Directors loan account

**Bradley** · 2 December 2003, 00:14

Loans

It's illegal for a company to lend a Director more than £5,000 in all but the most unusual circumstances.

For tax purposes you'll have a BIK if the loan is more than £5k at any stage of the tax year to 5th April i.e. no lending yourself £10000 on 6th April and paying it back on 4th April the next year.

You'll also have 25% tax to pay on the balance still outstanding 9 months after your year end (refundable).

Why not just pay dividends as you go along? As long as there's a dividend minute and a dividend voucher then the Revenue won't be bothered.

Just remember to do the paperwork at the time and also remember to pay any other shareholders at the same time!

**ASB** · 2 December 2003, 10:13

DCA

The illegality is under the companies act. For this to have any sanction it requires wounded shareholders to complain. In the case of most director controlled close companies this is unlikely to be a problem - thus there are no real teeth.

However, that is not to say that going over 5k is not without risk. The IR can treat these as net payments - subject to PAYE and NI. If the position is properly regularised by the end of year then it should be ok.

Further your accountants will need to put a note in the company accounts, which does rather draw attention to the fact that you are using company funds as a personal piggy bank.

**Bradley** · 2 December 2003, 10:41

Cos Act 1985 s342 - Criminal Penalties

Looking back at my student notes on this one this is the section that I've underlined as showing that a loan account is criminally illegal if the Director knowingly took money from the company as a loan.

I assume from what you're saying ASB that this has been repealed or amended?

**ASB** · 2 December 2003, 11:31

S342 CA 1985

Bradley,

A loan in excess of 5k is indeed a criminal offence under S342(1) and S342(2). Punishable by 2 years inside, a fine and disqualification as a director. I think it is S330 that defines the limits etc.

But I didn't say it wasn't.

In fact I agreed it was.

What I did say was that in practice it needs a wounded shareholder to file a complaint. If I had a directors loan in excess of 5k you could not report it (actually of course you could but nothing would happen because you were not damaged). My other shareholders could report it, and if they could show damage the SFO/DTI would prosecute (well in theory).

The same is of course true for most - but not all - offences under the companies act. They are designed to protect other shareholders interests from miscreant directors.

It is also at least mildly interesting to note the examples on the IR web site of the tax treatment of directors loans. A lot of large examples and no mention of the technical illegality.

It is, of course, possible to engage in some legitimate tax planning via recurring loans, but the IR don't like it and will often challenge. It is also possible to loan somebody who is a non-director as much as you want. The connected persons type of rules do not apply, however lending ones partner a large sum will most likely cause challenge that it is a loao to oneself - although there is no guarantee it will succeed.

Simon.

**Bradley** · 2 December 2003, 11:52

s342 CA 1985 and Money Laundering Regs

What I did say was that in practice it needs a wounded shareholder to file a complaint.

What if the other shareholder is your partner and you break up with them still owing them dividends and you can't pay them when they depart because you've taken all the company monies as a loan? I'm sure that situation must be fairly common and its worth making people aware that they may get a criminal record because of it.

I wonder what impact the ML regs will have on this? Its seems to me that any professional advisor should tell NCIS about an overdrawn loan account. What do you think ABS?

**ASB** · 2 December 2003, 12:20

What ifs

So an unexpected event makes a prior decision a bad one. All decisions have consequences - some unforseen. Yes, it is important that people become aware of the potential consequences.

If after taking a loan (irrespective of whether it is over 5k or not) one declares a dividend that one cannot pay without redeeming the loan then that is at best foolish anyway.

It is also probably in contravention of other parts of the CA because the retained profit would not have existed to pay it.

You do raise an interesting point about NCIS though. Where the boundary lies is unclear. To be on the safe side I think all advisors should report all transactions. After all that meeting room I hired might have been with the local drug dealer to sort out my importation of another 100ks of coke.

If this were to happen then hopefully NCIS would get completely swamped under the weight and we could get back to some sensible regulations.

**Bradley** · 2 December 2003, 15:25

Decisions Decisions

All decisions have consequences - some unforseen

If you don't take a loan of more than £5k at any time then there can never be any consequences - foreseen or unforeseen!

If after taking a loan ... one declares a dividend that one cannot pay without redeeming the loan then that is at best foolish anyway.

Well yeah, but I would venture to say that the situation I described is quite common and what you've suggested isn't. A dividend can be declared without breaching the realised reserves rules despite what you say because the loan is a debtor and its just a question of reclassifying an asset on the balance sheet.

**ASB** · 2 December 2003, 16:08

Fair Comments

All fair comments, but this becomes circular.

The original point I made was that - despite the criminal breach of S342 - it was unlikely to have criminal consequences. Not that it couldn't.

**pickle** · 3 December 2003, 14:15

Re: Fair Comments

Wow, thanks for the replies.

So I guess to sum up, I should use the 5k limit to keep me "topped up" between dividend payements?

I always thought (for some reason) that dividends were only paid at the end of the company year. It seems not. So if I pay myself a dividend say on a quarterly basis, when does the tax (both corporation and my own income tax) become due? do I just declare it on my persoanl end of year tax return in the same way I would for income from shares in say Tesco or something?

Life was simpler under IR 35.....

Directors loan account