Directors loan account \ buying a limited company

[t400ble]

Hey all

Go easy on me, not a subject I know a great deal on

Just before I sit down with my accountant, just a little clarification please?

Directors loan account
Any dividend payments I have received in the past, and money paid by the Limited company to the former directors is being taken and recorded against my
directors loan account, is this correct?

Paul

[JeffreyD]

Sounds wrong to me

[Eric Mc]

t400ble said:

Hey all

Go easy on me, not a subject I know a great deal on

Just before I sit down with my accountant, just a little clarification please?

Directors loan account
Any dividend payments I have received in the past, and money paid by the Limited company to the former directors is being taken and recorded against my
directors loan account, is this correct?

Paul

Were all these payments looked on as dividends? Directors do not receive payments in the form of dividends. Dividends are paid to shareholders. Of course, some shareholders may also be directors - but the reason they are receiving a dividend is because of their status as a shareholder, not because they are directors.

[t400ble]

Sorry, my bad, shareholders.
I had a 10% stake in the buisness, and recived a few dividend payments and these have been recorded againts my loan account
I'm now buying the rest of the company, and these payments are recorded againts my loan account


Thank you

[essayer]

Were the dividends actually paid to you in cash? Or just paid ‘into’ the directors loan account?

[t400ble]

Paid to me in 'cash'

[Countdown]

Sounds wrong to me.

Directors loan account should record either money owed by the Firm to the Director, or by the Director to the Firm,

If the firm declared a dividend and paid it out then there would be no entries on the Balance Sheet (other than Cr Cash Dr retained profit)

[silentbrown]

Countdown said:

Sounds wrong to me.

Directors loan account should record either money owed by the Firm to the Director, or by the Director to the Firm,

If the firm declared a dividend and paid it out then there would be no entries on the Balance Sheet (other than Cr Cash Dr retained profit)

Depending on the timings of the dividend declaration vs payout it could go through the directors loan account. But the dividend in, then cash out should cancel each other out.

[t400ble]

So should show a zero balance? As I thought

[silentbrown]

t400ble said:

So should show a zero balance? As I thought

Yes, If the directors account shows you owing those amounts to the company, then it's possible that the payments weren't actual dividends, but effectively "loans" from the company to the directors?

[Pit Pony]

Sometimes, a ltd company can loan a director/shareholder, cash which it believes will be profit, at the end of thier financial year. The accountant will then swap the loan for a dividend.
The danger is If something goes wrong and the company doesn't make the profit.

[Eric Mc]

Dividends can only be physically extracted from a company if the company has sufficient accumulated reserves/profits. If there were inadequate reserves in the company then the dividend should not be paid. If payments are still paid to a director/shareholder, then they may be allocated to the director’s loan account. This is OK, up to a point.

If the company already owed money to the director, then the payment can be legally treated as a repayment to the director of money already owed to him/her.

However, if the director’s loan account is in a negative situation I.e. the director’s loan account now shows him/her owing money back to the company, that creates a dangerous situation with a possible penalty Corporation Tax charge and a PAYE Benefit in Kind.

If you received what you assumed to be dividend payments, did you report them as dividends to HMRC on your personal tax return?

[APontus]

It does sound a bit smelly.

[t400ble]

Eric Mc said:

If you received what you assumed to be dividend payments, did you report them as dividends to HMRC on your personal tax return?

Yes

[Countdown]

Eric Mc said:

However, if the director’s loan account is in a negative situation I.e. the director’s loan account now shows him/her owing money back to the company, that creates a dangerous situation with a possible penalty Corporation Tax charge and a PAYE Benefit in Kind.

Why is it dangerous? It's a regular occurrence and as long as it's declared on P11d it's all above board. In terms of CT charge I assume you're thinking about a Section 455 charge in which case it's not really a penalty plus it gets refunded when the director repays the loan.

[Countdown]

APontus said:

It does sound a bit smelly.

Smelly only insofar as odd accounting treatment. There is nothing dodgy per se about DLs.

If I was the OP I'd ask the Company accountants to explain it.

[APontus]

Countdown said:

APontus said:

It does sound a bit smelly.

Smelly only insofar as odd accounting treatment. There is nothing dodgy per se about DLs.

If I was the OP I'd ask the Company accountants to explain it.

It sounds dodgy because the OP writes as if he's a director of the company (and receiving DLs...), yet he's been under impression he's received dividends when is fact he's been given loans. That means he and the company may be liable for tax charges and the financial position may not be what he thinks. If he doesn't know whether the company's declared dividends, and he's a director, that's a worry. How good has the financial reporting been and are there any liabilities (personal and the business) lurking that he has been unaware of.

How long has the DL account been overdrawn?

ETA, I've used directors loans plenty and typically converted to divis before charges.

[Eric Mc]

Countdown said:

Why is it dangerous? It's a regular occurrence and as long as it's declared on P11d it's all above board. In terms of CT charge I assume you're thinking about a Section 455 charge in which case it's not really a penalty plus it gets refunded when the director repays the loan.

If the directors report everything correctly and within the right reporting window, then the BIK situation is manageable. For smaller companies, they often don’t find out they are in this situation until long after the reporting deadlines have been missed, so it can create a problem.

As for S455, it’s best not to get into that situation in the first place.

[gumshoe]

Eric Mc said:

Countdown said:

Why is it dangerous? It's a regular occurrence and as long as it's declared on P11d it's all above board. In terms of CT charge I assume you're thinking about a Section 455 charge in which case it's not really a penalty plus it gets refunded when the director repays the loan.

If the directors report everything correctly and within the right reporting window, then the BIK situation is manageable. For smaller companies, they often don’t find out they are in this situation until long after the reporting deadlines have been missed, so it can create a problem.

As for S455, it’s best not to get into that situation in the first place.

I agree with Countdown, S455 cannot be considered to be a penalty, it's only punitive if the loan isn't "paid back" (including neutralised via dividends issue or salaries to offset).

The bit that sounds really wrong is this:

t400ble said:

Any dividend payments I have received in the past, and money paid by the Limited company to the former directors is being taken and recorded against my directors loan account , is this correct?

Paul

My bold and italics for highlighting. No that's not correct at all. You say "my" directors loan account, yet other director's loans have been posted against your account? What's likely happened is all director loans were aggregated to the same nominal ledger. it is possible that somewhere along the line you and/or other directors have loans outstanding to the company (assuming debit balance). Or they were never recorded properly and show an erroneous balance. Is it a debit or credit balance on the director loan account?

[Eric Mc]

S.455 is undesirable because it creates a lot of stress and concern for many directors - not to mention their accountants. In order to recover any of the S.455 Corporation Tax that has been paid, evidence has to be supplied to HMRC proving that the overdrawn directors loan account has been repaid and cleared. That creates additional work for the company and the accountant which will result in higher fees. There may also be interest charges arising due to the timing of payments.

I agree that it is technically a neutral event from a pure overall tax liability point of view, but it is a distraction and right old pain to sort out on occasions. I do my best to advise my clients to not let themselves get into an overdrawn director's loan account situation in the first place, but if they do, be prepared for the inconvenience that rectifying the situation will create.