Directors Loan or capital introduced?

Directors Loan or capital introduced?

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Am i being naive in thinking that cash introduced into a new business could be classified as a directors loan instead of capital introduced? .......... Thereby allowing the director to withdraw these funds at a later stage without any tax implications? If so are there any restrictions or further implications for this?

Thanks in advance.
Nik G

Replies (9)

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By User deleted
17th Apr 2006 12:58

Thanks to both of you for your comments
I think that answers my question.

The initial injection of cash is for marketing of the new venture and some day to day working capital.

Irrespective of this, my thinking was based around two scenarioes. The first would be where say 40k was introduced as capital and then 40k was drawn as salary throughout the year. The second option would be to have the 40k introduced as a DL with the first years 'salary' taking the form of repayment of that loan.

The obvious advantage of the second option being that no income tax would be payable! I assume from the responses so far that this would be correct?

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By kenbaugh
20th Apr 2006 16:23

company or not?
Where were you planning to show "capital introduced" in the balance sheet of a limited company? Do you in fact know the difference between an incorporated and unincorporated business? I am surprised that a fellow accountant could have trouble sorting out this scenario for himself! This is the sort of situation where an accountant could earn a whole lot of black marks for the profession as a whole.

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By AnonymousUser
21st Apr 2006 13:01

That's a bit harsh
Ken, I think you are being a bit presumptuous here, whilst alot of the members are qualified accountants, some are students and others everyday folk. I don't think your comments help to answer the question raised - the purpose of the forum.

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By AnonymousUser
22nd Apr 2006 13:42

share cap
I think Nik meant additional share capital when he says 'capital introduced'.

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Judi Castille senior partner of SP Consultancy LLP Kent, company formations and tax structures
By freelance32
16th Apr 2006 21:13

Temporary cashflow
You do not say why cash is being deposited into this company. It often happens with a Close company, ie only 2 Directors say, that money is tight in the first year of trading, and often it means hands in pockets.

If this is just a temporary cash flow issue, then by all means Cr the DLA, and then make sure they withdraw these monies as soon as the company can afford to repay. You can charge interest, but then that would be taxed on the individual.

Sometimes monies are depositted to assist with payment of large bills, ie the quarterly VAT, if the debtors have not been forthcoming. In the early years companies cannot be so pushy with the credit control policy, and sometimes the "Big Boys" credit terms can be over 90 days, which for a small company with quite a large labour force, can cause a few cash flow problems.

As long as the company is watching its margins, and the cash deposit is just working capital, then the DLA is fine. If it becomes "hard-core", then there would appear to be more serious issues than working capital.

Hope this helps.

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By Chris Smail
24th Apr 2006 11:21

I'm with Ken..
This is just about basic knowledge of the Companies Act

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By User deleted
19th Apr 2006 12:04

A loan is a loan ad obviously can and needs to be be paid back without tax implication.

To introduce capital you would have needed to issue new shares..

The usual catch here is of course if you try to charge excessive interest rates..

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By AnonymousUser
16th Apr 2006 09:06

It depends
If it is an unincorporated business there is no share capital. The only issue will be on any iwthdrawal from the account if interest relief is being claimed.

For a company you will need some shares but the rest can be in loan capital. Interest can be paid on the loan. Provided that it is not more than a commercial rate, the company will obtain a deduction and the individual will be taxed on the interest. The interest will be paid after deduction of tax. The loan can be withdrawn at any time that the company can afford it. If the withdrawal makes the company insolvent a liquidator may come after the money so withdrawn.

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Replying to IanRiley:
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By Nelly
13th Feb 2013 11:50

Please I just have a customer who has set up a limited company and she has put some shares in the company (£2000) for the first year.

I account it this way DR: Bank , Cr: Share capital. How I am going to account for this each year or is it possible for her to take the money out.

What will be the tax, legal and some other impact?

Thank you.

Nelly 

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