Does Director Loan Account and Dividends go hand in hand?

[tyut4669]

Couple of quick questions:

1. If the business account have distributable profits of 10000 pounds, and has paid director 10000 pounds as director loan. Since company does not have any more money in the account now, can it declare dividends of 10000 pounds to clear off the director loan?

2. Can we maintain a director loan account that works like this:

Withdrawn 1000 pounds: 01-Jan-2012 : Balance: +1000

Withdrawn 2000 pounds: 01-Feb-2012 : Balance: +3000

Declared 1500 pounds dividend: 01-Mar-2012 : Balance: +1500

And.. Can it continue like this: where all the withdrawals go into Director Loan account and when there are dividends, it gets cleared or reduced?

My accountant told me this is fine but I started doubting what he does now because of some of things he told me or done with my accounts?

[xoggoth]

Sounds fine to me, a running loan account consists of money paid to director less any repaid or due to him for whatever reason, divis, salary or valid personal expenses.

There may be tax or disclosure requirements for loans depending on amount and when paid back but that's a separate issue.

[VectraMan]

Yes, but why? Why not just declare the amount you're making as a loan as a dividend in the first place?

[Sockpuppet]

Yes, but why? Why not just declare the amount you're making as a loan as a dividend in the first place?

Because the profits may not be there at the time the load was made hence no possible to take a dividend.

You're doing exactly what I do.

I have a DLC (Sage code in the 2100 range).

Everything gets posted it it, wages, expenses, dividend payments (ovbiously with the other side of the transation in the correct code). It then shows me how much I owe or am owed by the company.

Generally I take wait until I'm £5k on the DLC and take a £10k dividend then work that £10k off until I'm another £5k "overdrawn".

Keeps me within the £5k DLC "limit" and means I get to use nice round numbers on my tax return. £30k of divs, £7 ish K of salary so very little higher rate tax paid. Doesn't mean I've worked out what to do with the nest egg I'm accumilating but I'll worry about that later.

[VectraMan]

Because the profits may not be there at the time the load was made hence no possible to take a dividend.

I suppose so, but like most I pay expenses and salary, then treat 79% of what's left as available to pay as a dividend. I guess there may be personal reasons why you'd need the extra short term and dip into your CT and VAT money, but it seems strange to operate like that all the time.

[malvolio]

I suppose so, but like most I pay expenses and salary, then treat 79% of what's left as available to pay as a dividend. I guess there may be personal reasons why you'd need the extra short term and dip into your CT and VAT money, but it seems strange to operate like that all the time.

In strict accounting terms, that's the wrong way to do it. You can only declare divis from known net profits; the director's loan (which is actually meant to operate in the other direction, for you to feed the company) gets used to give what is in effect an interim dividend until you know what the year end totals actually are.

And, BTW, taking everything out of the company is actually not such a smart idea unless you're planning on never being out of work or going sick.

[tyut4669]

Thanks for the quick replies guys. Much appreciated.

It looks like people seem to agree on the way I withdraw funds and keep filling it back with dividends (refer to my 2nd question). Can an expert please comment on my original question?

"If the business account have distributable profits of 10000 pounds, and has paid director 10000 pounds as director loan. Since company does not have any more money in the account now, can it declare dividends of 10000 pounds to clear off the director loan?"

I meant to ask since it has already paid 10000 director loan, does the director loan given out constitute as part of profits to be able to declare dividends then?

[malvolio]

Thanks for the quick replies guys. Much appreciated.

It looks like people seem to agree on the way I withdraw funds and keep filling it back with dividends (refer to my 2nd question). Can an expert please comment on my original question?

"If the business account have distributable profits of 10000 pounds, and has paid director 10000 pounds as director loan. Since company does not have any more money in the account now, can it declare dividends of 10000 pounds to clear off the director loan?"

I meant to ask since it has already paid 10000 director loan, does the director loan given out constitute as part of profits to be able to declare dividends then?

The clue is in the word "loan". It counts as an asset on the books, so your assumption is correct. It's only offshore EBTs that give loans they don't expect to be repaid.

[tyut4669]

Thank you so very much.

[Danielsjdaccountancy]

The freedom within DLA is no longer as attractive as it used to be. For instance the £5K limit is only available from a Benefit aspect via your P11D, any overdrawn DLA will give rise to a S419 on the company CT600, which results in further corporation tax, granted this can be reclaimed in later years but only if you put the money back in the company.

My advice, pay yourself dividends when the profits are there. It’s at the end of the year that your accountant may be able to use the DLA to your advantage.