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Right or wrong to write off leaver’s loan

This month’s Tax Discussion Group case study investigates the implications of writing off an ex-employee’s interest-free company loan.

April 2018

The accountant explained that his client had queried his tax and financial position regarding an employee who had left having received a £10,000 loan, but without paying back the monies. The accountant explained that the client was considering writing off the loan as irrecoverable. He explained that the £10,000 was interest free and the client had expected to receive the monies back prior to the employee’s resignation.

He confirmed that the final salary due to the employee was not sufficient to meet the loan, and that the employee was not owed holiday pay nor had any expenses to be reimbursed. He set out that the loan could be evidenced by a copy of the cheque given to the employee for the loan, but they had not obtained a signed loan agreement.

Those present quizzed the accountant regarding the purpose of the loan, and asked what the company had done to recover the loan. The accountant stated that the loan was provided to enable the employee to meet the legal fees for a divorce and so the monies were irrecoverable as the employee had spent the monies. The employee was not able to repay the loan nor prepared to enter into a repayment plan.

The discussions then ranged from the beneficial loan implications of the monies received, as well as whether there should be any PAYE applied to writing off the loan balances. Aside from the employment tax implications, there was also a discussion regarding the treatment of the loan being written off by the company and whether there should be any bad debt relief or claim for the cost to be an allowable expense to offset against the company’s taxable income.

Additionally, there was discussion regarding whether the company would be able to recover the monies from its former employee, and the necessary steps it could pursue to achieve repayment of the monies.

Each month (with the exception of July and August) the Tax Discussion Groups in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.

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