Overdrawn Director’s Loans Accounts, there appears to be some confusion over Director Loan accounts.
Some directors are taking regular withdrawals out of their company creating a negative balance on their director loan account. Let’s say they take £5,000 per month, they do this to avoid tax and NIC. The monthly payments continue and then often, six months after the year end, the accountant will issue a dividend to cancel the Directors Loan Account balance at the most recent trading year end.
There is so much wrong with this type of non-planned approach that it is almost difficult to know where to begin.
Firstly – the taking of regular monthly amounts would under scrutiny by HMRC be regarded as regular distributions and taxed accordingly.
Secondly – it would be far better to make a dividend payment at the year end, thereby clearing the Director Loan balance.
Thirdly – do not blindly continue to take monthly “drawings” out of your company, as if you continue to take monies out without a break in payment regularity then despite your trading year being passed, the balance will continue to be added to. The result being that the beneficial tax effect of the attempted clearance of the outstanding director loan balance will be ignored by HMRC.
If you are a company director and have been working hard for many years and after all the graft your company starts making reasonable profits. Then you will want to reward your family and yourself now that your company is successful.
It is perfectly natural to resist paying tax but attempting to do without a proper planned approach will undoubtedly create problems for you later on.
All company directors would benefit from a planned strategic approach to extracting cash from their business. This not only applies to director loan accounts but also to the payment of dividends and the use of pensions as a financial planning tool for you and your business.
We were recently requested to assist a company who failed to clear a fairly small balance at their trading year end of £39,000. They waited until six months after the year end and then paid a dividend of £157,000, to clear the accumulated director loan balance at that date. Because of sloppy practice the Director now faces a larger tax bill ….
Sloppy, sloppy, sloppy!
These sort of problems arise often with small accounting firms, who generally have small business owner clients and are not familiar or up to date with current taxation. In their client bank will be one or two companies that have done well, in reality they have outgrown their accountant but due to loyalty would like to stick with them.
Of course everyone is fairly busy, the directors with the demands of their business, the accountant trying to catch up with the twin demands of Companies House and HMRC.
I would suggest that all business owner’s seek out a third party adviser who is able to provide comprehensive financial planning both for the personal planning and the business planning needs of the director and his family.
Beware however there are two types of “advisers” – the main difference is that many “talk the talk” but very few can “walk the walk”.
Any comprehensive planner of note will be able to add more value to business owner director than any fee paid.
If you have an overdrawn Director Loan Account or find yourself paying too much tax why not contact us :- http://www.paretolawrence.co.uk/contact/