Good money after bad

18 October 2011

Issue: 4326 / Categories: Forum & Feedback

A business has collapsed since the start of the current tax year with a £20,000 deficit on the profit and loss account. The owner believes the business can be revived with an injection of funds, but how can this best be structured?

I have a client whose business has collapsed since 31 March 2011. Put simply the company has a deficit on profit and loss account of £20 000 matched by an overdraft of £20 000 with nominal share capital. There is corporation tax to pay on 1 January 2012 which will not be entirely extinguished by the current losses.

The client believes that the business can be turned around. To this end she is selling her house in order to sort out a number of debts and proposes to introduce further capital into the company to enable it to pay its tax and ‘start again’.

My question is this: how should she introduce that money? If it is new share capital or a loan the company will have to earn £20 000 before it can pay a dividend.

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