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Confusion re Directors Loan-need help here!

I agreed to complete 2011/12 accounts for a family member as a favour to help save some accountant fees. He is a Director for his limited company SME (just him, one director, no-one else involved). All was plain sailing until we reconciled the Trade Debtors account.

The trade debtors account was showing a £20k balance and it turns out that this was amounts paid from the company for personal items such as rent, personal phone, general living expenses, etc. A salary had been paid as well, but only up to the personal tax free limit. For the year we have been preparing the accounts, further payments were made so the 'trade debtors' now stands at £35k.

I feel that the previous accountant has treated this incorrectly in showing it as a trade debtor rather than a loan. Before I submit the accounts and offer him advice, I would really appreciate it if someone could reassure me that I am correct.

This is how I think it should be treated:

(1) the loan should always have been treated as a benefit in kind, therefore interest should have been charged.
(2) none of the loan has ever been repaid, and it is now over the 9 month period, so we have the following options available:
(a) the company must pay 25% corp tax on the loan balance
(b) we release the loan to show it as salary/dividends and he is then liable to pay the respective NI on the loan amount.
(c) the loan is written off and he will still owe the NI

Or am I missing something and have got it totally wrong, and the original accountant was correct in that we can treat it a a trade debtor forever with no tax to be paid?

Would really appreciate any comment here! Thanks very much in advance.
Patrick

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29th Dec 2012 20:21

Are there sufficient reserves

To vote a Dividend to clear the whole balance? (No NI on divis)

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29th Dec 2012 21:08

Yes there are sufficient funds...so if we declared a dividend does that mean that:
(a) there is no corp tax to pay and no NI? As there is no way hmrc will allow us to escape paying tax, presumably the tax gets paid via his income tax...so the net result for him is the same...he owes a fair chunk of tax ?

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29th Dec 2012 21:15

CT
You need to ave sufficient p&l reserves, after CT on trading profits, to declare the dividend. So you need to look at your last statutory accounts and a estimate/management accounts to date less provision for current CT,

If that gives enough headroom for a dividend, yes, you can declare it, however it sits in this current tax year, so you have loan outstanding last year with the attendant benefit in kind issues, however so long as you are within 9 months of the year end, the 25% S455 isn't payable.

In terms of BIK, the company pays NI on it, the individual income tax via Self Assessment. The individual also has a pore risk personal tax liability on the dividend, via SA, dependant on other income.

There is no direct CT implication.

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29th Dec 2012 21:35

Ok thanks everyone-much clearer.

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29th Dec 2012 21:35

Correct treatment?

Would not the correct treatment originally to have been to have added the amounts paid in respect of the director's personal bills to his actual gross pay in the week / month in which the payment was made and calculate Class 1 NIC on the aggregate, and then at the year end enter in section B of the P11D (payments made on behalf of employee) the total amount of his personal bills paid by the company?

The debit in the accounts would then be to wages / salaries (with appropriate CT allowance) rather than to trade debtors.

There would be no overdrawn director's loan account and so no interest on director's loan and no charge to s455 tax and no need for a dividend.

The employer and employee Class 1 NIC would have been accounted for by the company as part of its routine PAYE and the director would be subject to income tax under self-assessment on the basis of the figure in section B of his P11D (and would have suffered the employee's Class 1 NIC by deduction from his net pay).

Result happiness!

RM

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29th Dec 2012 23:49

yeah yeah

Big balls up by previous agent, but what did director think he was doing?

He thought he was taking dividends, didn't he? (HINT) Why else was only a personal allowance salary put through?

What did he declare on his SA100? or did the naff agent fluff that up too?

 

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30th Dec 2012 10:33

Well....
Nothing declared on SA100 so it has been treated purely as a trade debtor.

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30th Dec 2012 14:38

Fundamental errors.

pstubbs50 wrote:
Nothing declared on SA100 so it has been treated purely as a trade debtor.

He could never have been a trade debtor! Restate the comparatives and submit a correction to SA100.

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30th Dec 2012 12:30

Pardon me for asking

But have you spoken to the previous accountant?

Is it possible that the overdrawn balance until 5 April 2011 was always less than £5,000 and so there was no need to enter it on the P11D for 2010/11 or the director's income tax return for that year?

Is it possible that a dividend was put through (or at least the previous accountant intended one to be put through) at the time the company accounts for 2010-11 were signed off (which I expect was within 9 months of the end of that accounting year) sufficient to eliminate the director's loan account balance, and so no s455 tax would be due?

That dividend would show up in the company accounts for 2011-12 and the director's personal tax return for 2011/12 or 2012/13 (depending on whether the dividend fell before or after 5 April 2012).  The benefit in kind of an interest free loan to the director (assuming the loan was interest free) would show up for the first time on his 2011/12 form P11D and his 2011/12 personal income tax return (if the balance first exceeded £5,000 after 5 April 2011).

But maybe (to save money!) your friend didn't instruct his accountant to deal with the 2011/12 P11D or his 2011/12 income tax return - in the same way that he has not instructed the previous accountant to deal with the 2011-12 company accounts.

Might be worth asking your friend for permission to discuss all this with the previous accountant, if you have not already done that.

In any event it would be good to see copies of the CT return that went in with the 2010-11 company accounts and the 2011/12 P11D (and the director's 2011/12 income tax return if that has been submitted), if you have not already seen them.

RM

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