Overdrawn directors loan account

Overdrawn directors loan account

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I have just been to see a potential new client. They have been wrongly advised by their previous accountant, as they have treated the new limited company like a partnership business, and just drawn money from it with no consideration for paye/ni or dividends.

Hence there are large directors loan accounts. On their accounts package the entries are titled either drawings or wages and are usually £400 per week.

Their y/e is Feb, so C tax needs to be sorted by 30 Nov. The loans are around £20,000 at their year end, and as this has continued will be bigger now.

Paying back by 30 Nov not an option, they don't have the money. They are not even registered yet for PAYE.

So what can be done other than they pay the £5-6k tax as 25% of the loans, and aim to get these loans reduced to Nil by starting payroll to pay them off from now.

There is small amount of profit in the company at the year end, can they go back and declare a dividend at the year end to cover a small part of it? There are 2 directors who are both the only shareholders.

Can some of the 'drawings' be reclassified as salaries if they were under the lower earnings limit, so would not have had to be declared to HMRC?

Obviously they have also missed P11Ds.

Would it be horrendous to go back and do payroll for last year and pay the penalties for late filing, and can you even do that given they will have to register as employers first now?

Thoughts please?

Replies (7)

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By Ruddles
03rd Nov 2015 20:39

Dividend
No need to go back (and it would be wrong, if no dividend had in fact been declared).

I suggest drawing up management accounts to date and if there are post tax profits declare a dividend now and credit it to DLA. Accept s455 charge on any balance. I wouldn't mess around with PAYE, especially previous year.

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By Matrix
03rd Nov 2015 20:59

Agree with above.  You can

Agree with above.  You can declare the max dividend based on the distributable reserves now (or by end Oct) and clear as much of the DLA as possible so no s455 on this part since paid off within 9 months. 

If they can give you permission to speak to HMRC as agent you can call and register a PAYE scheme over the phone, obtain the reference and file RTI by 5 Nov for the first 7 months pay for this tax year at £6,183 each clearing £12,366.  This assumes you can set up the Directors as employees from 6 April and get a full year's NI allowance. There was a recent post about this. These rates assume the client is claiming EA and the PA is the optimal salary level.

You could also pay the Directors up to the LEL for 2014-15 but that would be rewriting history and why should you risk your professional ethics when they didn't have the benefit of your wisdom at the time?

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paddle steamer
By DJKL
03rd Nov 2015 23:46

How have they funded the withdrawls

As a new company how have they funded the drawings? Is the no profits to distribute calculated on the basis of the amounts paid to them being charged against the profit and loss, i.e. if reversed to DLA  are there actually  profits ?

Unless they have external lending, or they subscribed for large share capital,  then as a new company there must have been a source of funds to pay the "wages/drawings" in the first place, what was this source?

Final thought, were they previously in business before the company commenced trading i.e, are there any unaccounted for assets taken over at commencement that might create a credit to a DLA? (long shot)

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By airgeadagam
04th Nov 2015 08:52

Advise them of the option to sue their previous accountant for negligent advice.

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Replying to Asimadk:
By johngroganjga
04th Nov 2015 09:09

Negligence

airgeadagam wrote:

Advise them of the option to sue their previous accountant for negligent advice.

I was just about to post that the OP should take what the client says about advice from the previous accountant with a huge pinch of salt - they would say that they were professionally advised to do what they did wouldn't they?  Much more likely, a priori, that they did not bother to take advice in order not to incur fees.

But in any event, in order to sue they have to show not only that the advice was bad (which is usually the easy part) but also that they have suffered a financial loss as a result, which was a foreseeable consequence of the advice given - which is likely to be impossible in a  case like this.  

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Replying to Chris.Mann:
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By airgeadagam
04th Nov 2015 09:35

Exactly so. That their previous accountant advised them in such a way described sounds a bit hollow. It would be like a baker not knowing the difference between plain and self-raising flour.

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By JCresswellTax
04th Nov 2015 10:16

Did you just ask

If you can go back and declare a dividend at the year end?

Are you their previous accountant?!

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