Hi,

I have a client who is a single director/shareholder of a company. Like many, despite my protests, he continues to use his busines bank account like his personal account and pays for a great deal of personal expenses through it.

At the end of the year when I come to complete the company accounts I allocate all these expenses to his directors loan account. In addition, where profits allow I would declare these withdrawals as directors dividends.

My question is at what date would these dividends be declared and accounted for? Should I work out what the total dividend should be and declare the total at the year end date or should they be apportioned throughout the year accordingly?

Thanks

Matt

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It depends on whether the director wants to declare his dividend income in which tax year for self assessment purpose. Having said that, maybe it is just me, I haven't seen any company that declares dividend every month. I think the most common practice is to declare the dividend twice a year (interim and final).

Declare the dividends however you like

The dividends to clear the loan can be declared whenever is necessary - monthly, weekly, quarterly etc.

Just remember you will need to deal with the interplay between the directors personal tax on the divis, P11D benefit and s455 charges if the loan goes overdrawn.

Whilst also ensuring that the directors comply with company law ie dividends are properly minuted and company has distributable profits.

I assume the director takes a salary - if not he could have a small salary to use up his personal allowance which could be credited to the loan as well. Does the director claim other expenses such as mileage, use of own home, subsistence etc?

The correct answer is very techical.

Standard Memoarts give the directors the right to declare interim Dividend.

The Comapnies Act 2006 requires companies to record minutes of directors meetings.

They must be referenced to accounts showing sufficient distrutable profits to be legal.

So when did the director decide there were sufficent distributable profit to declare them? That will be the date. As above minutes will be required to be drawn up and there is also a requirement for divided vouchers.

The above said I know of practices that clear the DCA by dividends (subject to sufficient profits) at the year end and do not encounter problems. If you suggest that on this forum I suspect money laundering may crop up in the thread.

retrospectively??

I was always of the opinion that the dividends and minutes are drawn up during the year when the dividends are voted and should be maintained as such. I know that's what we insist upon.

Saying that, in a due dilligence we carried out 2 years ago, the solicitor acting for the vendor stated (when we raised this issue of dividends and minutes paperwork being raised after the event) "it is a non issue, by drawing up the paperwork after the event, even after the year end, all you are doing is regularising and documenting what was decided at the time, that is legally allowed"

I personally would only use that argument as a last resort though!

Follow the Companies Act 2006

First off make sure you have followed the Companies Act requirements with respect to accounts and have not declared an illegal dividend.

You can't back date board meetings but I see no problem with writing up other paper work later - such as the formal minutes or dividend warrants as many clients subscontract this work and who ever saw formal minutes agreed when a meeting closes.

Virtual Tax Support for accountants: www.rossmartin.co.uk

Weekly Dividends

Need to careful if declaring dividend weekly as this could really be seen as a salary which is avoiding tax.

In practice it works by letting the directors loan account go overdrawn in the year and declare a year end dividend to clear the overdrawn loan account at the year end when the accountant prepares the accounts.

As usual a small salary should be put through sufficient to claim entitlement for year but at such a level to avoid NIC and PAYE. Also same if their is a wife/husband with no taxable income and they do some "admin" work.

Difficulties occur if there is insufficient reserves to clear the loan account at the year end. This is where the creativity of the accountant comes into good use.

Dividends

And leaving the client liable for beneficial loan BIK tax?

It's important to never let the DLA go overdrawn more than £5k at any one time and make sure all is repaid within 9 months of year end if possible, to avoid any adverse tax consequences.

Interim dividends should therefore be declared in-year as necessary when needed.

Beware of the dividend police!!

If profits allow ...

... the idyll is to declare a large dividend on day one of the AP and credit to DLA, and it can then be drawn through the year - unfortunately few companies have sufficient reserves these days for that!

Many companies have monthly dividends though, you must lead a sheltered life kstan!

Dividend police?

I've heard that phrase before. Who are these dividend police meant to be? Surely not HMRC. Have they started checking computers yet to see when the dividend minute was created, or dusting pollen on the hard copies to see what time of year it was printed?

The best policy is quarterly accounts and recommended dividends confirmed by memo and e-mailed back to accountant so there is contemparaneous evidence. Brings in extra fees too!

I think the old "bringing the records up to date" policy still works but best to date the minute when it is actually done, even if refers to an earlier date for the dividend itself.

Easier to get away with for a sole shareholder of course, or a married couple. Bit more complicated if there are other people involved.

Easy to avoid a BIK on overdrawn DLA - just work out 4% interest on the daily balances. Takes about 10 seconds to enter the formula and copy it down the loan schedule on Excel. Just make sure you debit the interest by the end of the financial year. You don't want the taxman saying the whole thing's a sham!

Chris

I'd be very grateful for this information

"Takes about 10 seconds to enter the formula and copy it down the loan schedule on Excel.

What is the formula?

Formula

Come on Peter - you're meant to be an accountant :-)

Latest balance (usually the last column on the DLA schedule) x 4% divided by 365 (or 366 as 2012 is a leap year) x the number of days between the current and following transaction dates (usually the first column).

On a 5 column svchedule, it would be expressed as:

E1 x 4% / 365 x (A2-A1)

Copy that down until next 5th April (or financial year end), total it up and debit the next line.

It means exporting the DLA to Excel of course, so more work there.

Chris

Merely charging interest will not necessarily reduce the benefit in kind. There must be an obligation to pay the interest. HMRC's manuals make this point at EIM26257. Having said that, the manuals represent HMRC's interpretation of the law and as such, are not regarded as having statutory authority.

365 x (A2-A1)?

I use (1+Rate)^(1/365)^(A2-A1)-1

@ thacca - Don't think there's a money laundering issue

As far as I am aware, an illegal dividend is a civil rather than a criminal matter, so I don't think there is a requirement to report. Please correct me if I'm wrong.

Be careful with companies in financial diffs - directors can be merrily racking up an overdrawn DCA and paying themselves little / no salary on the assumption that they can clear it with a dividend. If the company goes into liquidation they are then left with a liability to repay to the liquidator.

Just do a board minute then

A board minute will show the necessary obligation if it was ever necessary to prove that, although the intention of the parties (ie the sole director) should also be proof enough. I've never heard of HMRC taking issue on this one, but do let me know if you think they do.

Chris

No, that's wrong!

Why deduct 1 at the end of the formula?

If you deduct a day for each individual line, this will be repeated all the way down the loan schedule and you will lose a day for each individual transaction. Say there are 24 transactions during the year. Interest would be understated by 24 x 4% x the average balance over all periods of calculation.

You should actually ADD 1 to the number of days since the last transaction to get the exact number of days over the whole period.

For example, if A2 is 31 January and A1 is 1 January, obviously that is 31 days, but if you subtract A1 from A2 on Excel you get 30 days. But this is compensated for on the next line, so actually you only lose a day for the whole period - hence the adjustment above.

Easy to prove! Just put 1 Jan in A1, 1 Feb in A2, 1 Mar in A3, etc, all the way down to 1 Dec in A12 and then put 31 Dec in A13. In cell B1 put the formula A2-A1 and copy down to B12. Then add column B. You get 364 days so you need to add 1.

If your formula is A2-A1-1 you would get a total of 352 days. For a large balance this could significantly distort the interest figure.

Use 2011 for this as 2012 is a leap year, which could be misleading if you see a total of 365 days and think it is correct.

In most cases it only makes a difference of a few pence anyway!

Chris

Why the confrontational language and the exclamation mark?

The part of the formula to which you refer does not deduct one from the number of days; it deducts 1 in the calculation of the rate.

Using your logic, let's say we had a balance of £100 and an interest rate of 12%pa and we calculated the interest monthly (to make the calculation shorter than using days). Your formula would give a monthly rate of interest of 1%. Applying a rate of 1% per month for 12 months would give total interest over the year of £12.68, because of the effect of the interest on the interest. As I am sure you can see, this equates to an annual interest rate of 12.68%, not 12%. My formula takes account of the interest on the interest, whereas yours does not appear to. As you say "For a large balance this could significantly distort the interest figure."

It's a bit harsh to title your comment "...that's wrong!", especially with the exclamation mark, which is presumably there to emphasise how wrong I am. I have managed to disagree with you here, with no such statements and no such inappropriate use of exclamation marks or statements such as "you're meant to be an accountant".

Because your criticism is wrong...

....and I don't like my posts being criticised by someone who has clearly misunderstood them. I've just tried out my formula on a monthly basis using your figures of £100 and 12% and it comes to £12 exactly (after adjusting for the extra day as per my previous post - otherwise it would have been 4p out).

I don't know where you get £12.68 from. I can only assume that you thought interest was being debited monthly, which was not the case, but even if it was the £12.68 would still have been right as it is the actual loan account balance that matters, and if interest is charged monthly then obviously the balance goes up. So long as the rate works out at a minimum of 4% (until HMRC change it again) then that is enough to avoid a BIK.

I'm sure Peter didn't mind my jocular remark. That's why I put a smiley sign after it. It was meant as a bit of banter. But sorry Peter if you did. Please don't set Chatman on me :-) :-) :-) :-) :-)

Chris

Brackets

I think chatman missed a set of brackets off his formula.

Understood the post; didn't understand the choice of formula.

Ah, I see what you've done. That works for a balance that does not change over a year, but I tried it with a single transaction of £100 on 01/07 and it came out with interest of £6.05 by 31/12. With low interest rates, the error is not that significant but I can remember rates as high as 15% under Thatcher, which could make a significant difference with large variations in the balance during the year.

In any case, even with a balance that does not change over the year, you still need to accrue the interest during the year for statutory disclosure of the maximum balance or even if you just want to know what the accrued interest is.

Regarding criticising your posts, I merely posted the formula I use, with absolutely no comment or criticism of yours at all. You then responded with your "No, that's wrong!", and your suggestion that I was deducting a day somewhere or other. You could have just said “Actually chatman, I do not understand your formula; you seem to be deducting a day for some reason”, to which I could have responded explaining my formula and we would all be friends.

Peter - I don't think I have missed a set of brackets, but am willing to be corrected. Where do they appear to be missing? Perhaps you are looking at Chris's incorrect reproduction, "A2-A1-1", of a section of my formula, which is certainly missing a set of brackets.

No, I was wrong!

I see that you didn't miss a set of brackets. I now see that you are taking off the balance after using it to work out the interest.

Stereotypes

Comments about tax are interesting. Discussion of formulae adds very little value; stereotypical accountancy behaviour to an outside observer.

Calculations are necessary in accountancy

You need to calculate the numbers in order to calculate the tax. That's what the formulae are for. I understand that, as an outside observer, that might be difficult to understand.

What do you know?

That's because you don't understand.

If you could understand then you might not be what you are.

Do not disagree with the need for a grasp of mathematics as exhibited above. Not jumping to conclusions is handy too as I was using the third person with regard to outside observers. After 20 years in the profession maths is a given. I actually find these Q&A's very interesting!

@ Fred Smith

I do not understand then; given that a formula is used to calculate a required figure, why does discussion of the correct formula "add very little value"?

I think Peter reached the conclusion he did because your comment appeared to display a failure to understand that a formula is used to calculate a required number. It may well be that you do understand, but your post did not give that impression.

What a big kerfuffle about nothing!

I'm out of this one - got far better things to do.

In fact, I'm beginning to wish I hadn't answered this post. I certainly won't be discussing formulae again on AWeb. Too much scope for misinterpretation. Someone is bound to disagree or pull you up because a bracket is missing or something.

But just for the record, my formula works perfectly well with in-year transactions. How on earth can £12 turn into £6.05 when the balance goes up £100 during the year?

Chris

Formulae need to be correct

If you start the year with a zero balance and then debit the account with £100 six months later, that's what your formula gives. Try it out in Excel.

I would say formulae are ideal for discussion on AWeb because they can be tested so easily and a correct answer arrived at, and it is important to get them right. It's bad manners that cause problems.

However, I withdraw my comment about the exclamation mark; it seems that you just like using them. I therefore apologise for my probably-incorrect interpretation of its use; I was probably over-sensitive and caused offence as a result.

It IS correct

I made it £6.03 actually - but that's simply because there are 181 days in the first 6 months of the year (except leap years) and 184 in the second, so obviously a single transaction on 1st July will produce slightly more than 50% of the annual interest charge.

Look Chatman, thanks for your rigorous testing, but there is nothing wrong with my formula. It works perfectly well.

I'm sure yours does too, but then what is the point of debating 2 versions of the same formula that produce exactly the same figures? All it does is confuse people and generate loads of unnecessary discussion.

Peter, I hope that my answer was satisfactory, but if you need any more formulae in future, best to PM the poster I think!

Chris

Not the same formula; not the same result.

They are not two versions of the same formula; they give two different results. And it didn't confuse everyone. The discussion would have been useful if it had been about the formulae and no-one had got all pre-menstrual about it.

Pre-menstrual?

Sorry, I didn't realise it was your time of the month. I naturally thought chatman was a man but it appears I was wrong!

Not so straight forward

This is why I was asking. It's not usually so obvious. I think whether you calculate interest cumulatively and how often makes a difference, too.

Two mistakes

The formulae and results are clearly different so cfield seems to be wrong there.

I think chatman is a man so cfield is wrong there, too.

Different?

The formulae may be different but I'm yet to be convinced the results are affected. Chatman's post on 23/1 at 15.53 implies that interest would be £12 using his formula, and it would also be £12 with mine.

My formula would require any interest paid during the year to be treated as a separate transaction increasing the balance, but it should still produce the same result.

Anyway, most owner-managers (or their accountants) would only debit the interest to loan account once a year. The Alternative Precise Method sometimes used by HMRC (instead of normal averaging) does not require the minimum 4% necessary to avoid a BIK to be a compound rate taking account of accrued interest (as far as I know) so my formula produces the correct result.

All seems to be a bit of a fuss about nothing to me.

Chris

Overdrawn loan acct interest charges & BIK

If a directors loan account agreement states that interest will be calculated and become payable in full (at prevailing HMRC rates)

at the end of the loan periodwould this negate the requirement to prepare P11d forms during the term of the loan ?Interest at end of loan period

According to EIM26103 the cash equivalent is the difference between a) the interest that would have been payable at the official rate, and b) the amount of interest "actually paid" by the borrower for that same tax year.

So it is very clear - interest should be paid on a tax year basis even if it is just by debiting it to loan account.

In any case, the company needs to accrue for the loan interest in its accounts as income, so you need to work out interest for the whole year, and having done that you might as well debit it too.

Chris

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