I have invested over £400,000 into my business over last 4 years. This year I have started selling and will make approx.£100,000 profit. If I pay this back to the directors loan account, will it still be declared as a profit and so have to pay tax?
The company has paid me no interest to borrow the money, so I have made no gain, I just want to get my cash back out of the company. As I see it, how can the company make a profit when it has to pay back its loans first?
Thanks for your help.
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Replies (33)
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You will have to pay CT on the tax adjusted profit. Repaying the loan will simply be a tax free way of you personally getting money out of the company.
director loan
But if there is no profit as the loan is repaid then there is no tax to pay?
As Jaxx says
Loans are CAPITAL and have nothing to do with profit.
Repayments are not charged against profit they are deducted from the creditors.
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A loan is not a cost, it's money you've borrowed to be paid back at a later date so paying off a loan in no way affects your profit. Did you not have an accountant for your affairs over the last 4 years?
Loan repayments aren't tax deductible
Loan repayments are not tax deductible. Therefore repaying the loan does not reduce the profit in any way, and you still have to pay tax on it.
To put it another way, when you put the money into the company, did you pay tax on it as income? I hope you didn't (if you did, that needs correcting). This is just a reversal of that.
You have to remember that, for tax purposes, you and the company are entirely separate. The fact that you are currently £300,000 down personally does not affect the tax position of the company itself.
You should really take paid-for professional advice on this. If you do not understand this fundamental issue, you are likely to have made other errors that could already be proving costly to you.
directors loan
QUOTE To put it another way, when you put the money into the company, did you pay tax on it as income? I hope you didn't, if you did, that needs correcting). End Quote.
I couldn't stop laughing at the main post. When I read this reply above - the mete thought that the OP could have and probably did treat his DL as income and paid tax on it.
These people who think they can do a job someone trains for years to do, never cease to amaze me. They deserve all the trouble and problems they get from HMRC when it goes belly up. Excuse me I have to laugh again. Ha Ha Ha Ha Ha Ha Ha Ha - I can't stop, Ha Ha Ha its blooming hilarious.
It doesnt work like that. Your company made a profit, if a company makes a profit then it has to pay CT. Repayment of a loan is not a deductible revenue expense.
It would CR loan account adn either DR bank and you receive the cash personal or DR your DLA. These are balance sheet adjustment not revenue adjustments.
You could happily submit such a return to HMRC but just expect an enquiry to be opened. I strongly suggest you seek professional advice as I don't think you understand these basic accounting and tax principles.
With those numbers ...
... you could afford to pay an accountant to explain things to you. Why are we getting so many freeloaders on AW at the moment?
.
... you could afford to pay an accountant to explain thing to you. Why are we getting so many freeloaders on AW at the moment?
Probably because they get away with it, and in most instances get an answer.
You can see the conversation in the pub...
"I don't pay for an accountant - i just do everything on my own and ask anything I don't know on a website to get all the answers".
Strange
You can see the conversation in the pub...
"I don't pay for an accountant - i just do everything on my own and ask anything I don't know on a website to get all the answers".
The problem comes, of course, when they don't know they don't know, then they don't ask the question.
Clients constantly expect full deduction for loan repayments. I've never, ever seen one expect to pay tax on the money when it arrives from the lender.
Strange ...............
Maybe it's because ......
... you could afford to pay an accountant to explain things to you. Why are we getting so many freeloaders on AW at the moment?
Maybe it's because we keep answering daft questions.
Usually
Often, they are trying to get someone (anyone!) to confirm that their own wrong answer is right.
If...
If he's put in £400k of loan there must surely be a big chunk of losses? Could be there's no tax to pay on this year's profit anyway.
REALLY?!
So it couldn't have been spent on freehold premises, stock, motor vehicles, IT, IP, etcetera, etcetera, etcetera?If he's put in £400k of loan there must surely be a big chunk of losses? Could be there's no tax to pay on this year's profit anyway.
Why must there be losses, Neil?
Perhaps it's just broken even for the first few years. Could be any number of scenarios (though I agree that based on the level of knowledge indicated, losses could easily have been overllooked).
@BKD
Yes, true. This is another one of those questions where we don't get enough information to give a proper answer.
Yes you do
You have to pay on the profit, and on the loan amounts you pay into the company, and on the amounts you take out again, and there's a double whammy if there's a leap year or a full moon. But HMRC have generously said that there will be some exemptions to this allowed if the company in question pays an accountant to do the job properly....
Go and see an accountant, not for God's sake but for yours.
With the sort of sums you are talking about you should go and see a professional. Even from the very basic info you have provided it's clear you don't have a clue and there may be implications that you are not even aware of.
Is he a builder by any chance
Invested £400,000 over four years. Starts selling in year 4. What sort of business is this? Wouldn't happen to be builder by any chance? And if he doesn't use an accountant, has he accounted for work in progress etc. etc. If he is a builder has he paid his previous accountant or does he think he can do DIY accounts like I do DIY building? Go on - get yourself an accountant and pay his bills on time.
YES is the answer!!!
Or
it could be NO!
or Maybe
How much for an accountant? Sounds expensive for a tin of beans I'd rather pay too much tax than a man in a suit. Don't trust them.
Usually a one-way street
Glad to have helped amuse you Carolynne I like to cover all the bases in situations like this, and didn't want to discount the possibility. :-)
My experience is that clients are a lot more keen to classify what they have spent as deductible expenses than they are to classify what they have received as taxable income. Even if, as is the case here, the two things are effectively the same transaction but in different directions.
More exactly if any of the 400k was tax deductible it may be carried forward if you have all the records
But if you expect 100k profit you need an accountant and/or bookkeeper you are gonna pay anyway
Think of it like not going to dentist, pain tomorrow for sure
Perhaps by 'This year I have started selling and will make approx.£100,000 profit", the OP means he's selling (some of) his shares in the Company and expects to make a gain?
Director Loan and Company Profit
Caron You had a choice to charge same interest to your company which you have paid to borrow this money and put into your company.You could have set off interest which you have paid to borrow these sums against interest received from the company. This oould have reduced this year profit of £100000.00 over the years. You have not mentioned how the company performed over the last 4 years and whether therei is any accumulated losses brought forward. This could reduce this year profit. As every one said above you have to pay CT for the profit of £100000.00. You can repay this sums over the year and still you could charge the interest to the company for the money you have borrowed personally. This will reduce the profit and you will pay less CT.
Qualifying loan?
If the OP borrowed the money to invest in his company, it should count as a qualifying loan and then he can claim tax relief on the interest. Better get his skates on if it was 4 years ago though - there are time limits.
.
. . . seems to have frightened the OP away.
Perhaps the penny finally dropped, and they ran off to find an accountant!
Accounts submitted
Got to wonder if/what kind of accounts and tax returns have been submitted in the mean time if nobody but the original poster was preparing them.
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