Director Loans
Discussion
Hi all, I'm just after a little advice please.
I set up a limited company 18 months ago with a business partner - 50/50 shareholders.
Throughout the year we paid ourselves a salary and took enough dividends to take us up to the HRT limit. After that, taking dividends is not tax efficient at all.
After speaking with our accountant, we were told we could pay ourselves a director loan (out of the profits after tax) and would avoid paying tax (BIK I think) as long as the loans were repaid by 9 months after our year end.
We have now repaid the loans, the result obviously being that the company now has enough profit after tax to pay out the same again as dividends, which we have done.
The problem is, we are now at the HRT limit again. Are we able to start paying ourselves a loan again so soon after repaying the last one? And if so, what is to stop us from doing this year in, year out?
Cheers
I set up a limited company 18 months ago with a business partner - 50/50 shareholders.
Throughout the year we paid ourselves a salary and took enough dividends to take us up to the HRT limit. After that, taking dividends is not tax efficient at all.
After speaking with our accountant, we were told we could pay ourselves a director loan (out of the profits after tax) and would avoid paying tax (BIK I think) as long as the loans were repaid by 9 months after our year end.
We have now repaid the loans, the result obviously being that the company now has enough profit after tax to pay out the same again as dividends, which we have done.
The problem is, we are now at the HRT limit again. Are we able to start paying ourselves a loan again so soon after repaying the last one? And if so, what is to stop us from doing this year in, year out?
Cheers
If your profits are at such a level so as to maintain a potential 40% tax issue then overdrawing your director loan account is just deferring the problem rather than solving it.
If you want the money personally then you will have to pay the tax. Or you could put it in a pension scheme for your retirement (and get corporation tax relief) or just leave it in the company to accrue and use somehow at a much later date.
If you want the money personally then you will have to pay the tax. Or you could put it in a pension scheme for your retirement (and get corporation tax relief) or just leave it in the company to accrue and use somehow at a much later date.
If you had overdrawn loan accounts AT ANY STAGE during the tax year, there could very well be a PAYE Benefit in Kind charge arising - irrespective of whether it was repaid in full within 9 months.
All loans over £5,000 are likely to cause a PAYE Benefitin Kind charge if the interest charged by the lender (the employer) was less than the bank base rate. 9 times out 10 directors with overdrawn loans will not have been charged any interest by the lender (i.e. their own company) and therefore will be subject to a BIK on balances exceeding £5,000.
The fact that such loans exist and the value of the Benefit arising should have been disclosed in a Form P11D. There are penalties for failure to do this correctly.
All loans over £5,000 are likely to cause a PAYE Benefitin Kind charge if the interest charged by the lender (the employer) was less than the bank base rate. 9 times out 10 directors with overdrawn loans will not have been charged any interest by the lender (i.e. their own company) and therefore will be subject to a BIK on balances exceeding £5,000.
The fact that such loans exist and the value of the Benefit arising should have been disclosed in a Form P11D. There are penalties for failure to do this correctly.
The repayment within 9 months is to avoid a charge under Section 455 - Loans to Participators. This charges the company an effective 25% rate of the "loan" if not repaid within 9 months of the end of the accounting period.
If you are repeating the loans straight away in the following period, there is precedent for HMRC to treat the original loan as not being repaid and assessing the charge as above.
By the way, dividends are still beneficial even if you are paying the 40% rate, though admittedly only by a small amount over the alternative of paying salary.
Eric's point re the potential benefit in kind is also pertinent.
Sounds like you need to speak more with your accountant....or get another who understands all the implications!
David
If you are repeating the loans straight away in the following period, there is precedent for HMRC to treat the original loan as not being repaid and assessing the charge as above.
By the way, dividends are still beneficial even if you are paying the 40% rate, though admittedly only by a small amount over the alternative of paying salary.
Eric's point re the potential benefit in kind is also pertinent.
Sounds like you need to speak more with your accountant....or get another who understands all the implications!
David
Thanks very much for the replies.
Can I ask what you mean by overdrawn loan account? Is it lending money the company doesn't have, or lending money regardless how much free cash there is?
Eric, we also haven't paid any interest on our loans (yet). It wasn't something we were told about so thanks for bringing it up. Am I right in thinking we will get back 80% of any interest we pay once corp tax has been accounted for?
And yes, I can see how we are deferring our tax problem rather than paying it. However, that is really why I started this post. If for example every year I were to have 20k over the HRT threshold spare, could I not pay it to myself as a loan, which is paid back with interest within 9 months of our year end, then pay myself another 20k loan in the next tax year, pay it back, and so on, and so on. It just seems a little too easy. Also, would you say this is tax avoidance or evasion?
Can I ask what you mean by overdrawn loan account? Is it lending money the company doesn't have, or lending money regardless how much free cash there is?
Eric, we also haven't paid any interest on our loans (yet). It wasn't something we were told about so thanks for bringing it up. Am I right in thinking we will get back 80% of any interest we pay once corp tax has been accounted for?
And yes, I can see how we are deferring our tax problem rather than paying it. However, that is really why I started this post. If for example every year I were to have 20k over the HRT threshold spare, could I not pay it to myself as a loan, which is paid back with interest within 9 months of our year end, then pay myself another 20k loan in the next tax year, pay it back, and so on, and so on. It just seems a little too easy. Also, would you say this is tax avoidance or evasion?
sumo69 said:
The repayment within 9 months is to avoid a charge under Section 455 - Loans to Participators. This charges the company an effective 25% rate of the "loan" if not repaid within 9 months of the end of the accounting period.
If you are repeating the loans straight away in the following period, there is precedent for HMRC to treat the original loan as not being repaid and assessing the charge as above.
By the way, dividends are still beneficial even if you are paying the 40% rate, though admittedly only by a small amount over the alternative of paying salary.
Eric's point re the potential benefit in kind is also pertinent.
Sounds like you need to speak more with your accountant....or get another who understands all the implications!
David
Thanks David. When you say following period, do you mean accounting year? Our year end is April. We paid back the loans a couple of months ago. Would we be in a position to pay ourselves another loan before April?If you are repeating the loans straight away in the following period, there is precedent for HMRC to treat the original loan as not being repaid and assessing the charge as above.
By the way, dividends are still beneficial even if you are paying the 40% rate, though admittedly only by a small amount over the alternative of paying salary.
Eric's point re the potential benefit in kind is also pertinent.
Sounds like you need to speak more with your accountant....or get another who understands all the implications!
David
You're right, we are going to have to talk more to our accountant! Just wanted to go to her with as much knowledge as possible.
Cheers
If you haven't been charged interest by the lender (the company) you will definitely have had a beneficial loan. Were the balances on these loans at any point from the moment the first amount was loaned out in excess of £5,000?
If so, the company should have declared the beneficial loans using the P11D system.
What date did the loan commence?
Was it in existence at 5 April 2012?
Will it still be in existence at 5 April 2013?
Does it or has it at any time exceeded £5,000?
If so, the company should have declared the beneficial loans using the P11D system.
What date did the loan commence?
Was it in existence at 5 April 2012?
Will it still be in existence at 5 April 2013?
Does it or has it at any time exceeded £5,000?
Cockey said:
Can I ask what you mean by overdrawn loan account?
The directors loan account is an accounting method of monitoring what a company owes a director or visa versa. It is not directly related to the cash the company has available.So for example , if a net dividend of £5000 is awared and the shareholding director doesn't physically wish to remove that cash from the company it is credited to the directors loan account. It can then be taken at any time in the future. Likewise, if the directors loan account stands at £5000 but the company makes a payment of £10,000 to the director, this will be debited against the directors loan account resulting in an overdrawn balance of £-5000.
Eric, (sorry to shout!)
If you haven't been charged interest by the lender (the company) you will definitely have had a beneficial loan. Were the balances on these loans at any point from the moment the first amount was loaned out in excess of £5,000? NOTHING HAS BEEN PUT IN WRITING ANYWHERE REGARDING THE TERM OR CONDITIONS OF THE LOANS. WE WERE JUST TOLD TO REPAY THEM BEFORE THE END OF THIS CALENDAR YEAR, PERHAPS WE CAN STILL MAKE AN INTEREST PAYMENT?
If so, the company should have declared the beneficial loans using the P11D system. NO IDEA, ACCOUNTANT FILES EVERYTHING FOR US
What date did the loan commence? VARIOUS DATES THROUGHOUT 2011/12 TAX YEAR.
Was it in existence at 5 April 2012? YES
Will it still be in existence at 5 April 2013? NO, REPAID OCT 2012.
Does it or has it at any time exceeded £5,000? YES
PurpleMoonLight - thanks, that makes sense. In which case, no, the the account has never been overdrawn.
If you haven't been charged interest by the lender (the company) you will definitely have had a beneficial loan. Were the balances on these loans at any point from the moment the first amount was loaned out in excess of £5,000? NOTHING HAS BEEN PUT IN WRITING ANYWHERE REGARDING THE TERM OR CONDITIONS OF THE LOANS. WE WERE JUST TOLD TO REPAY THEM BEFORE THE END OF THIS CALENDAR YEAR, PERHAPS WE CAN STILL MAKE AN INTEREST PAYMENT?
If so, the company should have declared the beneficial loans using the P11D system. NO IDEA, ACCOUNTANT FILES EVERYTHING FOR US
What date did the loan commence? VARIOUS DATES THROUGHOUT 2011/12 TAX YEAR.
Was it in existence at 5 April 2012? YES
Will it still be in existence at 5 April 2013? NO, REPAID OCT 2012.
Does it or has it at any time exceeded £5,000? YES
PurpleMoonLight - thanks, that makes sense. In which case, no, the the account has never been overdrawn.
PurpleMoonlight said:
Cockey said:
Eric, (sorry to shout!)
PurpleMoonLight - thanks, that makes sense. In which case, no, the the account has never been overdrawn.
Huh?PurpleMoonLight - thanks, that makes sense. In which case, no, the the account has never been overdrawn.
If that's the case how have you managed to effect a loan?
Let's say there was a £20k dividend in the account due to me which I didn't want to take. I chose to take a £20k loan instead. I thought that meant the account would be flat, and therefore not overdrawn.
By the way, thanks everyone for taking the time to reply. It's much appreciated.
Cockey said:
Let's say there was a £20k dividend in the account due to me which I didn't want to take. I chose to take a £20k loan instead. I thought that meant the account would be flat, and therefore not overdrawn.
What loan?You have withdrawn your owm money.
Have you misunderstood your accountant perhaps?
Cockey said:
PurpleMoonlight said:
Cockey said:
Eric, (sorry to shout!)
PurpleMoonLight - thanks, that makes sense. In which case, no, the the account has never been overdrawn.
Huh?PurpleMoonLight - thanks, that makes sense. In which case, no, the the account has never been overdrawn.
If that's the case how have you managed to effect a loan?
Let's say there was a £20k dividend in the account due to me which I didn't want to take. I chose to take a £20k loan instead. I thought that meant the account would be flat, and therefore not overdrawn.
By the way, thanks everyone for taking the time to reply. It's much appreciated.
So - forget about the principle of the directors loan account and being overdrawn on it - that's hiding behind fancy words. You are offsetting your annual dividend/income tax exposure by taking a loan from the company instead of dividends. The tax man isn't going to treat these 'loans' as loans. He'd treat them as dividends or potentially even more costly as income - he may even push to treat your entire dividend as income because of the way you are doing it and guess what - you don't get the corp tax back on that if he does so you'd be looking at an equivalent tax rate of 60+% plus fines... pretty costly.
Like I say - medium risk.
Olf said:
So - forget about the principle of the directors loan account and being overdrawn on it - that's hiding behind fancy words. You are offsetting your annual dividend/income tax exposure by taking a loan from the company instead of dividends. The tax man isn't going to treat these 'loans' as loans. He'd treat them as dividends or potentially even more costly as income - he may even push to treat your entire dividend as income because of the way you are doing it and guess what - you don't get the corp tax back on that if he does so you'd be looking at an equivalent tax rate of 60+% plus fines... pretty costly.
Yeah, that's pretty much it. Obviously we are trying to avoid paying effectively 45% on our earnings above £35k. Think we need a bit more tax advice! Cheers.Edited by Cockey on Friday 7th December 21:24
PurpleMoonlight said:
Cockey said:
Let's say there was a £20k dividend in the account due to me which I didn't want to take. I chose to take a £20k loan instead. I thought that meant the account would be flat, and therefore not overdrawn.
What loan?You have withdrawn your owm money.
Have you misunderstood your accountant perhaps?
Unfortunately, HMRC will pay little attention to a director using the "my accountant looks after it" excuse.
If P11Ds were not filed correctly showing the true situation regarding loan accounts, then it is the director and the comopany that picks up the fines and penalties, not the accountant.
If P11Ds were not filed correctly showing the true situation regarding loan accounts, then it is the director and the comopany that picks up the fines and penalties, not the accountant.
PurpleMoonlight said:
Cockey said:
Profits after tax which are sat in the company account. This could be paid to me as a dividend, but I chose to take it as a loan instead.
In that case your directors loan account before the loan was £0 and after the loan it was £-20000. So it was overdrawn.
I misinterpreted what you wrote earlier...
PurpleMoonlight said:
So for example , if a net dividend of £5000 is awared and the shareholding director doesn't physically wish to remove that cash from the company it is credited to the directors loan account. It can then be taken at any time in the future. Likewise, if the directors loan account stands at £5000 but the company makes a payment of £10,000 to the director, this will be debited against the directors loan account resulting in an overdrawn balance of £-5000.
I read it that a net dividend of £20k had been awarded, but didn't want to be taken so was credited to the directors loan account. Directors loan account now stands at £20k. Company then makes a payment to the director, making the balance zero.OP if it helps any this issue has been raised before on here and the resident expert accountant always gives the same advice . We have always taken advice from our own accountants and have been fine taking a dipper now and again,the world hasn't ended and no children were hurt 
Most number crunchers (very rarely good business people) especially those on here,are just that and are barely capable of seeing beyond the end of their noses and forget that running a business is not always black and white.
Speak to your own accountant he knows more about your business and you.
Most number crunchers (very rarely good business people) especially those on here,are just that and are barely capable of seeing beyond the end of their noses and forget that running a business is not always black and white.
Speak to your own accountant he knows more about your business and you.
Thanks squeezebm.
I think that any professional accountant is required to tell their clients the legal situation. If the client choses to ignore the regulations and the advice given, then that is up to them. They will pay the consequences if caught out.
And if you think that companies don't caught out by failures to adhere to the regulations on director's loans and other taxable benefits, then you had better think again.
I inherited a client who had just such a suitaution and who therefore failed to properly disclose a benefit - all down to negligence and bad advice of the type you are giving here.
When the notices for underpaid tax, interest and penalties started dropping on his doormat, the client was almost suicidal and it was a real struggle for me to keep him focussed on what he needed to do and to stave off the worst excesses of HMRC.
In the end, we were able to get most of the penalties cancelled, although he still had to pay the tax and interest.
You are correct that in many cases the individual "gets away with it" - but so do many other law breakers. It doesn't make it OK.
I think that any professional accountant is required to tell their clients the legal situation. If the client choses to ignore the regulations and the advice given, then that is up to them. They will pay the consequences if caught out.
And if you think that companies don't caught out by failures to adhere to the regulations on director's loans and other taxable benefits, then you had better think again.
I inherited a client who had just such a suitaution and who therefore failed to properly disclose a benefit - all down to negligence and bad advice of the type you are giving here.
When the notices for underpaid tax, interest and penalties started dropping on his doormat, the client was almost suicidal and it was a real struggle for me to keep him focussed on what he needed to do and to stave off the worst excesses of HMRC.
In the end, we were able to get most of the penalties cancelled, although he still had to pay the tax and interest.
You are correct that in many cases the individual "gets away with it" - but so do many other law breakers. It doesn't make it OK.
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