SCIG12480 - Reaching agreement on income or profit addition: Tax treatment: Tax treatment of company extractions and other income or profit additions
The normal treatment of extracted company income or profits described at SCIG12460 gives rise to liability on the company to Corporation Tax and tax under Section 419 ICTA 1988. The liability under Section 419 should be computed by re-writing the directors loan and current accounts, as described at EM8620.
Where the Employment Income E route is followed the amount of the extractions will be treated as additional income or profits and, along with any other (i.e. non-extractive) additional income or profits, will form the basis of a computation of additional Corporation Tax liability. Amounts assessable under Schedule E will be deductible from that computation in the period in which they were made available to the director. Where we proceed against the company for PAYE or NIC liability, or effect a settlement by agreement to include that liability, the amount will be treated as a Case I deduction in the earliest year that is open for amendment, either because there is an open enquiry or the enquiry window remains open (see BIM47090 for further guidance).
In those few cases where the director’s defalcations are regarded as allowable there is no net effect unless and until there is a recovery by the company. The amount recovered will be brought in the year when recovery is effected.
Where amounts are treated as assessable on the director personally there will be, in that respect, no effect on the company’s tax position.
Where expenses in a company’s accounts include the payment of a director’s personal expenses not declared on form P11D these will normally be disallowed for CT purposes and debited to the director’s loan account (i.e. the CT/419 route will normally be followed). See however EM8601 - last paragraph - for possible alternative treatment.