I am trying to learn more about the Directors Loan account. Mainly for myself as I am a limited company for my part time bookkeeping business but also for future reference.
I understand that sometime directors use their own money to purchase things for the business and this gets posted to the DL account. The company owes the director this money.
What if the director uses company money and hasn't paid it back at the end of the year? I have a client who I purely do bookkeeping for and he has a separate accountant to do his year end etc. His Directors loan account is currently overdrawn and probably will be at year end. I presume he pays tax on this as if it was a wage? Maybe his accountant does a journal to say it was pay but is this the correct way to do it? I have heard him mention running PAYE so can he be paid just once at year end?
I always make sure at the point of year end I have enough money in to settle my Corporation tax. I also pay myself a dividend as I work full time and am paid through PAYE so I pay myself through my company in dividends.
Can anyone add to anything I have mentioned here to help guide me and learn more about the Directors loan accounts?
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Besides money that the director has put into the company directly it may also be money invested indirectly such as salary declared but not taken, use of home as office, etc.
If the director owes the company money at the period end rather than the other way around then generally the accountant will declare a dividend from profits (you cannot declare a dividend unless you have profits or reserves) in order to clear the overdrawn account.
As an owner / director of a company the director has a fiduciary duty of care for the company very similar to a parents duty of care for a child. Namely the company's money belongs to the the company not directly to its owners even though the owners have responsibility for it.
An overdrawn DLA is actually a beneficial loan to the director (not a wage) and the director will be expected to pay tax on that benefit in kind (#1)... But it doesn't stop there!!!!
The company is charged 25% tax on the outstanding balance (yes, thats as well as the tax on the director). This is known as a section 455.
The S455 is a vehicle to ensure DLA's are not abused. It does not care whether the business has made a profit or not, the 25% of the loan is still payable (you tell HMRC about it in the supplementary pages of the CT600).
The above said though, S455 is a bit of a strange tomato in that if the director repays the loan in the nine months between the company period end and when the tax is due the 25% tax must be declared but will not physically be paid to HMRC.
Basically, the director could end up with a S455 charge, a benefit in kind or both.
Easiest approach by far is to clear the DLA each year with a dividend from profits.
Hope that helps,
Shaun.
#1 from 2014/15 no benefit arises if the loan in £10k or less. Prior to 2014/15 this was £5k.
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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.
Another question here for you then. I have made a profit at year end which is tomorrow. I have money sat in my directors loan account which I owe the company and from that I am going to take a dividend.
I have already calculated my Corporation Tax and have enough in my bank to pay it.
There will be a balance in my directors loan account that I owe the company and I was going to transfer it back to the company and leave my directors loan account as nil.
Are you saying I could leave that balance in my DL account and so long as I repay it to the company before the tax is due which is 9 months and a day are you saying I will not be taxed on it or at least not have to pay the tax? Although I guess the company will still have to pay 25% tax on the outstanding amount?
We are only talking a couple of hundred pounds.
Elaine
-- Edited by Elaine R on Wednesday 30th of December 2015 08:49:25 PM
I personally wouldn't leave it. Better all around if you repay it and then take it again after the period end.
Have you taken your use of home into account already? The £208 from that would possibly clear it if its only a small amount.
HTH,
Shaun.
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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.
Hi Shaun, hope Elaine doesn't mind me jumping into her thread. I knew about the S455 but not fully understood how the tax treatment worked, thinking it was the Director who paid it. The BIK to the Director I wasn't aware of but your explanation tidies up the confusion in my mind. If the Director declared less that 8.5k in salary I'm guessing the BIK wouldn't arise? (Looks a bit dodgy on paper no doubt though) Have to say I've tried to get my head round this in the past without success so I appreciate your explanation.
Shaun said: I personally wouldn't leave it. Better all around if you repay it and then take it again after the period end.
Its probably worth pointing out that there must be a 30 day break between paying the loan and taking out another one, as this as been subject to wide abuse in the past. If that happens HMRC will treat it as if the loan wasn't repaid.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
there's no 8.5k deminimus for directors unless they meet all three of these rules :
- They must be a full time working director
- They must earn less than £8500
- They must own less than 5% of the ordinary share capital of the company
All three tests must be passed... Very few SME directors will pass the last one. Very few non SME directors will pass the second one.
Agree on the 30 day break. My golden rule is that I don't want to see it appearing on the same bank statement!
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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.
Sorry Elaine, we crossed in the post, wasn't ignoring you.
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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.
