Director Loan account operation

Director Loan account operation

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Director loan account operation in real life for a small limited coy - 1 director.

Having accepted this limited company as a client we shall be processing a monthly salary and dividend (on different dates with supporting documentation and preparation of necessary minutes and vouchers)

My question relates to how this works in practice?  Based upon the usual expenses going through the company which are allocated straight to the loan account and the directors requirement for disposable income above that of the salary payment (£833 pm) then do you post a dividend to the DLA then pay out the "nett dividend" having made allowance for the expenses etc.  My first reaction would be to encourage the director to removal all personal expenses from the business and pay for them personally thus allowing the dividend to be made directly to them or is this me working purely in a theoretical world?  Would it work better by stating the director receives the payroll payment then allocate expenses to DLA as they arise and have the director withdraw a reasonable and supported amount of cash from the business with the dividend then clearing this out on a monthly basis?

Also, if you are making a say a monthly dividend payment on a different day to the payroll run (say few days after) would HMRC deem this to be remuneration - think not however wanted to put the question out there.

Acknowledge need to watch DLA balance regards £5k overdrawn position and repayment within 9 months of y/end etc.

To rest the minds of those who think this is basic matters, a tax revision course via my professional institute has  been booked but isnt until May unfortunately.

Many thanks in advance.

Replies (3)

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By andyjdicker
24th Apr 2014 10:04

I would say in the vast majority of cases it's best to a) keep it simple and b) make sure the directors understand how it operates, and the level of which they want to get dividends.

Firstly, avoid any 'personal' expenses through the company. It's a pain to deal with for the bookkeeping and the accounts.

Secondly. There really should be only 3 types of payment to directors: Wages, Dividends, and Expenses. That way there is a clear linkage between any monies which get paid, and exactly what they are for. I would also keep each type of payment separate as well.

That way each, say month, there are three payments to the directors, which is easy enough to track and understand.

If you can 'train' clients, then it just makes life easier for everyone..Sometimes its not always possible, but it's certainly easier when you start, rather than a few years down the line, and playing catch up.

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By Mark_NW
24th Apr 2014 10:35

Sound advice Andy.

I have inherited clients in the past who mixed everything up and put everything and anything through the company. In one instance, to compound matters, their previous accountants didn't properly complete P11Ds etc so when a PAYE inspection came along it was a dream day for HMRC with rich pickings and penalties and the client left facing a huge bill and querying what they had paid their previous accountants for.

Mark

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By sparkler
24th Apr 2014 11:51

Definitely train clients!

As soon as clients realise that their business bank account is not there to pay for their personal shopping, personal tax bill etc etc, and that they can't just declare a dividend at the end to cover any personal items bought during the year from the business account, life becomes a lot easier for us accountants!  

I would wholly agree with Andy who notes that three payments each month, for Wages, Dividend and Expenses, are all that is required.

I give my clients a blank Expense claim form to complete each month, which should tie in nicely to the monthly Expense transfer.

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