Reply to: Best way to calculate interest on Directors Loan accounts over £10k

[WTFH]

Error and incorrect... Clearly the sum of trial balance makes no sense to anyone except for the balances of all individual ledgers. I think that is an obvious mistake ...

Which is why you should be getting your accountant to do it first, and then you check their figures, rather than the other way around.

As for £35k, if it was in a personal account rather than tied up in the business, then it would be a reasonable archest to borrow from - depending on your burn rate.

[css_jay99]

Yes it is, but you can't offset it against CT. I won't even begin to explain why (there used to be a detailed explanation on their website - good luck finding it) but it's based on the definition of a trade association dating back ot the early 1900s.

Then someone hacked your account when they posted:

Error and incorrect/incomplete sentence on my part due to editing. Clearly the sum of trial balance makes no sense to anyone except for the balances of all individual ledgers. I think that is an obvious mistake which you could pull me up on but I doubt anyone on CUK will be calling £35k a warchest to borrow from

[WTFH]

I actually did not mention trial balance of £35k

Then someone hacked your account when they posted:

I'm ghosting them at the moment till I submit trial balances for tax return. It's about £35k.

[css_jay99]

OK, so there's one of those dang facts.

In post 1, if you had said "My company isn't trading, but I've got £50k sitting in it, I'm not drawing a salary and only taking minimum dividends. I've checked with my accountant and this is what they are suggesting"
That would have got different answer to what you wrote in post 1, your vague bit in post 4 where you might be saying that you are "ghosting" your accountant - which probably means you're not using an accountant for whatever reason.

You mention "trial balance of £35k" in post 3, then in post 12 you're talking about borrowing £37k, i.e. £2k more than you claim the company has (revenue & capital)

A few questions:
How much will your company need to pay the taxman this year?
How much will that leave in the company account?
What else are you not telling us (or not making clear)?

I'm ghosting my accountant not because I don't use him but because he wants me to send over my trial balance, sage accounts and bank statements a lot earlier than usual. I usually send this information after I have done all the sage bookeeping and prepared the final accounts myself. This gives me an opportunity to raise a query if my calculations don't match with his. You might think a company not currently trading does not have a few transactions but 8 bank accounts paying monthly interest does generate a fair bit of paperwork. I usually done by now, but its been a busy 4 months period with travelling and job change.

Before you ask me why I even bother even attempting it myself, its because I worked as a part qualified accountant a couple of decades ago. I also worked on building accounting & ledger systems from a developer pov. The accountant is still there to hold my hands.


I actually did not mention trial balance of £35k or that I only had £37k/£35K of reserves, I can assure you it's a bit more than that. Question (and monetary illustration) was based specifically on the amount to be borrowed to show its incremental impact on company as a whole.

As it stands income is from inside IR35 contract so only 2k dividend last and this tax year.

So your questions
How much will your company need to pay the taxman this year? -> Amount is not really relevant but coming from interest receivables
How much will that leave in the company account? -> Company has a 6 figure balance
What else are you not telling us (or not making clear)? -> I think it's pretty much covered, also that I am a strong believer that every penny counts.

[WTFH]

... after 2 years of not trading

OK, so there's one of those dang facts.

In post 1, if you had said "My company isn't trading, but I've got £50k sitting in it, I'm not drawing a salary and only taking minimum dividends. I've checked with my accountant and this is what they are suggesting"
That would have got different answer to what you wrote in post 1, your vague bit in post 4 where you might be saying that you are "ghosting" your accountant - which probably means you're not using an accountant for whatever reason.

You mention "trial balance of £35k" in post 3, then in post 12 you're talking about borrowing £37k, i.e. £2k more than you claim the company has (revenue & capital)

A few questions:
How much will your company need to pay the taxman this year?
How much will that leave in the company account?
What else are you not telling us (or not making clear)?

[northernladuk]

Unless my calculations are flawed, I think it's worth a punt.

And that is absolutely key and the bit you need to get professional advice. To go ahead on your assumptions and advice from us is bordering negligent.

And the fact that you are talking in the low hundreds in your calcs and not much in three figures per year I'd personally disagree it's worth it but then I'm very risk averse. You've not mentioned once the worst case scenario of it not going to plan which personally I'd factor in. I tend to not concentrate completely on the good as you can't do anything about that, but look at the bad which you can do something about if you get me. Everything works when it works, it's whether you can pull it back if it's goes bad.

But yes, I'll agree there are savings there so it's your call. Your one and only task is now to go speak to an accountant. To a) Get the process right and b) make sure your numbers are right. It's only going to take a small percentage mistake or missed line item and it's gonna blow such low numbers.

Sorry for being super negative but experience on here tells us that anyone comes on here so eager to use some tax advantage is rarely looking at the bigger picture and is just looking for the answer they want to hear, which is rarely the correct answer in the particular circumstance.

EDIT : Did we talk about making sure that this money is above and beyond your warchest? Will a two, three or more months on the bench in the loan period affect anything?

[css_jay99]

Eh? But it comes out of your pocket? It's you paying the interest so doesn't really 'cover' anything surely?

I am not in agreement. Last time I checked, my business easy access account was only generating 0.75% interest

Here are my calculations:-

Assuming 2% interest on £37K over 1 yr is £580 approx and yearly accounting fee is £360

I pay Ltd co. £580 as interest on personal loan.
Profits chargeable to corporation tax is £220 = £580 - £360
Corp Tax @19% = £42
Increased reserves £220 - £42 = £178
----
Company is still better off loaning the money to me than leaving it in the bank. This looks like a win to me for ltd co, completely offsetting accountant fees with this arrangement and income of £580.

My mortgage is 3.24% which is likely to step up to 3.74% next week. That's £968 minimum over next 1 Yr with no more rate hikes. Just from that alone, I am £388 (968-580) better off personally. That savings might look insignificant as a contractor, but think about how much money you will need to keep in a savings a/c just to generate that sort of savings. Sometimes spending less could just be as important as earning more.

Unless my calculations are flawed, I think it's worth a punt.

Yes it is, but you can't offset it against CT. I won't even begin to explain why (there used to be a detailed explanation on their website - good luck finding it) but it's based on the definition of a trade association dating back ot the early 1900s.

I was not saying you could offset against corp tax. IPSE is also something else I need to decide if I still need or not after 2 years of not trading

[malvolio]

.... though the latter is not tax deductible

Yes it is, but you can't offset it against CT. I won't even begin to explain why (there used to be a detailed explanation on their website - good luck finding it) but it's based on the definition of a trade association dating back ot the early 1900s.

[northernladuk]

Even better. The interest charged on this transaction alone more than covers my only outgoings i.e. accountant & ipse fees .... though the latter is not tax deductible

Eh? But it comes out of your pocket? It's you paying the interest so doesn't really 'cover' anything surely?

[css_jay99]

But the cost of it going wrong far exceeds the few percent you'll save. And it does go wrong regularly. It's the stuff you don't know that could happen that is the problem. Here is an example and there plenty more on here.
https://forums.contractoruk.com/acco...loan-help.html

All the advice I've seen from the respected accountants on here and others that don't post is to not bugger about with it if possible. We've had plenty of people coming on here that have cocked it up and bitterly regretted it. It's somewhat similar to company cars. You can do it but the general rule of thing is just don't bother (EV has changed that now of course)

I'd speak to your accountant first ot make sure you've got the process right first as you might be missing something pretty important. You need a resolution from the shareholders so there is some extra paperwork etc. Don't mess about with 35k that could end up incurring over 20% interest if you screw it up on advice from other contractors. Get proper advice.

Lots of short term borrowings can also fall foul of bed and breakfasting rules and HMRC will deem it income if you don't do it properly on top of all the interest stuff.

The savings just aren't worth the risk or hassle IMO. You company and you are two separate things and keep them that way. Getting in to the habit of using your company as a cash mule will more often than not cost you more in the long run. We are talking the difference between a 4% mortgage and 2% interest rate on 35k for 19 months? Is that even a grand saved?

But.. if you've read all my negativity and you've gone in with a greater awareness of the risks and happy to take them on then fill your boots. But for gods sake speak to your accountant.

I hear you but my scenario is completely different from the linked thread. I haven't taken a directors loan in a decade and divs only ever come out once a year so no chance of bank statements aiding misinterpretation from hmrc if harrased. As you said, I will create all the necessary paperwork.

Oh and.. (sorry it's late and my brain is befuddled). Isn't the interest charged tax as it's income to the company? So you are looking at a saving of 2% vs mortgage rate minus the extra tax on the interest so further reducing the benefit?

The benefit is weighted more towards flexibility rather than savings. Also the interest charged on this transaction alone more than covers my only outgoings i.e. accountant & ipse fees .... though the latter is not tax deductible


Also this discussions has made me think about delaying this decision a bit longer just incase I can wipe more than half of the balance after daughter starts uni in September. I haven't got a clue what her outgoings will be like

[ladymuck]

Oh and.. (sorry it's late and my brain is befuddled). Isn't the interest charged tax as it's income to the company? So you are looking at a saving of 2% vs mortgage rate minus the extra tax on the interest so further reducing the benefit?

The interest you pay on the loan is income to the company, yes. So there'll be CT to pay on it.

[northernladuk]

Oh and.. (sorry it's late and my brain is befuddled). Isn't the interest charged tax as it's income to the company? So you are looking at a saving of 2% vs mortgage rate minus the extra tax on the interest so further reducing the benefit?

[northernladuk]

Oh, and don't forget the DL is a very useful tool for staying tax efficient. If you need to take more dividends one year or you make an accounting mistake you can take some from the DL to keep the divis under the threshold and then pay it back next year so saving on the tax. With a loan already out you'll potentially lose this ability which could mean you'll be paying extra tax which could easily beat the 1k you'll be saving from your scheme. To be honest I don't know the exact details but bear that point in mind and ask your accountant how it might affect your exact situation.

[northernladuk]

Surely this type of infrequent short term borrowings (over £10k) is a good way of making use of company money at a decent cost ... Saying that business rates bonds have picked up.

But the cost of it going wrong far exceeds the few percent you'll save. And it does go wrong regularly. It's the stuff you don't know that could happen that is the problem. Here is an example and there plenty more on here.
https://forums.contractoruk.com/acco...loan-help.html

All the advice I've seen from the respected accountants on here and others that don't post is to not bugger about with it if possible. We've had plenty of people coming on here that have cocked it up and bitterly regretted it. It's somewhat similar to company cars. You can do it but the general rule of thing is just don't bother (EV has changed that now of course)

I'd speak to your accountant first ot make sure you've got the process right first as you might be missing something pretty important. You need a resolution from the shareholders so there is some extra paperwork etc. Don't mess about with 35k that could end up incurring over 20% interest if you screw it up on advice from other contractors. Get proper advice.

Lots of short term borrowings can also fall foul of bed and breakfasting rules and HMRC will deem it income if you don't do it properly on top of all the interest stuff.

The savings just aren't worth the risk or hassle IMO. You company and you are two separate things and keep them that way. Getting in to the habit of using your company as a cash mule will more often than not cost you more in the long run. We are talking the difference between a 4% mortgage and 2% interest rate on 35k for 19 months? Is that even a grand saved?

But.. if you've read all my negativity and you've gone in with a greater awareness of the risks and happy to take them on then fill your boots. But for gods sake speak to your accountant.

[css_jay99]

I would calculate the interest daily but only do a monthly journal in the books.

A 'loan amortisation' spreadsheet is likely to be the best method to both do the calculation and keep track of repayments you make.

Check if the interest is supposed to be simple or compound. Makes a biiiiig difference.

What's your back up plan if you can't repay within 9 months? You might think it won't happen but still a good idea to plan for it.

I'll check with hmrc & accountant regarding the calculations. Its repayment over part of current accounting year + 9 months after which gives me about 14 months to pay up. I'm confident that it will be paid in time but off course there will be a backup plan.

Surely this is one for your accountants to do the sums for you and also advise you on the proper process to take it? Not something you want to be doing off the advice from your peers.

You'll have to keep a close eye on it for this to be beneficial over such a short term with such low interest rates. Personally I wouldn't be buggering about with company money for those amounts. The fall out of it going wrong is way way bigger. Risk vs reward just not worth it.

As usual in these types of threads you've omitted key facts like the amount so we can help or give our opinion. Might not matter, but it might.

I'm ghosting them at the moment till I submit trial balances for tax return. It's about £35k. While the difference in rates/savings might not be big, It's still something nonetheless. Most importantly, I can use funds in personal account for other things before re focusing back to clearing the loan with interest rate rises over the next year furthest from my mind.

Surely this type of infrequent short term borrowings (over £10k) is a good way of making use of company money at a decent cost ... Saying that business rates bonds have picked up.