Director loans
Discussion
I've searched and read a previous thread, but I'm still unsure.
I'm paying myself and 1 other through directors' loans, along with PAYE to the normal tax free threshold. I will clear these loans at financial year end with a dividend.
I read of a £10k per person limit before BIK is payable etc. (this is my first year of trading, so its all new to me). My accountant says:
Provided your loan account is cleared by a dividend before your year end the benefits in kind rules do not affect you.
Is this right? An article I saw, stated...
What happens if I owe my company money?
If you owe your company over £10,000 (interest-free) at any given time, the loan is classed as a benefit in kind and you’ll need to record it on a P11D, as it’ll be liable to both personal and company tax. You’ll also need to pay Class 1A National Insurance at the 13.8% rate on the full amount.
Can someone knowledgeable set the record straight?
Many thanks.
I'm paying myself and 1 other through directors' loans, along with PAYE to the normal tax free threshold. I will clear these loans at financial year end with a dividend.
I read of a £10k per person limit before BIK is payable etc. (this is my first year of trading, so its all new to me). My accountant says:
Provided your loan account is cleared by a dividend before your year end the benefits in kind rules do not affect you.
Is this right? An article I saw, stated...
What happens if I owe my company money?
If you owe your company over £10,000 (interest-free) at any given time, the loan is classed as a benefit in kind and you’ll need to record it on a P11D, as it’ll be liable to both personal and company tax. You’ll also need to pay Class 1A National Insurance at the 13.8% rate on the full amount.
Can someone knowledgeable set the record straight?
Many thanks.
Sounds to me like you’re getting a bit confused as to who is loaning who money through your directors loan account.
To try and explain how I understand it;
- each month you declare in your accounts that the company pays you £800.
- this is credited to your directors loan account (your company owes you £800)
- if you decide not to actually pay yourself then this can carry on for ever and a day.
- if this carries on for say 2years your director loan account has credit of £19,200.
- there are no tax implications for you in this scenario.
- you can chose when your company pays back the money it owes you and when it does there’s no tax to pay on it assuming the £800 is below tax levels.
Where the £10k comes in is if;
- each month you declare in your accounts that the company pays you £800.
- however each month it pays you £1,600.
- therefore each month you are effectively borrowing £800 from your company,
- after a year you’re up to owing your company £10,000 and all sorts of things kick in.
Hope that helps, I’m not an accountant of any shape but do dabble with directors loans
To try and explain how I understand it;
- each month you declare in your accounts that the company pays you £800.
- this is credited to your directors loan account (your company owes you £800)
- if you decide not to actually pay yourself then this can carry on for ever and a day.
- if this carries on for say 2years your director loan account has credit of £19,200.
- there are no tax implications for you in this scenario.
- you can chose when your company pays back the money it owes you and when it does there’s no tax to pay on it assuming the £800 is below tax levels.
Where the £10k comes in is if;
- each month you declare in your accounts that the company pays you £800.
- however each month it pays you £1,600.
- therefore each month you are effectively borrowing £800 from your company,
- after a year you’re up to owing your company £10,000 and all sorts of things kick in.
Hope that helps, I’m not an accountant of any shape but do dabble with directors loans
Does either scenario match what I do? If I paid £800 a month to each person, I take this out of the company and send it to the personal accounts of each person. I record how much.
Can directors’ loans be used for money that won’t actually be pay? Is this where the confusion comes in?
Thank you.
Can directors’ loans be used for money that won’t actually be pay? Is this where the confusion comes in?
Thank you.
Yes you're doing my first example, think of the Directors loan account as a bank account, it's the bank of you to your company where you loan your company money but you shouldn't use it for your company to loan you money.
As for can other things go through directors loan accounts, yes basically anything that you fund on behalf of the company and expect your company to refund you (at some point).
A few examples;
- you drive in your own car to see a client so you can charge the company x pence per mile,
- you use your personal mobile for business calls, the bill is paid for by your private account so your company owes you for these calls.
- you have a meeting in a costa and buy the coffee and cake with some cash,
- train fares - assuming you didn't use the company credit card
- and possibly the biggest the dividend.
As for can other things go through directors loan accounts, yes basically anything that you fund on behalf of the company and expect your company to refund you (at some point).
A few examples;
- you drive in your own car to see a client so you can charge the company x pence per mile,
- you use your personal mobile for business calls, the bill is paid for by your private account so your company owes you for these calls.
- you have a meeting in a costa and buy the coffee and cake with some cash,
- train fares - assuming you didn't use the company credit card
- and possibly the biggest the dividend.
Marcellus said:
Does this help the explanation?
Yes, thank you. But the issue was based around the £10k and if you can go over that before clearing it within a financial year. I felt that it would result in penalty, but my accountant says its no issue if its all done and dusted by year end. | Date | Description | Debit | Credit | Balance |
|---|---|---|---|---|
| Jan | Salary to #1 | 800 | 0 | -800 |
| Feb | Salary to #1 | 800 | 0 | -1,600 |
| Mar | Salary to #1 | 800 | 0 | -2,400 |
| Apr | Salary to #1 | 800 | 0 | -3,200 |
| May | Dividend | 0 | 5,000 | 1,800 |
| June | Salary to #1 | 800 | 0 | 1,000 |
MJ85 said:
Yes, thank you. But the issue was based around the £10k and if you can go over that before clearing it within a financial year. I felt that it would result in penalty, but my accountant says its no issue if its all done and dusted by year end.
As I understand it provided you don’t owe the company then there’s no issues and even if you do then there’s not always an issue.Directors' Loan Accounts (DLA) can be of three permutations -
i) the company owes money to the director
ii) the director owes money to the company
iii) nil balance - nobody owes anything to anybody
In scenario i) HMRC could not care less
In scenario iii) HMRC could not care less
In scenario ii) however, HMRC does very much care. In fact, they care so much they can classify the situation as being "illegal" and will heavilly penalise the company in a number of ways. Scenario ii) is usually referred to as an "Overdrawn Director's Loan Account" and should be avoided at all costs.
If, at the end of the company's financial year a director's loan account is overdrawn - it is expected that the company adds and additional Corporation Tax amount onto its "normal" Corporation Tax bill. The "normal" CT would be the tax calculated on the company's taxable profits. The additional tax is a penalty based on the value of the overdrawn DLA as it stood at the balance sheet date. It is referred to as Section 455 tax and is currently set at 32.5% of the value of the overdrawn balance at the balance sheet date. So it can be quite a heavy burden.
If and when the overdrawn director's loan account balance is rectified i.e. turned the other way around or become Zero, the S.455 tax will be refunded - but that can take a long time - three years is actually good going.
The other aspect of loans TO directors is that they will be subject to a PAYE Benefit in Kind tax charge but only -
i) if the balance at any point exceeded £10,000 for ANY length of time during the TAX year and
ii) the company did not charge any interest to the director for the loan, or charged interest below market rates i.e. a cheap loan.
iii) the company also needs to ensure that the loan is properly declared on the company's PAYE Benefit in Kind returns. There are serious penalties for failing to do this.
PAYE, Company Law and Corporation Tax rules are very much drafted to make overdrawn DLAs unpalatable.
i) the company owes money to the director
ii) the director owes money to the company
iii) nil balance - nobody owes anything to anybody
In scenario i) HMRC could not care less
In scenario iii) HMRC could not care less
In scenario ii) however, HMRC does very much care. In fact, they care so much they can classify the situation as being "illegal" and will heavilly penalise the company in a number of ways. Scenario ii) is usually referred to as an "Overdrawn Director's Loan Account" and should be avoided at all costs.
If, at the end of the company's financial year a director's loan account is overdrawn - it is expected that the company adds and additional Corporation Tax amount onto its "normal" Corporation Tax bill. The "normal" CT would be the tax calculated on the company's taxable profits. The additional tax is a penalty based on the value of the overdrawn DLA as it stood at the balance sheet date. It is referred to as Section 455 tax and is currently set at 32.5% of the value of the overdrawn balance at the balance sheet date. So it can be quite a heavy burden.
If and when the overdrawn director's loan account balance is rectified i.e. turned the other way around or become Zero, the S.455 tax will be refunded - but that can take a long time - three years is actually good going.
The other aspect of loans TO directors is that they will be subject to a PAYE Benefit in Kind tax charge but only -
i) if the balance at any point exceeded £10,000 for ANY length of time during the TAX year and
ii) the company did not charge any interest to the director for the loan, or charged interest below market rates i.e. a cheap loan.
iii) the company also needs to ensure that the loan is properly declared on the company's PAYE Benefit in Kind returns. There are serious penalties for failing to do this.
PAYE, Company Law and Corporation Tax rules are very much drafted to make overdrawn DLAs unpalatable.
MJ85 said:
So the accountant IS wrong? After £10k you either pay interest or (as i'd like to do), issue a dividend to clear it?
You can clear it by issuing a dividend. It's not perfect but at least it will bring the balance down to Zero.If at any point the balance exceeded £10,000 and there was no interest being charged, then a taxable Benefit in Kind situation existed.
Eric Mc said:
MJ85 said:
So the accountant IS wrong? After £10k you either pay interest or (as i'd like to do), issue a dividend to clear it?
You can clear it by issuing a dividend. It's not perfect but at least it will bring the balance down to Zero.If at any point the balance exceeded £10,000 and there was no interest being charged, then a taxable Benefit in Kind situation existed.
So the accountant is pulling a dodgy move in saying it is possible to sort any amount of loan before year end, "penalty" free...
Under current rules, HMRC are pretty much reliant on directors to self-declare the movements on Directors' Loan Accounts. This means that as long as the balance is sorted by the end of the company's financial year end, HMRC will not be aware of what state the balance was during the previous 12 months of that accounting year. HMRC does not like this (obviously) as the law actually says that the balance should be reported at ANY time it goes overdrawn.
One of the hidden agendas of the Making Tax Digital initiative for limited companies is that HMRC will eventually get to see in-year movements on director's loan accounts on a "real time" basis and will be able to levy fines, interest, penalties and tax charges much more efficiently - at least on a quarterly basis.
One of the hidden agendas of the Making Tax Digital initiative for limited companies is that HMRC will eventually get to see in-year movements on director's loan accounts on a "real time" basis and will be able to levy fines, interest, penalties and tax charges much more efficiently - at least on a quarterly basis.
Eric Mc said:
Under current rules, HMRC are pretty much reliant on directors to self-declare the movements on Directors' Loan Accounts. This means that as long as the balance is sorted by the end of the company's financial year end, HMRC will not be aware of what state the balance was during the previous 12 months of that accounting year. HMRC does not like this (obviously) as the law actually says that the balance should be reported at ANY time it goes overdrawn.
One of the hidden agendas of the Making Tax Digital initiative for limited companies is that HMRC will eventually get to see in-year movements on director's loan accounts on a "real time" basis and will be able to levy fines, interest, penalties and tax charges much more efficiently - at least on a quarterly basis.
Surely everyone will then start just to declare quarterly "interim" dividends won't they?One of the hidden agendas of the Making Tax Digital initiative for limited companies is that HMRC will eventually get to see in-year movements on director's loan accounts on a "real time" basis and will be able to levy fines, interest, penalties and tax charges much more efficiently - at least on a quarterly basis.
Marcellus said:
Eric Mc said:
Under current rules, HMRC are pretty much reliant on directors to self-declare the movements on Directors' Loan Accounts. This means that as long as the balance is sorted by the end of the company's financial year end, HMRC will not be aware of what state the balance was during the previous 12 months of that accounting year. HMRC does not like this (obviously) as the law actually says that the balance should be reported at ANY time it goes overdrawn.
One of the hidden agendas of the Making Tax Digital initiative for limited companies is that HMRC will eventually get to see in-year movements on director's loan accounts on a "real time" basis and will be able to levy fines, interest, penalties and tax charges much more efficiently - at least on a quarterly basis.
Surely everyone will then start just to declare quarterly "interim" dividends won't they?One of the hidden agendas of the Making Tax Digital initiative for limited companies is that HMRC will eventually get to see in-year movements on director's loan accounts on a "real time" basis and will be able to levy fines, interest, penalties and tax charges much more efficiently - at least on a quarterly basis.
evidence that underlying accounts were reviewed by the directors
evidence of a meeting of the directors in which a dividend decision was made and the dividend amount agreed upon
the issue of dividend vouchers
the recording of any waivers in respect of such dividends and evidence that those making the waivers agreed to them
Merely transferring the money out of the company bank account to the shareholders' bank account(s) is not sufficient evidence that the payment is a bona fide dividend.
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