Dividend and directors loan

[Martin at NixonWilliams]

Interesting... And do we assume if the OP has 8k showing profit he is only taking 7k as that will hit the tax limit rather than the full 8k or is there some reason to keep a little bit of profit to cover small issues when it comes to year end accounting?

I don't know what the OP's reasons are, though capping your income at the higher rate threshold is common tax planning of course.

I would always advise keeping some profit in the company as you do not know what is around the corner - for example an unexpected period without a contract. From reading your posts in the past I think you are of the same opinion as me on that one!

Martin

[northernladuk]

Hi NLUK,

It isn't recommended by ourselves, our advice is to avoid director's loans at all costs as we have seen many clients end up in difficulty as a result. However, most succesfully repay the loan without any difficulty at all.

It is a small minority that take loans out of funds set aside for tax, i.e. loans not covered by reserves.

Martin

Interesting... And do we assume if the OP has 8k showing profit he is only taking 7k as that will hit the tax limit rather than the full 8k or is there some reason to keep a little bit of profit to cover small issues when it comes to year end accounting?

[Maslins]

It does and I understand, not my cup of tea though. Kinda saying it is ok to invest CT/VAT money as long as you can pay it back at the end of the period. Am sure that isn't recommended.

Just out of interest though, to both accountants that have posted... How many people do dip in to CT/VAT like this in your experience?

Not sure any do it as deliberately as the OP's talking about...but quite a few do end up with overdrawn loan accounts. Either due to lack of understanding or lack of willpower (the cash is there so they take it).

We've seen a fair few occasions where that "short term loan" has spiralled, interest gets added to it, S.419 (or 455 or whatever it is these days) gets added on, and once you're at that stage it can be hard to get back out.

[Martin at NixonWilliams]

It does and I understand, not my cup of tea though. Kinda saying it is ok to invest CT/VAT money as long as you can pay it back at the end of the period. Am sure that isn't recommended.

Just out of interest though, to both accountants that have posted... How many people do dip in to CT/VAT like this in your experience?

Hi NLUK,

It isn't recommended by ourselves, our advice is to avoid director's loans at all costs as we have seen many clients end up in difficulty as a result. However, most succesfully repay the loan without any difficulty at all.

It is a small minority that take loans out of funds set aside for tax, i.e. loans not covered by reserves.

Martin

[northernladuk]

Hi NLUK,

I agree, I would generally advise against such an arrangement as more often than not there is a high risk of the loan not being repaid. However, in my experience there are times where this can be done without much risk at all so it all depends on the directors circumstances really, and what the money is going to be used for. For example, simply putting the money into an ISA to earn more favourable interest rates and not spending the money would present very little risk, if any.

If a loan is taken on day 1 of a company's accounting period out of money that will eventually be due for CT, the CT and the date by which the loan must be repaid are 21 months away - a lot can be done with this money during this time so it can be in the directors interests to make the loan.

I hope this helps.

Martin

It does and I understand, not my cup of tea though. Kinda saying it is ok to invest CT/VAT money as long as you can pay it back at the end of the period. Am sure that isn't recommended.

Just out of interest though, to both accountants that have posted... How many people do dip in to CT/VAT like this in your experience?

[Martin at NixonWilliams]

Is this really good advice though? When those reserves belong to the tax man, not the company? And advising to use monies with a proviso on something that may not happen?

I would sincerely hope my accountant would be strongly disuading me from doing this just to put it in an ISA.

Hi NLUK,

I agree, I would generally advise against such an arrangement as more often than not there is a high risk of the loan not being repaid. However, in my experience there are times where this can be done without much risk at all so it all depends on the directors circumstances really, and what the money is going to be used for. For example, simply putting the money into an ISA to earn more favourable interest rates and not spending the money would present very little risk, if any.

If a loan is taken on day 1 of a company's accounting period out of money that will eventually be due for CT, the CT and the date by which the loan must be repaid are 21 months away - a lot can be done with this money during this time so it can be in the directors interests to make the loan.

I hope this helps.

Martin

[northernladuk]

Hi Contreras,

What you are suggesting is fine. If there are reserves of £8k then you are perfectly entitled to pay a £7k dividend. The fact there is a director's loan in addition to this isn't a problem providing the liabilities can be met in time.
If taxes are unpaid as a result of the loan, the 'corporate veil' will be lifted, meaning the directors and/or shareholders can be held liabile for the company's debts. The lifting of the corporate veil simply means the director or shareholder would not be protected by the usual limited liability a ltd company provides and would therefore be forced to meet the company's tax bills personally.

I hope this helps.

Martin

Is this really good advice though? When those reserves belong to the tax man, not the company? And advising to use monies with a proviso on something that may not happen?

I would sincerely hope my accountant would be strongly disuading me from doing this just to put it in an ISA.

[Maslins]

It's legally ok, but I wouldn't recommend it.

Who knows what could happen in 2-3 month's time, your sales invoices might become bad debts, then you'd have to scrabble around personally to find cash to put back into the company to pay the VAT. Sure, you may think it's unlikely, but it happens.

For many it becomes a slippery slope so I'd recommend sticking with what you know you can take out of profits.

[Martin at NixonWilliams]

Is it OK to pay out a dividend and also a director's loan such that future liabilities are not immediately covered even though the dividend itself is covered?

For example, early in the company year the bank account stands at just over £10k, and P&L shows reserves of £8k. The company issues a dividend of £7k and makes a loan to the director of £3k, so it no longer has the cash needed to pay CT & VAT.

Does this make the dividend ultra vires?

To add some context to this structure, let's say the director wants to use up his ISA allowance for the tax year so needs the money now even though it'll be sitting on deposit and available to be repaid at any time. There are outstanding sales invoices sufficient to cover the VAT, and the CT is not due for another 8 months, by which time the company has built up enough reserves to issue another dividend cancelling the director's loan, and end the year with a healthy profit and the DLA in credit.

Anyone see a problem with that?

Hi Contreras,

What you are suggesting is fine. If there are reserves of £8k then you are perfectly entitled to pay a £7k dividend. The fact there is a director's loan in addition to this isn't a problem providing the liabilities can be met in time.

If taxes are unpaid as a result of the loan, the 'corporate veil' will be lifted, meaning the directors and/or shareholders can be held liabile for the company's debts. The lifting of the corporate veil simply means the director or shareholder would not be protected by the usual limited liability a ltd company provides and would therefore be forced to meet the company's tax bills personally.

I hope this helps.

Martin

[northernladuk]

You cannot pay a 7k dividend if you do not have money for CT/VAT. It is not profit. Period.

The fact you know it is available to be paid back means squat. Many people said that before their investments fell through the floor. It's the paperwork that counts not the good intention.

What if your lose your investment, the invoices aren't paid yadda yadda.

[Contreras]

Is it OK to pay out a dividend and also a director's loan such that future liabilities are not immediately covered even though the dividend itself is covered?

For example, early in the company year the bank account stands at just over £10k, and P&L shows reserves of £8k. The company issues a dividend of £7k and makes a loan to the director of £3k, so it no longer has the cash needed to pay CT & VAT.

Does this make the dividend ultra vires?

To add some context to this structure, let's say the director wants to use up his ISA allowance for the tax year so needs the money now even though it'll be sitting on deposit and available to be repaid at any time. There are outstanding sales invoices sufficient to cover the VAT, and the CT is not due for another 8 months, by which time the company has built up enough reserves to issue another dividend cancelling the director's loan, and end the year with a healthy profit and the DLA in credit.

Anyone see a problem with that?