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Director Loan and Dividends

Dividends, Director Loan and Administration of a Ltd Company

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Hi. My client was a director in a two director Ltd company. Share holding was 50% each. The client put in 100k at startup as director loan. As the business progressed both directors started taking equal dividends out. It was an informal agreement and no dividend vouchers were issued. The company eventually went into administration and my client was still owed 100k director loan. Client filed a tax return in which he declared dividends taken minus the director loan owed upon administraion. Now HMRC are investigating his personal tax return.

I wanted to see if some one else had dealt with a similar situation and also what was the best way of resolving this. Thank you in advance

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By Tim Vane
07th Dec 2016 14:53

If no dividend vouchers were issued, then whatever money they took out, it wasn't dividends. It sounds like the company was merely repaying the loan to the director. Whether it was in a position to do so is another matter, and your client may have more to worry about than just an investigation into his personal return.

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By kamran37
07th Dec 2016 15:26

My client was dealing with the technical aspects of the business. Finance was being dealt by the other director. He took money out as and when he pleased and paid my client the same .He also never put any money in the business. I suspect his returns are showing all the money he took out as dividends while my client deducted the director loan from money he received as dividends

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By johngroganjga
07th Dec 2016 15:10

So your client tax return says, in effect, that the payments to him were primarily repayments of his loan, and only the excess was dividends?

What do the company's accounts say?

What does the tax return of the other shareholder say?

I don't agree with Tim that dividend vouchers are a sine qua non for there to be a dividend.

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By kamran37
07th Dec 2016 15:30

Yes my client is saying what you mentioned buti suspect the other director/shareholders return is showing all the payments as dividends because he never put any money in the company. They are not on speaking terms so i am not a 100% sure.

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By DJKL
07th Dec 2016 15:57

What do the accounts say?

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By kamran37
07th Dec 2016 16:04

The company went in to administration 6 months after the year end so no year end accounts were prepared

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By DJKL
07th Dec 2016 16:04

kamran37 wrote:

The company went in to administration 6 months after the year end so no year end accounts were prepared

Ever- how long did they operate?

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By johngroganjga
07th Dec 2016 16:03

Indeed. And also, what does the administrator say?

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By kamran37
07th Dec 2016 16:13

The administration is still ongoing. The administrators opinion is that the money taken out should be treated as Director loan and not dividends.

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By DJKL
07th Dec 2016 16:21

kamran37 wrote:

The administration is still ongoing. The administrators opinion is that the money taken out should be treated as Director loan and not dividends.

What do the administrators say it was for the monies taken by the other director, who had not lent monies to the company?

It could hardly be the other director receiving a loan repayment for a loan he never made, and there are significant difficulties with one shareholder receiving dividends but not the other . (Show me the waiver)

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Replying to DJKL:
By johngroganjga
07th Dec 2016 16:32

DJKL wrote:

kamran37 wrote:

The administration is still ongoing. The administrators opinion is that the money taken out should be treated as Director loan and not dividends.

What do the administrators say it was for the monies taken by the other director, who had not lent monies to the company?

It could hardly be the other director receiving a loan repayment for a loan he never made, and there are significant difficulties with one shareholder receiving dividends but not the other . (Show me the waiver)

My reading is that the OP is telling us that the administrator says there are no dividends just loan payments.

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By Euan MacLennan
07th Dec 2016 16:37

Who cares about the other director?

The OP's client has lent money to the company. The administrator is of the opinion that company has paid him back his loan and in the absence of any evidence to the contrary (such as dividend vouchers or resolutions to pay dividends), I agree with the administrator.
I am not clear what is meant by deducting his loan from the dividends, but the only point at issue is whether the excess of the company payments over the amount of the loan are dividends or loans from the company. It seems clear that they were intended as dividends (even if not properly declared) and if that is what the client put on his tax return, I see no need to amend it.

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By DJKL
07th Dec 2016 17:01

I care about the other director.

Why look at both directors?

If both 50% shareholders can be shown to receive the same amount on the same day from the company, yet only one made a loan to the company and the other did not, the pattern of payments may convince that they were not loan repayments but something else.

Of course they may be regular loan advances , however the pattern and frequency might suggest that as an unlikely scenario.

They could of course be wages payments, who knows, if paid every Friday or similar such an argument from the pattern might be made. Most likely nobody thought what they were.

The fact is the administrator has a vested interest (for the administration) of arguing they are loans- with loans, in the case of one half, they are repayable to the company, if dividends possibly they are not recoverable. We have no idea what ability company had to pay dividends re retained profits at the point of each such pair of payments- presuming the payments were made in pairs like Noah's animals?

Of course the administrator may hold evidence we do not, if I were the OP I would be asking him/her to explain his/her reasoning why they are loan repayments (evidence/case law/whatever) to use as argument with HMRC, but I am not feeling hopeful.

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By johngroganjga
07th Dec 2016 16:30

All of it? So the other director has to repay everything but your client gets to keep £100,000 and has to repay the excess. And the company will sue its shareholders to recover the loans if necessary?

If so just show HMRC the claim your client has received from the Adminstrator to repay the amount he has included on his return as dividends, and repair the return to remove them.

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Replying to kamran37:
By johngroganjga
07th Dec 2016 16:06

kamran37 wrote:

Yes my client is saying what you mentioned buti suspect the other director/shareholders return is showing all the payments as dividends because he never put any money in the company. They are not on speaking terms so i am not a 100% sure.

It sounds to me as if your client is on a loser. If I were HMRC I would be asking why the other shareholder isn't repaying the money paid to him, as he would have to if they weren't dividends.

You should probably advise your client to repair his return and pay up.

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By feelingthestrain
07th Dec 2016 16:55

How could an insolvent company pay dividends legally in the first place if there was a director's loan account of £100k - obviously we don't know the details but I'm struggling to visualise a positive reserves balance to pay dividends from?

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By DJKL
07th Dec 2016 17:12

Vast quantity of goodwill on the balance sheet worth squat as an example..

Also remember a company going into administration may well have positive net assets but an inability to pay its bills as they fall due.

I once worked for a company with over £200k of net assets, not that much in fixed assets except shop fit-out costs (tenant improvements/fixtures/equipment), yet we experienced liquidity issues and had to call in liquidators (we even had over £50k in the bank at the time)

It can happen, we just could not turn the stock over fast enough to get the liquidity we needed to pay our creditors as they fell due. (early 1990s)

However I must admit the company the OP describes sounds like it was run and operated with little fiscal control so I suspect your point, in this instance, is well warranted.

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By Portia Nina Levin
07th Dec 2016 17:02

GIGO

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