Directors Loan - What's the point
Discussion
Contract Killer said:
Take a loan at the start or throughout the year, use this to live on for the year.
At end of year give yourself a dividend to pay back the loan.
As HMRC do not like you taking monthly dividends.
Yep, works for me. Loan account accrues throughout the year and then is 'wiped' at the end.At end of year give yourself a dividend to pay back the loan.
As HMRC do not like you taking monthly dividends.
Clockwork Cupcake said:
They don't? I've been doing that for years and my accountants have never flagged it to me as an issue.
There is no law prohibiting it but some accountants are wary of HMRC trying to argue that such a regular payment is salary not dividends. I was told to do them quarterly.I now pay mine annually on 6th April though.
PurpleMoonlight said:
There is no law prohibiting it but some accountants are wary of HMRC trying to argue that such a regular payment is salary not dividends. I was told to do them quarterly.
Interesting. My accountants are usually ultra-conservative about such things and so I would have thought it would have been something they would have flagged. I will have to bring that up with them. PurpleMoonlight said:
There is no law prohibiting it but some accountants are wary of HMRC trying to argue that such a regular payment is salary not dividends. I was told to do them quarterly.
I now pay mine annually on 6th April though.
Your accountant is talking bobbins. It's not up to HMRC to decide whether any given payment is salary or a dividend - that's a matter of fact, not opinion.I now pay mine annually on 6th April though.
There is perhaps some truth that taking monthly dividends may be a flag that makes HMRC look closer at your IR35 status, and even if you're clean there (admittedly a massive and often unwarranted assumption for many contractors) an IR35 investigation is, at best, a huge, time-consuming and potentially expensive pain in the bum. However the fact remains that dividend frequency has no bearing on IR35 status.
Zoon said:
PurpleMoonlight said:
There is no law prohibiting it but some accountants are wary of HMRC trying to argue that such a regular payment is salary not dividends.
But if the dividend has been declared from retained profits what is wrong with spreading it out over the following year?deckster said:
There is perhaps some truth that taking monthly dividends may be a flag that makes HMRC look closer at your IR35 status, and even if you're clean there (admittedly a massive and often unwarranted assumption for many contractors) an IR35 investigation is, at best, a huge, time-consuming and potentially expensive pain in the bum. However the fact remains that dividend frequency has no bearing on IR35 status.
That's probably the reality of the situation, and the rationale behind the advice. 
deckster said:
Your accountant is talking bobbins. It's not up to HMRC to decide whether any given payment is salary or a dividend - that's a matter of fact, not opinion.
There is perhaps some truth that taking monthly dividends may be a flag that makes HMRC look closer at your IR35 status, and even if you're clean there (admittedly a massive and often unwarranted assumption for many contractors) an IR35 investigation is, at best, a huge, time-consuming and potentially expensive pain in the bum. However the fact remains that dividend frequency has no bearing on IR35 status.
I am not a contractor.There is perhaps some truth that taking monthly dividends may be a flag that makes HMRC look closer at your IR35 status, and even if you're clean there (admittedly a massive and often unwarranted assumption for many contractors) an IR35 investigation is, at best, a huge, time-consuming and potentially expensive pain in the bum. However the fact remains that dividend frequency has no bearing on IR35 status.
I am a believer that if you pay someone for advice with more knowledge than yourself on a subject, you probably should effect that advice.
You are free to do otherwise of course.
Clockwork Cupcake said:
Contract Killer said:
As HMRC do not like you taking monthly dividends.
They don't? I've been doing that for years and my accountants have never flagged it to me as an issue. HMRC CAN interpret anything how they see fit. That doesn't always mean they are right.
However, I have attended lectures where it has been pointed out that regular and frequent (such as monthly) withdrawals by a director can be assessed by HMRC as salary rather than dividend.
In order to be able to convince HMRC that they really are dividends, the company would need to show -
there were adequate reserves in the company to support the dividends
that the dividend decision was based on a review of the company's accounts - such as management accounts or quarterly accounts. If monthly, then monthly accounts
that the dividends were voted on at a directors' meeting
that the meeting was properly drafted and minuted
that dividend vouchers complying with the standard format have been drafted for each dividend
Regarding directors' loan accounts - if a director borrows from his company and only clears the debt at the end of the accounting year (by voting additional salary or dividends), it is highly likely that the director will be subject to a PAYE Benefit in Kind tax charge UNLESS the company was charging the director a commercial rate of interest on the loan.
However, I have attended lectures where it has been pointed out that regular and frequent (such as monthly) withdrawals by a director can be assessed by HMRC as salary rather than dividend.
In order to be able to convince HMRC that they really are dividends, the company would need to show -
there were adequate reserves in the company to support the dividends
that the dividend decision was based on a review of the company's accounts - such as management accounts or quarterly accounts. If monthly, then monthly accounts
that the dividends were voted on at a directors' meeting
that the meeting was properly drafted and minuted
that dividend vouchers complying with the standard format have been drafted for each dividend
Regarding directors' loan accounts - if a director borrows from his company and only clears the debt at the end of the accounting year (by voting additional salary or dividends), it is highly likely that the director will be subject to a PAYE Benefit in Kind tax charge UNLESS the company was charging the director a commercial rate of interest on the loan.
Eric Mc said:
In order to be able to convince HMRC that they really are dividends, the company would need to show -
there were adequate reserves in the company to support the dividends
that the dividend decision was based on a review of the company's accounts - such as management accounts or quarterly accounts. If monthly, then monthly accounts
that the dividends were voted on at a directors' meeting
that the meeting was properly drafted and minuted
that dividend vouchers complying with the standard format have been drafted for each dividend
That’s exactly how we do it Eric, seems to be the correct and sensible way to approach this method of remuneration.there were adequate reserves in the company to support the dividends
that the dividend decision was based on a review of the company's accounts - such as management accounts or quarterly accounts. If monthly, then monthly accounts
that the dividends were voted on at a directors' meeting
that the meeting was properly drafted and minuted
that dividend vouchers complying with the standard format have been drafted for each dividend
The reality is, of course, that HMRC rarely challenges such payments.
My hunch is that, if and when the "full fat" version of Making Tax Digital (MTD) eventually comes into effect, movements on Directors' Loan Accounts will be something HMRC will take an extremely high interest in. With MTD, HMRC will be able to review the detailed movements on Directors' Loan Accounts on at least a quarterly basis.
My hunch is that, if and when the "full fat" version of Making Tax Digital (MTD) eventually comes into effect, movements on Directors' Loan Accounts will be something HMRC will take an extremely high interest in. With MTD, HMRC will be able to review the detailed movements on Directors' Loan Accounts on at least a quarterly basis.
Zoon said:
I frequently see a number of companies where the director takes a large loan £100k+ at the start of the year and then pays it all back.
Is there something I'm missing?
I don't see the benefit.
Cash flow and administrative. Is there something I'm missing?
I don't see the benefit.
Compared to salary, no PAYE is due on the loan. The loan can be extinguished at the end of the year with a salary or dividend payment. Effectively giving a cash flow benefit to the individual.
Compared to dividends, which by the way can be paid monthly, there’s less admin involved.
The danger is the BIK implications. Paying it back in full before the end of the company's financial year end does ensure that penalty S.455 Corporation Tax won't be levied on the balance outstanding at the balance sheet date - but all the time the balance has been outstanding (and if it exceeded £10,000 at any time) - and no interest was charged to the director, then a BIK tax charge will become due.
Eric Mc said:
The danger is the BIK implications. Paying it back in full before the end of the company's financial year end does ensure that penalty S.455 Corporation Tax won't be levied on the balance outstanding at the balance sheet date - but all the time the balance has been outstanding (and if it exceeded £10,000 at any time) - and no interest was charged to the director, then a BIK tax charge will become due.
The implication in the question was that the loan was repaid at the year end (or before CT is due), so no 455. I suspect BIK is a small penalty to pay for the cash flow timing for most entrepreneurs.
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