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HMRC internal manual

Enquiry Manual

Close Companies: Directors: Misappropriations

Misappropriations are company funds wrongly extracted by the director or participator for their own use. Curtis v J & G Oldfield Ltd (9TC319) indicates that misappropriations by a controlling director are not deductible in computing profits.

Company funds misappropriated by a director are normally assessable upon the company unless the facts show that the extractions can be regarded, instead, as employment income received by the director/participator EM8601 and EM8701.

As a consequence of misappropriation of funds a participator has incurred a debt to the company, making the company liable under CTA10/S455. The debt incurred is not, however, a beneficial loan for ITEPA2003/S175 purposes until there is an intention that it be repaid.

Each separate amount misappropriated is an advance on which S455 liability arises. Although the participator may have had credit balances available on loans shown in the accounts, CTA10/S458 relief is strictly only effective when repayment of the misappropriated amount is made during or after the enquiry. However, where there is full co-operation with negotiating an acceptable offer S455 liability should be computed on the net overdrawn position after deducting existing loan account balances.

Exceptionally, insufficient income and financial resources of the directors might be explained by other sources or activity outside the company’s organisation. When considering a claim that amounts are from a source other than the company you should take into account the nature and adequacy of the company’s records. You should only settle with the director where you are satisfied that the explanation is genuine.

Payments to participators who are not directors might similarly have been hidden or mis-described as business expenses in the accounts. Again, clear evidence would be needed that these were derived from genuine business services supplied to the company and thus allowable to the company and assessable on the participator.