Director drawings

Director drawings

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I have a client who is a sole director of his company and a client that does not appear to listen to me! I have his 2014 Income tax return yet to file but he has just told me for the 2013/2014 tax year he has with drawn altogether almost £9,000 from the company as and when he needed it from supermarkets. I have said that if the company has made a profit we could show it as a dividend if not it will be classed as a loan to him and the company will have to pay tax on it.

There is no PAYE scheme set up for the company so I won't be able to show it as wages or can I? He hasn't earned anything anywhere else.

Don't you just dislike these clients who treat their companies as if they are sole traders!

Replies (30)

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By andy.partridge
29th Jan 2015 16:38

It doesn't sound like a dividend

It sounds like an overdrawn director's account.

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By User deleted
29th Jan 2015 16:41

Unless ...

... he drew up minutes and dividend vouchers as he was waiting for the ATM/checkout girl to give him the cash.

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By TerryD
29th Jan 2015 16:42

Indeed

Hopefully, though, you can clear it with a dividend paid now?

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By Tim Vane
29th Jan 2015 16:49

I once had a very similar conversation with a client. He told me in no uncertain terms that it was most definitely not a loan, and he would not approve me describing it as such in the accounts.

I told him that in that case, as it was an unsanctioned withdrawal of cash, I had to treat it as theft, and how did he want me to proceed?

We parted company shortly after.

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Replying to RyanTheBeanCounter:
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By james3
31st Jan 2015 17:51

Re: I once had a very similar

Tim Vane wrote:

I once had a very similar conversation with a client. He told me in no uncertain terms that it was most definitely not a loan, and he would not approve me describing it as such in the accounts.

I told him that in that case, as it was an unsanctioned withdrawal of cash, I had to treat it as theft, and how did he want me to proceed?

We parted company shortly after.

Theft is exactly what it is (although the "dishonesty" required to meet the legal definition is arguably lacking, as these people genuinely think they are doing nothing wrong). People don't seem to understand a company is a separate person and they can't just take it's money "willy nilly". Imagine a company as a (young human) child. The parent may have de facto control over the child's money, but that does not mean he can use it for his own purposes.

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By helen0904
29th Jan 2015 16:53

If there was a PAYE scheme set up and he couldnt afford to pay the wages could we credit the DLA and then debit it with these transactions?

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By andy.partridge
29th Jan 2015 16:55

Unfortunately

You will need to have a PAYE scheme in place to file the P11D and P11D(b) which is now 6 months late.

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By User deleted
29th Jan 2015 16:57

Problem with the DLA and PAYE ...

... is that if the expectation is that payments are to be cleared by way of posting salary to DLA the payments fall within the RTI regime and PAYE ought to have been applied at the time. Unless that is no longer the case?

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By helen0904
29th Jan 2015 17:33

Thanks for the replies, there is just no way round it, it is a loan to the director and he needs to pay it back or face the consequences.

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Replying to whitevanman:
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By andy.partridge
29th Jan 2015 17:43

But . . .

helen0904 wrote:

Thanks for the replies, there is just no way round it, it is a loan to the director and he needs to pay it back or face the consequences.


There are already consequences even if he pays it back today.
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By petersaxton
29th Jan 2015 18:14

You can tell clients what their options are

but then you have to account for what they did given the circumstances and possibilities.

Then you can tell them what their options are to minimise the mess ....

 

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By helen0904
29th Jan 2015 18:14

So how do I get round the fact there is no PAYE scheme to declare benefits in kind? Come clean with HMRC as soon as possible?

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By andy.partridge
29th Jan 2015 18:27

Also

You don't say when the company's year-end is and I infer the director is 100% shareholder in the company - unless the loan is repaid within 9 months of the year-end there is also 25% s455 CT deposit to consider.

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By petersaxton
29th Jan 2015 18:35

accounts

they haven't been prepared yet.

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By helen0904
29th Jan 2015 18:44

The company year end is the 31st July 2014, and according to the client has withdrawn just below £9,000 in the 2013/2014 tax year. There is no PAYE scheme set up. So can someone please give me a straight answer of what my clients options are without trying to test my knowledge. I am only human after all!

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Replying to Tax Dragon:
By petersaxton
29th Jan 2015 19:04

I've told you

helen0904 wrote:

The company year end is the 31st July 2014, and according to the client has withdrawn just below £9,000 in the 2013/2014 tax year. There is no PAYE scheme set up. So can someone please give me a straight answer of what my clients options are without trying to test my knowledge. I am only human after all!

The director should pay back the loan by 30/04/15.

The company should charge the director 4% pa until 05/04/14 and 3.25% pa after that.

Any other option is worse.

What's not to understand?

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By [email protected]
29th Jan 2015 18:54

Register paye and clear as much through DLA within 9 months and 1day of the financial year end. and for rest of the balance, if there any profit declare dividend. Its clents choice, if he is going to pay the 25% surcharge or not

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Replying to Wilson Philips:
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By helen0904
29th Jan 2015 19:05

Thank you I appreciate your clear answer to my question. That was my understanding of things but some of the replies on here are confusing.

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Replying to Tax Dragon:
By petersaxton
29th Jan 2015 19:17

There are other options

helen0904 wrote:

Thank you I appreciate your clear answer to my question. That was my understanding of things but some of the replies on here are confusing.

but they can lead to other issues and cloud things. Even if you understand, clients still come up with a variation of what you tell them - even if it's in writing!

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Replying to Wilson Philips:
By petersaxton
29th Jan 2015 19:10

Forget the day!

<a href="mailto:[email protected]">[email protected]</a> wrote:
Register paye and clear as much through DLA within 9 months and 1day of the financial year end. and for rest of the balance, if there any profit declare dividend. Its clents choice, if he is going to pay the 25% surcharge or not

It's 9 months.

You have to take into account the tax effect of paying a salary and/or dividend. It may not be tax efficient. If it is it will be a better route if the director can't repay.

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Replying to leshoward:
By petersaxton
29th Jan 2015 19:36

1 day

petersaxton wrote:

<a href="mailto:[email protected]">[email protected]</a> wrote:
Register paye and clear as much through DLA within 9 months and 1day of the financial year end. and for rest of the balance, if there any profit declare dividend. Its clents choice, if he is going to pay the 25% surcharge or not

It's 9 months.

You have to take into account the tax effect of paying a salary and/or dividend. It may not be tax efficient. If it is it will be a better route if the director can't repay.

I've seen HMRC website say 9 months but gov.uk say 9 months and 1 day!

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
29th Jan 2015 19:01

Strictly speaking if they aren't dividends and they aren't salary then they aren't taxable income to go on the persons self assessment tax return.

If this is their only income, set up a PAYE scheme, pay them the standard directors salary, declare dividends now as much as one can from the records given. And make sure you know what the position is at 5th April 2015 so you can do a p11d if necessary.

And get regular dividends declared going forwards.

All my director shareholder clients sign a meeting minute stating their intended remuneration policy of salary and dividends. If they then can't be bothered to do dividend vouchers at the time, we can prepare them for them (later), in the knowledge that they had a meeting with themselves and took the monies as salary or dividend. I know, purists will cringe at that approach but unless anyone can provide a foolproof way of training your average director-shareholder any better, it's the best I've come up with. There is a difference between backdating dividends, which is wrong, and drawing up paperwork that someone didn't do at the time when the intent was there.

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By petersaxton
29th Jan 2015 19:15

Online bookkeeping

This is why I want my clients to use online bookkeeping and have the directors loan account balance on their dashboard.

I also want to remind them regularly in emails with links to the rules and consequences.

There's nothing to this multitasking!

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By User deleted
29th Jan 2015 19:22

Interest

Charging interest will not help in this scenario, as it will not have been paid by 19 July. So there is still a reportable benefit for Class 1A purposes.

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Replying to Wilson Philips:
By petersaxton
29th Jan 2015 19:48

gov.uk doesn't say it has to be PAID

BKD wrote:

Charging interest will not help in this scenario, as it will not have been paid by 19 July. So there is still a reportable benefit for Class 1A purposes.

What if there were payments in and out before 19 July? Can some of the payments into the company bank account by the director be treated as interest paid?

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By User deleted
29th Jan 2015 19:47

1 day

Just another example of the inadequacy of gov.uk. It's 9 months so you were right first time, Peter. (Though there is still the issue about charging interest.)

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By User deleted
29th Jan 2015 20:04

gov.uk

As you will have gathered from my comment above, I'm not particularly impressed by what is said on gov.uk - they've already got the timing wrong re s455 (at the very least their wording is very misleading).

Yes, if there had been payments back into the loan account I'd argue that those should be treated as payment of interest.

But there is another problem with interest - company needs to be able to demonstrate that there was an obligation to pay the interest in existence during the tax year. I'm not sure that this can be said to be the case here.

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By petersaxton
29th Jan 2015 20:18

Obligation

Unfortunately many small company directors don't have a clue of what they are doing or the consequences.

Monsoon referred to a policy document. If an accountant prepared such a document and covered payment of interest for overdrawn director's loans and the director read and signed it (and presumably understood it even if it was only for a few seconds!) would that be sufficient?

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By User deleted
29th Jan 2015 20:53

Policy document

It may well be sufficient - provided of course that it is signed and dated in time. Hands up who thinks such a document exists in this case?

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By petersaxton
29th Jan 2015 21:27

It may be unearthed

TOMORROW!!!

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