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Confused about overdrawn DLA

Why would it be so overdrawn for so many years?

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Hi all,

Kinda new here and like my name says I'm just a bookkeeper so totally understand if you don't have time for this but I'm a bit confused and would really appreciate any help.

I've recently been appointed to do the books for a retail company, it's been quite a baptism of fire for me as it's over 10 years since my AAT training, only doing husbands soletrader books in the meantime and I've asked our accountant so many "I know I should know this" questions I thought it time to reach out and ask elsewhere.

I've had a look around on the net over the last few days and the way I understand it is, if a Director's loan account is overdrawn by more than £10,000 and not repaid within 9 months of year end it's taxed at 32.5% per year? 

Our directors loan accounts are well over this and any repayments at year end still leave the balance at over  £10.000, as far back as I can see this has always been the case.

So:

1. Have I read the rules right?

2. If I have read the rules right, why wouldn't they take dividends to clear their accounts, bearing in mind there are enough available funds to do this?

Thanks again for any help

Replies (29)

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123fr.com
By Just A Bookkeeper
13th Mar 2019 22:55

Sorry, forgot to say if it helps no interest has been charged on these loan accounts.

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By Accountant A
13th Mar 2019 23:00

Unless you have responsibility for tax compliance, I wouldn't get involved. How do you know that the loans aren't being dealt with correctly for tax purposes?

Dividend policy is a much wider issue than whether there are outstanding loans to directors. Again, if it's not part of your job I'd leave it.

PS Please don't use the phrase "reach out" (unless you are a member of the Four Tops); it's an Americanism that really sets my teeth on edge.

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Replying to Accountant A:
123fr.com
By Just A Bookkeeper
13th Mar 2019 23:40

Yes I have no responsibility for tax compliance other than writing out cheques, I'm just trying to get a bit more understanding of how it all works.

Sorry if the reach out bit offended, I had no idea it had that effect on anyone.

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Replying to Just A Bookkeeper:
By ireallyshouldknowthisbut
14th Mar 2019 08:50

Don't worry Accountant A gets offended by most things.

But in short, you might be right, the loan account might not be being dealt with properly, however as the corrections occur in the CT comp, you may well not see them either.....

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Psycho
By Wilson Philips
13th Mar 2019 23:18

You are conflating the rules for loans to directors/employees and loans to participators.

The £10k rule applies to the former and the annual interest charge, on which tax and NI is then charged, is currently 2.5% pa.

The 9 month rule applies to loans to participators and it is a one-off charge on the company regardless of the size of the loan (if there are further advances further charges may apply in respect of each advance). Depending on when the loan was made the charge should have been 25% or 32,5%.

If the individual is both a director/employee and a shareholder then both rules would apply- assuming that none of the limited exceptions apply.

Thanks (3)
Replying to Wilson Philips:
123fr.com
By Just A Bookkeeper
13th Mar 2019 23:35

Thanks Wilson, bear in mind I don't have your training, what do you mean by participators?

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Replying to Just A Bookkeeper:
Psycho
By Wilson Philips
14th Mar 2019 07:31

In the context of a small company it usually means the shareholders although it can have a wider meaning

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Replying to Just A Bookkeeper:
RLI
By lionofludesch
14th Mar 2019 09:11

Usually shareholders.

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Replying to Wilson Philips:
123fr.com
By Just A Bookkeeper
14th Mar 2019 10:19

Wilson Philips wrote:

The 9 month rule applies to loans to participators and it is a one-off charge on the company regardless of the size of the loan (if there are further advances further charges may apply in respect of each advance)

Ah sorry just spotted that bit, so if a part of the loan is paid back each year to leave a balance of say £20,000 then no further charges?

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Replying to Just A Bookkeeper:
Psycho
By Wilson Philips
14th Mar 2019 10:42

Correct - and in fact, following a reduction in the loan balances, the company should receive a refund of any tax paid under section 455

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Replying to Wilson Philips:
123fr.com
By Just A Bookkeeper
14th Mar 2019 11:13

Thank you Wilson, very much appreciated

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By atleastisoundknowledgable...
14th Mar 2019 07:54

Making some assumptions:

1. Sort of, as explained by Wilson. For practical purposes, with my assumptions, yes.

2. Could be a few reasons, but should have been repaid (normally by dividend) or interest charged. The accountant should have dealt with this each year though. If you’re still a member of AAT you’re probably obliged to ask the question to the accountant. Something like “the DLAs have historically been overdrawn, but I can’t see any repayment, interest or s455 tax in the books, are there any year-end journals that haven’t been posted to clear the DLAs?” It’s very possible that dividends were declared, just havebts been posted by the (previous) bookkeeper.

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Replying to atleastisoundknowledgable...:
123fr.com
By Just A Bookkeeper
14th Mar 2019 10:03

Thank you, not a member of the AAT anymore but I'll still check with accountant, I just wanted to be sure I wasn't asking them another daft question.
I haven't actually seen a payment for s455, is this made as a separate payment or could it have been paid as a lump with other tax?
The previous bookkeeper is actually our accountant, they have made a few bookkeeping errors, one quite serious, hence now I'm afraid I'm micro managing them lol

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By johngroganjga
14th Mar 2019 07:55

How do you know that they are not taking dividends each year to repay all the loans within nine months of the last year end, so that the loans you see in the books are all new loans repaid within nine months of the year end?

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Replying to johngroganjga:
123fr.com
By Just A Bookkeeper
14th Mar 2019 10:11

Looking at the entries the loan is made up of personal expenditure, at the end of a year a fraction of the loan is repaid but at all times the loan is over £10,000.
For the loan to be paid off either by dividends or other means would there not be an entry paying it off and then another entry retaking it?

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Replying to Just A Bookkeeper:
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By John R
14th Mar 2019 10:36

As explained by someone earlier in this thread, the £10,000 rule is only applicable to the benefit in kind charge under the beneficial loans legislation. It does not apply to the 32.5% charge on the company that arises when a loan of any size is still outstanding nine months after the end of the accounting period.

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Replying to John R:
123fr.com
By Just A Bookkeeper
14th Mar 2019 11:21

Ah right, thanks John, I think I've finally got the grasp of it, sometimes it takes a few different ways of hearing it to understand it.

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Replying to Just A Bookkeeper:
By johngroganjga
14th Mar 2019 10:45

As you have been told several times on this thread already, the loan being over £10,000 or not has no bearing at all on whether S455 tax is payable. Yes if the loan is repaid by a dividend each year you would see an entry in the account to that effect, providing the book-keeping is up to date and complete of course.

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Replying to johngroganjga:
123fr.com
By Just A Bookkeeper
14th Mar 2019 11:17

johngroganjga wrote:

As you have been told several times on this thread already, the loan being over £10,000 or not has no bearing at all on whether S455 tax is payable. Yes if the loan is repaid by a dividend each year you would see an entry in the account to that effect, providing the book-keeping is up to date and complete of course.

I think someone got out of bed the wrong side this morning, as I said I am confused. Have you never needed something explained a few different ways for it to make sense?

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Replying to Just A Bookkeeper:
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By Brend201
14th Mar 2019 14:57

I'm just a random member of this forum. Do you think it is reasonable to come on here to ask random strangers to assist you, out of the goodness of their hearts, and to then deride a person who has given you correct information?
In my opinion, it is rather rude to respond with "I think someone got out of bed the wrong side this morning". Do you think people will help you out again? You are looking for, and getting, free information from people who normally sell their time. I suggest you acknowledge that.

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Replying to Brend201:
123fr.com
By Just A Bookkeeper
14th Mar 2019 15:08

Brend201, I felt John was quite rude, I did state if no-one had time for this I understand. If my dumbness made anyone tetchy all they needed to do is either unfollow or not respond. I have thanked everyone for their help so far, I did not "expect" free advice if no-one replied then so be it. I also did not invite rudeness.

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Replying to Just A Bookkeeper:
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By Gone Sailing
14th Mar 2019 15:31

.

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Replying to Just A Bookkeeper:
Lone Wolf
By Lone_Wolf
14th Mar 2019 15:56

Ignore him. He suffers from an over inflated sense of his own self worth. If your question irked him so much then he could quite easily have not responded to it - but then he wouldn't have got to make his condescending comment to you and show how big and clever he is.

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Replying to Lone_Wolf:
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By andy.partridge
14th Mar 2019 16:00

Don't be like that. That's why we are all here.

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Replying to andy.partridge:
Lone Wolf
By Lone_Wolf
14th Mar 2019 16:08

True

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By Duggimon
14th Mar 2019 12:16

Is the issue perhaps that the books show one thing and the accounts another?

When I get records from clients keeping books in, say, Sage, I do the accounts based on the transactions posted in the year. There may then be adjustments made, for a number of different reasons.

Typically, after the accounts are finalised, I send the client or their bookkeeper a journal to post that will bring their balances in line with the accounts. If I missed that last step then my adjustments would never show up and the balances wouldn't match.

Perhaps in the past there have been dividend payments posted to directors loans as the bookkeeper just saw the money going to the director and wasn't advised otherwise. This was then correctly reallocated in the accounts but the books were never updated, leaving debtor balances in the loan accounts.

Or are the debit balances in the actual accounts as well as the books?

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Replying to Duggimon:
123fr.com
By Just A Bookkeeper
14th Mar 2019 15:01

Hi Duggimon,

The bookkeeping was actually done by our accountant before me so I would have hoped I was passed a complete, up to date and easy to take over set of accounts, this hasn't been the case. I have had quite a bit of work to do to, for one the cash balance was a very hefty minus which is more than a bit puzzling how they even got to that considering there is always a float kept in each till. One of their blunders was so bad that if it had been picked up by HMRC it would have cost us a lot of money. I seriously don't understand how they could be happy to hand the accounts over like that, I would be mortified if it was my work.
I'm almost at the point where I'm happy with them but odd things still keep jumping out at me.
Yearly journals have been posted for as far back as I can go, with a little paid off the loan account but always leaving a hefty balance, this is why I thought I'd investigate so see if 1. This is a normal state of affairs? and 2. Is this costing the company/directors more money than it should?
I understand now that it's possibly fine as the repayment seems to take it back to somewhere near that year's starting figure.

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Replying to Just A Bookkeeper:
By Duggimon
15th Mar 2019 11:36

I suppose what I was driving at is have you actually seen the accounts, rather than just the books?

The full final accounts for last year should let you know if the incorrect balances have just been accruing unchecked for years in the books but being adjusted during accounts preparation with adjustments not reflected in the books.

That seems more likely to me than the other possibility of wildly incorrect balances going in the final accounts, but then maybe the former accountants really were awful.

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Replying to Duggimon:
123fr.com
By Just A Bookkeeper
16th Mar 2019 11:54

Sorry Duggimon, yes the balances in the final accounts agree with the books, yearly journals have been posted.

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