70K DLA would be to do a debt for equity swap at par value for the shares (normally £1). Then apply for Strike Off and claim the £70K as loss on shares on my SA personal tax return.

That way avoids the argument whether the Strike off is a release/write off on the loan which is taxable for the company.

 

[Metic45]

Well IMO the route i would go down for a £70K DLA would be to do a debt for equity swap at par value for the shares (normally £1). Then apply for Strike Off and claim the £70K as loss on shares on my SA personal tax return.

That way avoids the argument whether the Strike off is a release/write off on the loan which is taxable for the company.

So issue 70k new shares to myself at £1 per share, inform CH using gov.uk within 21 days of that new issue as per their guidelines and move the debt to equity on the final B/S?

Would it matter by the way that the original (and only) shares I issued to myself were when setting up the company and they had a nominal value of 1p each rather than £1? Could I still issue the new shares at £1 each or would they also need to be issued at 1p?

 

[DontAsk]

Well IMO the route i would go down for a £70K DLA would be to do a debt for equity swap at par value for the shares (normally £1). Then apply for Strike Off and claim the £70K as loss on shares on my SA personal tax return.

Sounds like a huge fiddle that should not be allowed, but I like it.

I'll remember that one when I come to wind up in a few years, if the rules don't change, as my company owes me £10ks.

In the case of multiple shareholders (e.g., spouse) could we split the share issue and both claim a loss?

 

[numbersrule]

IMO you can't buy shares for £1 when they are not worth £1 because the reporting of the subsequent loss would be incorrect. The same applies to 100 x more shares for 1p.

You could argue that the Company would be worth £5k if the DLA was written off and on that basis you could write off £65k of the DLA and then have the company buy back the 100 x 1p nominal shares.at a rate of £50 per share = £5,000. Then the Company would own itself and you would have a CGT Bill for

£5,000 minus £1 minus £3,000 CGT Allowance = £1,999 at the applicable CGT rate.

But, before you go down that route I would look more closely at your accumulated losses because logically if your DLA is truly the only amount on the BS then your accumulated Loss should match it. Then you wouldn't need any skullduggery with Shares.

 

[Daybooks]

Your points about writing off the director’s loan is genuine. Generally writing off a debt would go through the profit and loss account and therefore become taxable if leading to taxable profits.

The explanation comes in how you eliminate the directors loan on the balance sheet. By debiting the account you need to credit the profit and loss account.

The issue is whether you can lawfully credit the capital section (Share Capital and Reserves) of the balance sheet. Rather than write off the loan you could waive it. This would effectively be a capital contribution reserve which may be distributable. Your £70k director loan account (matched by shareholder capital and negative reserves) would be eliminated and your capital and reserves would net off to zero.

However capital contribution reserve is not recognised in company law (I believe) and thus could be challenged albeit that recent case law seems to acknowledge its existence. The safest route on this basis is the conversion of the loan account into shares. All things being equal either way you’ll end up with share capital equal and opposite to a debit set of reserves.

Thus the company closes with nothing to distribute. Your latest year end accounts may not reflect any of this. You may still be required to file a corporation tax return for the final period to cessation. At this date the director loan may still be on the balance sheet. That isn’t an issue but I would write up the ledgers to finally clear all accounts and distribute anything back to the shareholder if required.

The alternate option of writing off the loan and thus taking through the profit and loss may be simpler but depends upon your taxable position. If you have accounting losses brought forward you may well also have taxable losses brought forward - acknowledging that accounting profit and losses are not the same as taxable profit and losses. The potential profit generated from the write off may be used to offset any unused taxable losses brought forward.

The devil is always in the detail. Hopefully some of the legal bods on the forum may add any input to the write off versus waiver and or conversion to shares.

 

[Metic45]

Your points about writing off the director’s loan is genuine. Generally writing off a debt would go through the profit and loss account and therefore become taxable if leading to taxable profits.

The explanation comes in how you eliminate the directors loan on the balance sheet. By debiting the account you need to credit the profit and loss account.

The issue is whether you can lawfully credit the capital section (Share Capital and Reserves) of the balance sheet. Rather than write off the loan you could waive it. This would effectively be a capital contribution reserve which may be distributable. Your £70k director loan account (matched by shareholder capital and negative reserves) would be eliminated and your capital and reserves would net off to zero.

However capital contribution reserve is not recognised in company law (I believe) and thus could be challenged albeit that recent case law seems to acknowledge its existence. The safest route on this basis is the conversion of the loan account into shares. All things being equal either way you’ll end up with share capital equal and opposite to a debit set of reserves.

Thus the company closes with nothing to distribute. Your latest year end accounts may not reflect any of this. You may still be required to file a corporation tax return for the final period to cessation. At this date the director loan may still be on the balance sheet. That isn’t an issue but I would write up the ledgers to finally clear all accounts and distribute anything back to the shareholder if required.

The alternate option of writing off the loan and thus taking through the profit and loss may be simpler but depends upon your taxable position. If you have accounting losses brought forward you may well also have taxable losses brought forward - acknowledging that accounting profit and losses are not the same as taxable profit and losses. The potential profit generated from the write off may be used to offset any unused taxable losses brought forward.

The devil is always in the detail. Hopefully some of the legal bods on the forum may add any input to the write off versus waiver and or conversion to shares.

Thanks. Where do you stand on the other option of just leaving the loan on the balance sheet (without taking it to P/L or converting to shares) and applying for strike-off directly after year-end?

In this case, the Corporation Tax return for this year would just show the trading loss up to cessation date and the final accounts sent to HMRC and CH would show the full credit DLA amount still remaining as an outstanding liability on the B/S.

Are HMRC or CH likely to object to the strike-off in this case? HMRC could theoretically argue that the DLA, by virtue of not being paid back by strike-off application date, has effectively become a gift to the company and therefore should be moved to Profit and Loss before company closure (with the requisite amount of tax paid). But in practice, do you know whether or not they will really do that as quite a few people, including in this thread, seem to be support that option?

 

[DWS]

Thanks. Where do you stand on the other option of just leaving the loan on the balance sheet (without taking it to P/L or converting to shares) and applying for strike-off directly after year-end?

In this case, the Corporation Tax return for this year would just show the trading loss up to cessation date and the final accounts sent to HMRC and CH would show the full credit DLA amount still remaining as an outstanding liability on the B/S.

Are HMRC or CH likely to object to the strike-off in this case? HMRC could theoretically argue that the DLA, by virtue of not being paid back by strike-off application date, has effectively become a gift to the company and therefore should be moved to Profit and Loss before company closure (with the requisite amount of tax paid). But in practice, do you know whether or not they will really do that as quite a few people, including in this thread, seem to be support that option?

I still stand by my original post #3 as the best course of action in my opinion, submit accounts and CT600 and then apply to dissolve using form DS01, HMRC would have no reason to object as there is nothing owed to them.
You are the only Creditor and there is nothing to stop a Company from applying to dissolve with outstanding Creditors only that they are informed of your plans.
If you waiver the DLA credit, yes it should then be taken to the P&L and tax may be due, so don’t waiver it and leave it outstanding,
Yes you could exchange the debt for shares but from what you say these would be worthless with no value so not sure what loss you could claim for CGT purposes.
Also worth considering what numbersrule says about the balance sheet, if you are owed £70k this must be mirrored in the accounts for them to balance.

 

[UK Contractor Accountant]

Would it matter by the way that the original (and only) shares I issued to myself were when setting up the company and they had a nominal value of 1p each rather than £1? Could I still issue the new shares at £1 each or would they also need to be issued at 1p?

you issue at 1p if nominal value is 1p

 

[Metic45]

I still stand by my original post #3 as the best course of action in my opinion, submit accounts and CT600 and then apply to dissolve using form DS01, HMRC would have no reason to object as there is nothing owed to them.
You are the only Creditor and there is nothing to stop a Company from applying to dissolve with outstanding Creditors only that they are informed of your plans.
If you waiver the DLA credit, yes it should then be taken to the P&L and tax may be due, so don’t waiver it and leave it outstanding,
Yes you could exchange the debt for shares but from what you say these would be worthless with no value so not sure what loss you could claim for CGT purposes.
Also worth considering what numbersrule says about the balance sheet, if you are owed £70k this must be mirrored in the accounts for them to balance.

This definitely sounds like the easiest and most attractive option to be honest if it won't cause any problems going forward.

As the company stopped trading a few months prior to year-end (today), my understanding is that the Corporation Tax return for this year should only cover the period to the trading cessation date. However, if I use the government's free online CATO service to submit the CT600, it will default the period covered by the return to the whole financial year i.e. until Oct 31st. Would that cause any problems?

The reason I ask is because I know there is a regulation stating you need to wait 3 months after cessation of trading to be able to apply for strike-off. If my final corporation tax return and final set of accounts all cover up until October 31st, would HMRC assume I only stopped trading on October 31st and therefore require me to wait until Jan 31st to be able to apply for strike-off? If that's the case, would it be advisable to send a letter to HMRC in November saying I stopped trading more than 3 months ago and am going to apply for strike-off immediately? I just don't want them objecting to the strike-off because they think I haven't followed their regulations or that they should still be expecting another tax return etc.

 

[Daybooks]

Thanks. Where do you stand on the other option of just leaving the loan on the balance sheet (without taking it to P/L or converting to shares) and applying for strike-off directly after year-end?

In this case, the Corporation Tax return for this year would just show the trading loss up to cessation date and the final accounts sent to HMRC and CH would show the full credit DLA amount still remaining as an outstanding liability on the B/S.

Are HMRC or CH likely to object to the strike-off in this case? HMRC could theoretically argue that the DLA, by virtue of not being paid back by strike-off application date, has effectively become a gift to the company and therefore should be moved to Profit and Loss before company closure (with the requisite amount of tax paid). But in practice, do you know whether or not they will really do that as quite a few people, including in this thread, seem to be support that option?

If you were to ‘release’ the director loan be careful with terminology. Writing off the loan would generally be an action taken by the directors of the company because they were of the view they would never pay it back and hence would go through the profit and loss account; but the liability although no longer shown on the balance sheet still exists.

Waiving the loan is the director formally giving up the entitlement to be repaid. If treated as a capital contribution reserve that director if a shareholder may benefit from it.

Converting the loan to capital (shares) allows the director to retain some value albeit in a different form.

Leaving the loan on the balance sheet has great value in my view. Primarily it means you are in no way relinquishing your rights.

Applying for strike off requires the company to have stopped trading in the three previous months so this is really a matter of fact and notification to HMRC does not alter this fact.

If you were to file the accounts and tax returns within three months of the year end and advise HMRC of the intended strike off the inference is that there is no further tax liabilities since that disclosed at the year end. This would lessen the likelihood of objecting.

In terms of HMRC attempting to treat the director loan creditor as write off income your accounts will show differently; it’s one of the reasons why you maintain bookkeeping records.

 

[Metic45]

Ok. Thanks everyone for your help!

As advised, I'll first ensure the B/S contains only the outstanding Director's Loan liability and that the total Accumulated Loss carried forward matches this figure.

Next, rather than me waiving the loan, moving it to Profit and then offsetting with that Accumulated Loss, I'll just leave it on the B/S as an outstanding liability in the final set of accounts and not mention it in P/L on the final tax return.

After submitting this final set of accounts and CT600 (all for the F/Y to Oct 31st 2025), I'll apply directly to CH for strike-off.

As suggested, I'll also send a copy of the strike-off form (DS01) to HMRC Corporation Tax Services indicating the company stopped trading several months ago and therefore has no more tax to pay.

For the benefit of anyone coming across this thread in future, I'll only reply back if there were any issues with this approach.

Thanks again.