Directors Loan account

[Diestl]

Hi,

I am looking at my year end accounts and it says I have a directors loan account of @45k, Dividends of @15k, And salary of 10k. Do I have to pay any more income tax based on this other than what I paid on the 10k?

[ASB]

Hi,

I am looking at my year end accounts and it says I have a directors loan account of @45k, Dividends of @15k, And salary of 10k. Do I have to pay any more income tax based on this other than what I paid on the 10k?

Potentially. I am assuming the 45k is you owe the company not the other way round.

Broadly the tax rules are:-

1) There is a BIK based on the interest you have not paid unless you are paying the official rate. This should go on your personal tax return. [note capitalising the interest by virtue of an additional debit is not good enough to make it appear interest has been paid, though you could embark on a circular transaction via your bank account to achieve the same effect]

2) The loan must be repaid. If it is written off then it is treated as an income tax charge to you. [It might potentially be treated as a dvidend in some circumstances]

3) your company accrues a tax charge of 25% of the value of the loan if it is not paid off within 9 months of the year end. This is reclaimable when the loan is paid off

You have also committed a criminal offence under the companies act. [Though this is moot; it would need an injured party to launch action against the company for this to actually go anywhere]

Of course you accountant will be able to give you the full implications; though I'm surprised they haven't already. You might want to discuss this and the personal tax position with them before submitting the accounts and/or filing you tax return.

Edit: Assuming the funds and the retained profit is there you could pay a dividend of about 55k to clear it.

You personal position is that you have 25k of income. If you paid 55k this would give you 80k of income. Of this approx 40k is dividends in the higher rate tax band. Thus the 55k would cost you about 10k in higher rate tax and then yield the 45k to repay the loan.

At the very least you should ensure that you dividends + salary use the entire basic rate bracket (appprox 35k plus you allowances), since this will not attract any further tax.

[Crossroads]

Again, assuming that the DLA is overdrawn, just how did you manage to cock up so royally?

[ASB]

Again, assuming that the DLA is overdrawn, just how did you manage to cock up so royally?

By spending 45k more than his income I imagine

[Diestl]

Accounts are filed, the accountant said there was a retained profit of 40k though. The accountant did this not me.

[Platypus]

Accounts are filed, the accountant said there was a retained profit of 40k though. The accountant did this not me.

Then perhaps it would be an idea to ask him instead of asking us to guess ?

[Alan @ BroomeAffinity]

Presumably if there's £40k retained profits you can reverse the DLA by declaring a dividend.

[gingerjedi]

3) your company accrues a tax charge of 25% of the value of the loan if it is not paid off within 9 months of the year end. This is reclaimable when the loan is paid off

I’ve never really understood this bit, if I’ve taken a DL of say 4k in May this year when do I need to pay it back by? Obviously it doesn’t show on last years financial accounts so do I have 9 months from April 2009? Would I be better off paying it before next years accounts are due so it doesn’t show at all? This effectively lets me draw it again after April 2009 without it showing up again.

Confused?

[Diestl]

I contacted my accountants and they say I have no more tax to pay.

[ASB]

I’ve never really understood this bit, if I’ve taken a DL of say 4k in May this year when do I need to pay it back by? Obviously it doesn’t show on last years financial accounts so do I have 9 months from April 2009? Would I be better off paying it before next years accounts are due so it doesn’t show at all? This effectively lets me draw it again after April 2009 without it showing up again.

Confused?

There is a school of thought which says an overdrawn directors account is a red rag to a tax man so paying it off in the current year may be wise.

My understanding:-

y/e 31/03/08. There is a loan outstanding of 4k.
There is no repayment by 31/12/08. The company has to pay 1k tax [not sure how it actually pays it, but I imagine it is on the CT return somewhere].

Then in the next year the loan happens to be paid off, say on 1/2/09. The company is now entitled to the 1k tax back. Again I'm not sure of the mechanics of how it actually happens.

------------------------------------------------------
Of course I believe the following could happen instead:-

y/e 31/03/08 Loan outstanding of 4k.

On the 30/12/08 another loan of 4k is made. On the 31/12/08 the original loan of 4k is paid off. Now there is no loan outstanding for > 9 months and tax is not due on the original loan. There is a view that this doesn't work and there is a view that it does. I don't know which prevails, but there is case law* that suggestsunless a physical transaction (or two in this case) actually happens (i.e. the money really moves) then it is ineffective. [i.e. simply journalising it would not be good enough].

*Can't remember the details, but there was a case related to somebody arguing there was no BIK on a directors loan because the interest had been debited to the loan, thus the official interest rate was paid.


Edit: Handy guide. In your case I think because you are below the 5k de minimus that might take the s419 tax out of it.

http://www.isis-business.eu/solution...n-accounts.pdf