I'm a newbie to this site, some great posts on here.
I am under the impression that by the year end a director's loan account needs to be cleared down. I have a client who has taken £13K out of the business, I put it through the director's loan account.
Can someone please confirm if this does in fact does need to be nil by year end.
If overdrawn at the year end then provided is cleared within 9 months of the year end there is no tax consequences. If not they the company has pay 25% of the balance when it pays over it corporation for that year (this is due nine months after the year end). The payment is a payment on account and will be repaid by HMRC when the loan is repaid. If part of the loan is repaid then HMRC will refund part of the payment. If next year the loan balance increases then only need to pay 25% of the increase.
If in credit at the year end then the company owes the director monies so no issues.
If the directors loan account is overdrawn at the period end then the approach is usually to declare a dividend to clear the loan account.
Remember that dividends can only be taken from profits.
If there are no profits it is down to the director to either put the money back again or the company will suffer a corporation tax liability on the amount remaining outstanding PLUS there will be income tax and N.I. implications for the director.
If a dividend is declared there will be nothing to pay out on the diividend as the director has already taken the money from the company. All that the dividend is doing is tieing up the loose strings.
Note that a directors loan account can remain at the period end but as shown above it is not wise for it to be left open due to the tax implications of such.
kind regards,
Shaun.
Note. If the directors loan account is in credit there is conversely no reason for that to be settled at the period end.
For more information see here : http://www.hmrc.gov.uk/ct/managing/director-loan.htm#2
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
One of our Client Advisory Letters available on the website covers just this topic and gives a basic outline of what is a Director's Loan Account, how it works and the tax implications of overdrawn balances.
