I have just picked up a new Ltd Co client.
He acts as a consultant and is highly profitable but does not take much out of the business because he already has a substantial pension that is paying out and pushing him over £100k earnings.
Per his last accounts, he has £45k in business bank, £16k in retained profits and £28k on his director’s current account creditor, i.e the co. owes him £28k. Very little else in terms of assets and liabilities.
What is confusing me is the CR on the director’s current account which is increasing annually. He has never lent the business money also I can see that over the years (certainly last 3 years) whatever (small) dividends have been declared in the accounts these have been physically paid as well (this is reflected in his SA returns too).
The director is now buying a new house and wants to take funds out of the business.
Are there any personal tax implications of him drawing down the DCA, the client is under the impression that he cannot take any money out without incurring a personal tax liability. I have to say I don’t understand how the CR on the loan account has arisen if all divs shown in the accounts have been physically paid. I was anticipating all amounts owing to the director would sit in retained profits and would be subject to normal dividend rules and tax regarding withdrawing the retained profit. Any ideas on why the balance on the loan account is increasing and if he were to draw out the loan account would there be personal tax implications.
Replies (9)
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Drawing down from a DLA that's in credit has no personal tax consequences.
You don't seem confident of the DLA position, however. I would drill down and see how it has arisen.
You need to answer the first question before you can answer the second question. Withdrawing the loan balance does not incur a tax charge, assuming it is, in fact, a loan balance and not just confused bookkeeping. Lots of reasons why the credit balance could be increasing (is he paying any company expenses personally, is the company paying him for use of premises etc?)
Find out where the loan comes from first
You need to find out where the credit in the loan account comes from before advising of any tax implications. If all declared dividends have been paid and he has not paid expenses out of his own pocket and the company is not paying him anything like rent for property he owns or any such thing then I don't see how it could carry on increasing.
I would have thought the information you surely requested from his previous accountant would at the very least have covered the movements to the account in the last year which might give some clue as to where it's come from.
Of course, if, as you imply, the retained profits have been allocated each year to the director's loan account then I would consider chucking most of what you got from the previous accountants in the bin because they have no idea what they're doing.
Unpaid remuneration
I recently picked up a similar case and the annual increase in the loan was due to remuneration being returned to HMRC but not physically paid to the director. Just a thought.
But if it's been credited to the DLA then it is not unpaid remuneration.
And I would assume it is not salary if he already has pension income pushing him over the HR.
DLA
1/. Its tax free
2 It arises because
a. USe of home as an office
b. mileage claim on the car
c. expenses paid personally in cash not entered in the books
d. year end bonus dividends credited to dla
e. Salary declared on RTI not drawn
f. He lent the company some money
g he paid some exps on his personal credit card
h. wifes salary and dividends not drawn.
In your prof clearance letter just ask the old accountant for an analysis of the dla over the last couple of years...
make sure you put similar amounts in it tjis time...eg dont miss his cash expenses
Use of home
1/. Its tax free
2 It arises because
a. USe of home as an office
Tom, as this is a company we're talking about, why do think he can claim "use of home as an office"? Do you mean rent under a proper license agreement?
He was once a sole trader then incorporated.
DR Balance sheet - cash at bank , debtors , goodwill ? , equipment???
CR DLA
You may have to drill back 10 years or so ?
Sole trade cessation accounts may hold the key
Late to this one
If he's "highly profitable", where's the CT liability in your opening Balance Sheet scenario?