A considerable proportion of our clients have financial year-ends running to either 31st March or 30th April, in common with a lot of other small/medium businesses in general. In practice that means that around this time of year many accountants start seeing their clients’ end-of year paperwork come into the office to be turned into financial statements and business tax computations that eventually have to be filed with HMRC, Companies House, etc. One subject that has come up more and more frequently when doing this work is that of “Director’s Loan Accounts” – which clearly relates to limited companies, but in principle very similar issues can arise with businesses run as ordinary unincorporated partnerships.
Director’s Loan Accounts.
In recent years many site operators have been struggling to show decent-looking profits when their bank or other lenders ask for copies of financial accounts, and some have realised that if they reduce their wage bills by cutting their own salaries – and then ‘borrowing’ the money from their company – that this can make the bottom line look a lot healthier.
In other cases, operators have decided that borrowing money from their company is easier than going through the whole credit-rating and application hassle involved in obtaining a personal loan from elsewhere; a few have also worked out that they can avoid paying monthly PAYE and NIC on a regular cash withdrawal out of their company by charging it to a “director’s loan” rather than putting it through the wages and salaries systems.
Incidentally, it’s not just ‘salary’ payments that can come out of a loan account – it basically covers any personal bills paid by the company on behalf of a director, such as domestic rates, private ‘phone bills, private credit card bills, mortgage payments, etc., so you may not even be aware that your book-keeper or accountant is posting some of your payments to a loan account every month.
Yes, this can be a way to window-dress the profit/(loss) report, although it shouldn’t really fool any experienced reader of business accounts; and potentially it can ease cash flow a little if the company isn’t paying PAYE/NIC every month on what the director takes out of the business. But like any loan it has to be repaid eventually, and there is a big difference between taking out money that you initially lent to the company, and taking out money that wasn’t there in the first place – which is how the loan account becomes ‘overdrawn’.
Certainly it’s not illegal to have an overdrawn loan account, however there can be some tax implications of which every director should be aware:
- If you repay the loan before the end of your company’s financial year – no problem; the loan doesn’t even need to be shown on your company tax return.
- If you repay the loan within 9 months of your financial year-end, then loan details have to be included on the company’s tax return, but there’ll be no tax charge to the company.
- If the loan is still not repaid after 9 months of the year-end, then your company will be charged corporation tax at 25% of the outstanding balance – yes, that’s twenty five percent. So on a £10,000 outstanding balance, the company will pay additional tax of £2,500 – a very expensive way of borrowing money. And there’ll be interest due to HMRC on any tax unpaid from the due date to the date that the tax is paid or loan is repaid.
- You should also be aware that there can be personal tax implications if your company loans you money interest-free or below normal rates of interest. The loan is treated as a benefit in kind, and must be declared on your P11D return, and you’ll be charged Class 1A National Insurance on the benefit.
So how do you repay an overdrawn loan account? The simple answer is that you put cash back into the company’s bank account; the more ‘involved’ answer is to convert the loan back into a salary payment at some point – which means that there’ll then be PAYE and NIC liability at that time. An even more ‘involved’ answer for a shareholding director is to declare a dividend to cover the loan account, although that assumes that the profits are there to do so, and of course you can’t make a dividend payment just to one shareholder alone if there are two or more shareholders.
On a completely unrelated note, just a couple of reminders for those who’ve so far avoided stepping into the 21st Century as far as VAT is concerned:
Paper VAT returns- final chapter
Although most VAT-registered business have had to file [and pay] their VAT returns online since last year, a few smaller ones [net turnover below £100,000 p.a.] have so far been allowed to continue making paper returns and old-fashioned cheque payments. This facility will end in April 2012, after which all returns and payments will have to be electronic. Obviously the vast majority of Forecourt Trader readers running their own sites will already be making their returns this way, but there are a number of small workshops and even a few of the smaller commission-operated sites that have so far managed to avoid having to conform to the online requirements, and it’s not unknown for some larger retailers to also run small independent businesses off-site. Anyone in that position really should acquire a business PC now and start using it as soon as they can.
Paying VAT electronically
Making a VAT return online is one thing, paying it electronically is another. The ‘normal’ method is for the retailer to set up a Direct Debit Instruction in favour of HMRC; this allows the maximum time for payments to be made – i.e. an additional three working days on top of the standard seven [calendar] days following the normal ‘due date’. Confused? OK: your VAT quarter ends on 31st August; the normal due date would be 30th September; the latest date for any other payment method would be 7th October, but if you have a DD set-up already, the actual date on which the money will leave your account will be Wednesday 12th October [because the 7th falls on a Friday this year].
One alternative method that some people have used is payment by credit card; unfortunately it loses the extra three working days’ extension, and is subject to a 1.4% transaction fee. That’s £140.00 extra on a ten-grand payment – not “£14” as one client had convinced himself it would be!
As with all tax matters, we’d strongly urge you take professional advice if in any doubt.
