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Do you "draw the line" when overdrawn DLA gets big?

Like a lot of practitioners, I have several clients that have large overdrawn directors loan accounts.

Some are several £10k's, one or two are over £100k. Apart from processing the tax and financial reporting consequences of this, do you ever say "enough is enough"? I'm uncomfortable about it but in the absence of an impending insolvency it doesn't actually appear to be illegal.

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By Locutus
16th Oct 2012 13:47

Tax issues
My feeling is so long as the tax issues with an overdrawn loan account are dealt with correctly, the accounts show the correct disclosures and the director(s) concerned are aware that in the event of insolvency they will have to repay it then I am fairly relaxed about it for an owner-managed company.

At the end of the day you can only advise. It is up to the directors to run the company

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We tell clients every year - at the end of the day, if the company is solvent, and they payinterest etc, I can see there is little that can be done!

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16th Oct 2012 14:54

I would suggest . . .

I would suggest that any director with a substantial overdrawn director's loan account seek written confirmation (at least annually) from appropriate people that they are aware of the position and consent to it.

As to who are the 'appropriate people' they might be the other directors of the company or, in certain circumstances, significant shareholders.

The reason is that I know of a case in which a director borrowed money from the company (by way of getting company cheques in payment of personal expenses).  He says everyone knew about this and was 'happy' with it.

Then the directors fell out and one of them made an allegation of theft against the director in relation to the transactions (which had been debited to DLA).

To cut a long story short, he was convicted by a jury of theft and is not a happy bunny!

If he could have produced evidence of consent it is most unlikely that he would have been taken to court.

David

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16th Oct 2012 15:06

@David

Thanks for that. That's one consequence I certainly hadn't thought of!

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Similar comments

I advise clients of the implications.

Overdrawn DLA's can often be an effective solution for short term tax planning, especially when the director may have fluctuating income levels, beyond that its a problem waiting to rear its head.

I picked up a client with a 6 figure overdrawn DLA and we are now working on reducing it over the next few years. His previous accountant had advocated long term use as being tax efficient - more like they were being lazy and couldn't be ars*d to explain the potential implications and work out a plan of action to rectify the position.

@davidwinch - hmmm on the limited facts available it sounds like he was either being very naive or knew exactly what he was doing.

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Shareholder approval

Hi RL - following on from David's comments the Companies Act requires any loan or credit >£10K to be authorsied by shareholders resolution.

It's got me thinking, none of my clients do this, yes they may stray over by up to £5K every now & again but they don't like the thought of P11D entries, or S455 tax & monitoring if the loans go up & down.

Presumably though, from a cash flow point of view, drawing a substantial loan and paying the S455 tax is cheaper than drawing a dividend then having to find the extra cash to pay the personal tax bill by drawing more dividend?  (sorry calculator broken).

Longer term however, if the idea is that the loan will stay outstanding until it's effectively cancelled when the company closes, could HMRC argue the intention was that the drawing was in anticipation of the final closure making any adjustments at the end difficult if trying to avoid the £25K capital trap?  I don't know but I'd imagine it will add to the work necessary when planning the closure of the company.

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