Overdrawn director loan account and P11d

Overdrawn director loan account and P11d

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Non Resident director of a UK Limited company has a overdrawn loan balance of 40K.  

Apart from 455 issue - how do you account for the benefit in kind 

The second problem is the director has left the business without dealing with the 40K DLA deficit and his brother will take over as a director (he is claiming he is non resident) though questionable under the SRT if he is non resident (which needs to be checked).  However the new director is also a subcontractor to the business. Can he still render services to the business without any employment tax issues.

Replies (24)

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By johngroganjga
10th Mar 2015 08:40

The company "accounts for the

The company "accounts for the benefit in kind" by submitting a P11D.  Any consequences of the director being non-resident are between him and HMRC (nothing to do with the company).

What is the nature of the business and what type of services is the new director providing to it?

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Replying to DKB-Sheffield:
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By Jim100
10th Mar 2015 11:05

IT

johngroganjga wrote:

The company "accounts for the benefit in kind" by submitting a P11D.  Any consequences of the director being non-resident are between him and HMRC (nothing to do with the company).

What is the nature of the business and what type of services is the new director providing to it?

Thanks John for the reply.  It is IT Consultancy

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By User deleted
10th Mar 2015 09:15

I disagree, John

The individual's residence status is relevant to the company - do you think that Class 1A NI is payable or not?

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By johngroganjga
10th Mar 2015 09:24

I was referring to tax and P11D reporting.  Yes the company has to consider the director's residence status in relation to the payment of Class1A NI on the benefit.

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By johngroganjga
10th Mar 2015 11:25

IT Consultancy

Is that the business of the company, or the type of service being provided by the director to the company, or both?

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Replying to SXGuy:
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By Jim100
11th Mar 2015 10:10

Both

johngroganjga wrote:

Is that the business of the company, or the type of service being provided by the director to the company, or both?

Both

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Replying to SteveHa:
By johngroganjga
11th Mar 2015 10:28

Why

Jim100 wrote:

johngroganjga wrote:

Is that the business of the company, or the type of service being provided by the director to the company, or both?

Both

So why does a company whose business is that of IT consultancy need to engage an IT consultant?

Do you mean perhaps that the director is providing his services as an IT consultant to his company's clients (i.e. not to the company itself) (i.e. as a subcontractor)?  

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Replying to youngloch:
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By Jim100
11th Mar 2015 14:14

Correct he is a subcontractor providing services to other companies and then he invoices the company where he is now a director of.

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By Matrix
10th Mar 2015 21:14

Shareholders

Who are the shareholders?  If the debtor brother owns shares then are there sufficient reserves to clear the debt by dividend distribution?  Does the new Director own shares and if so wouldn't he prefer to receive dividends - how is he currently billing as a sub-contractor?

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Replying to johnjenkins:
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By Jim100
11th Mar 2015 10:23

Shareholders

Matrix wrote:

Who are the shareholders?  If the debtor brother owns shares then are there sufficient reserves to clear the debt by dividend distribution?  Does the new Director own shares and if so wouldn't he prefer to receive dividends - how is he currently billing as a sub-contractor?

Shareholders are a Cyprus company which is in turn is owned by another overseas company.  The ultimate ownership of the group structure is the two brothers. Therefore it can't be cleared through dividends and they have been taking money out to pay expenses but have not submitted sufficient expenses to clear the account.  I do not know how the former director will end up clearing the account as cannot see them paying the money back and rather difficult conversation is looming as this will result the a couple of tax charges (S.455 and P11d) which they will not be happy with at all.

Thats another key question how this setup will work if the contractor becomes a director and invoices the company.  

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By SQUIRE
10th Mar 2015 21:56

Is there a BIK?

Has the company charged interest to the former director on the overdrawn loan account, and in accordance with the beneficial loan arrangements rate (4% now 3.25%)? If it has there probably no BIK or class 1a due. 

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Replying to possep:
By johngroganjga
11th Mar 2015 09:29

BIK

SQUIRE wrote:

Has the company charged interest to the former director on the overdrawn loan account, and in accordance with the beneficial loan arrangements rate (4% now 3.25%)? If it has there probably no BIK or class 1a due. 

Well there may not be - we don't know - but as the OP's question is how to account for the benefit they must believe that there is one.

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Replying to possep:
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By Jim100
11th Mar 2015 10:11

No Interest

SQUIRE wrote:

Has the company charged interest to the former director on the overdrawn loan account, and in accordance with the beneficial loan arrangements rate (4% now 3.25%)? If it has there probably no BIK or class 1a due. 

No interest has been charged

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By pauljohnston
11th Mar 2015 12:27

I believe there is a solution

but no doubt my peers will put me right if I am wrong.

As the ex-director is non-resident the payment of a salry will be without NIC or tax being due.  So pay a salary equiv to loan account..  THis will mean that the S455 payment will be due back 9months (and 1 day) after the end of the current trading period.  The Company will also get a deduction in its accounts. P11d interest will be subject to class 1a until salary is paid.

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Replying to Manchester_man:
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By Jim100
11th Mar 2015 14:16

Next question

pauljohnston wrote:

but no doubt my peers will put me right if I am wrong.

As the ex-director is non-resident the payment of a salry will be without NIC or tax being due.  So pay a salary equiv to loan account..  THis will mean that the S455 payment will be due back 9months (and 1 day) after the end of the current trading period.  The Company will also get a deduction in its accounts. P11d interest will be subject to class 1a until salary is paid.

Thanks a lot Paul that was going to be my next question.  I guess there is no way of avoiding the 1A NIC

 

 

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Replying to FirstTab:
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By Jim100
11th Mar 2015 14:20

Problem

Jim100 wrote:

pauljohnston wrote:

but no doubt my peers will put me right if I am wrong.

As the ex-director is non-resident the payment of a salry will be without NIC or tax being due.  So pay a salary equiv to loan account..  THis will mean that the S455 payment will be due back 9months (and 1 day) after the end of the current trading period.  The Company will also get a deduction in its accounts. P11d interest will be subject to class 1a until salary is paid.

Thanks a lot Paul that was going to be my next question.  I guess there is no way of avoiding the 1A NIC

 

 

Another problem payroll isn't set up yet and we don't have much time to set a PAYE scheme

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By johngroganjga
11th Mar 2015 13:55

Wood for the trees

Some people are starting to answer a question the OP has not asked, namely how to eliminate the DLA from the company's books without troubling the debtor to make any repayment of his borrowing.

Apart from the fact that that is not one of the OP's questions, I think the respondents on that point are assuming that the debtor is the sole shareholder in the company in question, which he may be but we are not told.  To say the least, any other interested parties may have strong views on whether the loan should be repaid or not, and they are unlikely to be indifferent on the matter.

Making suggestions to minimise the tax consequences of his being allowed to walk away without repaying it perhaps misses the wood for the trees.

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By pauljohnston
11th Mar 2015 14:07

@john

Point noted but the OP indicated that he was going to have a difficult meeting so was trying to be helpful!

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By raycad
11th Mar 2015 23:04

Class 1A may not be due

Yes, there is a way of avoiding a Class 1A charge.  Or, rather, it would be more accurate to say that Class 1A may not be payable.  This is because Class 1A can only be charged if there are earnings for that individual which are subject to Class 1 NICs.  So if there are no earnings subject to Class 1 in the tax year, say because the individual is non-resident AND does not perform any duties in the UK, then Class 1A cannot be charged.  

Rather quirkily, it is still necessary to complete a P11D showing the BIK and it is also necessary to include the BIK on the P11D(b) in Box A.  However, after the total BIK figure is shown in Box A of Section 1 there is a tick box which states "If you need to adjust the figures entered in Box A do not complete Box C [the Class 1A amount] but complete Section 4 overleaf instead."

If you look on the reverse side of the P11D(b) you will see that section 4 allows you to make an "adjustment" to the Class 1A.  There are only very limited circumstances where one can make an adjustment (see the reference here to paragraph 18 of Booklet CWG5.)  However, one of these is the situation with non-residents who have no earnings subject to Class 1.  When the adjustment is entered it removes that particular benefit from the Box A amount and so Class 1A is then calculated only on the other benefits. 

 

 

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By Jim100
12th Mar 2015 09:46

Class 1A

 @ raycad Many thanks for the detailed answer.

No sure how will HMRC try to correspond with the director when HMRC will have no record.  The Non Resident Director doesn't have a NI Number. Only problem now is setting up a payroll before 5th April but before then a difficult conversation is pending with the client as there are other issues too.....

 

 

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By pauljohnston
12th Mar 2015 15:13

@jim100

This is getting a bit messy.  Is the director who has left, a UK resident?.  You say that the new director is not.

If both are non-resident you may have trouble in getting HMRC to set up the scheme on the basis that no tax is due.   But you can still run the payroill (certainly Moneysoft will let you do this).

I would run the payroll and deal with HMRC next.  I believe that it is 19 May when the return has to be submitted.

With regard to the payroll & HMRC I have a client director without a NIC and he is non resident so HMRC wont set up a scheme without a NIC number.  But the comapny has UK staff.

Hopefully someone else will advise how to get around this problem

 

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By Jim100
12th Mar 2015 16:28

Both directors are non resident

Apologies I should have clarified, I will need to get a PAYE registration set up for the company for the P11d not to run the payroll as no salary will be paid. Though we may need to do this to help reduce the DLA deficit.

I am also non the wiser if the new director can raise invoices to the company in a capacity of a subcontractor. He was raising such invoices before he become a director.  Wondered it there were any issues if he continued with such a practice

It has been messy from the start and having to deal with many issues being an international setup and non resident directors with a lackadaisical approach in running a company and been spending countless non chargeable hours trying to sort this out .   I will get there one day - Sigh

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By pauljohnston
13th Mar 2015 15:14

@jim100

THe way that I have seen this done is as follows.  THe director has two contracts.  One for his directorship duties say £9000 pa and another between him the contractor and the company as a consultancy..

If the later he does not have a company credit card except for directorship duties, nor a company car.  THere should be a second director/senior colleague to sign off his consultancy work.

Do you need a PAYE number for P11ds?  Can these not be sent to HMRC with an explanation.  I would try this method first.

I would guess that HMRC wont be that interested in view of comments above. 

With regard to s455 has the 9 months following the year end passed?  Could you extend the trading period and pay the salary within 9 months of the extended period?

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By JimLittle
13th Mar 2015 16:55

meeting with director

@paujohnston

 

I have a meeting with the new director in a couple weeks time which will be interesting. The only option of a second director is his brother who has just left. There is no credit card or company

I thought you need a Employer PAYE number to submit the P11d.

The 9 months has not passed as yet.  They have already shortened the period and think lengthened it again (another story). To curtail the S,455 option they either have to pay the loan back or reduce the DLA through mix of salary and expenses.  I know neither of these options they will be particular pleased with and will expect me to come out with another solution which I will not be able to find.

 

 

 

 

 

 

 

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