I have a new client who, like many, struggles to differentiate between what is theirs and what is the company's. 'It's my company so it's my money, right?'
Looking through the bank statements there are a myriad of items of personal expenditure in there. The question is, which are to be classified as director's loan and which are benefits in kind? The previous accountant classified everything as DLA - then again they included the pre-incorporation sole trader overdraft within the company balance sheet and have told the client there is no CT to pay despite a £xx,xxx overdrawn DLA.
I've looked around and struggled to get a rule of thumb on this (obviously there is no definitive answer).
I am proposing to work on the basis that if something is a regular expense (e.g.: paying the household bills by direct debit from the company account) then this is a P11D BIK item. If they transfer £200 to the personal account every so often then this is a genuine director's loan.
Is this a decent rule of thumb, or is there more definitive guidance out there?
Thanks in advance
Replies (5)
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There is a flaw in your plan
"I am proposing to work on the basis that if something is a regular expense (e.g.: paying the household bills by direct debit from the company account) then this is a P11D BIK item."
Oh, No! It isn't! If the company settles the personal liability of an employee, it has to go through the payroll and have both tax and Class 1 Ee's NIC deducted at source. That is why most accountants charge any personal expenditure paid by the company to the DLA.
And Yes - if the DLA is overdrawn and not repaid within 9 months of the year-end, 25% s.455 tax must be paid by the company.
The only P11D BIK item in this context is the beneficial loan, assuming that "a £xx,xxx overdrawn DLA" means more than £5,000 at any time during the tax year and the director does not pay 4% interest. That is why many accountants will calculate the interest, charge it to the DLA and pay CT on the interest income in the company's accounts.
I would put everything to DLA
I would just put everything personal to DLA including household bills and the old sole trader overdraft in the brought forward balance sheet. A use of home as office charge can be calculated and credited against the DLA to offset part of the household bills, but certainly nowhere near all of them. Obviously there will be a large overdrawn DLA at the year end (unless a dividend is declared in the year) with the tax consequences that come with it.
I think it is more a case of educating the client that if they wish to trade through a company and have the tax benefits / limited liability benefits that come with it, then they just have to adhere to the rules of how a company is run. If they can't then they have to go back to being a sole trader.
DLA
I am no expert but my simple mind works on the premise that money put into the company by a director is shown as a loan (can be drawn down without tax implications as cash flow allows).
Everything else is a director's current account item e.g. credit net salary, charge expenses paid by company.
It seems there is a lot of confusion in this area - the accounts of my most recent client bear this out.
Or am I old fashioned?
DLA = DCA
I've always been told a DLA is the same as a DCA (current account), and I've always used one account to run everything through.
I would put all items you'd code to "drawings" as a sole trader as a debit to the DLA in a company such as this, and declare dividends accordingly to clear it. I certainly wouldn't entertain payrolling it or putting it through as a BIK unless there was a very good reason for it.
The only BIK I give my "ordinary" directors is a beneficial loan charge if applicable -and as Euan says, it's often better to calculate the interest, charge it to the DLA and pay CT on the interest income in the company's accounts.
Keep it simple!