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How to explain the concept of a Directors Loan

Is there better terminology?

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I cannot say how often I have struggled to explain to clients that the Directors Loan Account is merely a device for monitoring their relationship with their company, and appears in the Balance Sheet. According to circumstances it can be in credit (good) or in debit/overdrawn (bad)

Of course any rudimentary understanding of Double Entry removes the problem, but few lay people can be expected to have that. I cannot find any jargon-free descriptions online.

Helpful suggestions for client education will be welcome!

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Flag of the Soviet Union
By thevaliant
17th Jun 2021 09:42

"Money you owe the company"?

Fortunately, I've only one client completely clueless about the issues around loans and what have you. They all seem to understand that.
However colleagues of my regularly have clients who simply go, "I'm the company, the company is me." and on Saturday afternoon whether they take their personal card or company debit card to pay for the Asda shop is entirely pot luck.

For my clueless client, completely wrongly of course, we simply make decisions for him as to what to do. At the year end, after a year of Saturday afternoon shops sending the DLA into £50k debit, we simply 'declare' a dividend to clear it, backdated, and that sorts it out. Client is clueless and I suspect partner (who has all the meetings) never enlightens him about the issues but simply presents him with bills to pay, and tax to pay and accounts to sign.

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Replying to thevaliant:
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By SWAccountant
17th Jun 2021 10:41

So you willingly commit fraud to save your useless client a bit of tax?

I'd be more than happy to declare a dividend for them, but it would be dated the day I do it. If they have some s455 and/or interest to pay then so be it. Maybe that will learn 'em.

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Replying to thevaliant:
RLI
By lionofludesch
17th Jun 2021 10:55

thevaliant wrote:

For my clueless client, completely wrongly of course, we simply make decisions for him as to what to do. At the year end, after a year of Saturday afternoon shops sending the DLA into £50k debit, we simply 'declare' a dividend to clear it, backdated, and that sorts it out.

Why are you backdating it ?

What's the point ?

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Replying to lionofludesch:
ALISK
By atleastisoundknowledgable...
19th Jun 2021 13:50

s455, BiK. Removes hassle of having to explain the concept of an o/s DLA to client.

I’m constantly amazed by the number of people who don’t do this. Anyway, that’s another thread or 10 …

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Replying to atleastisoundknowledgable...:
Flag of the Soviet Union
By thevaliant
20th Jun 2021 18:40

I'd also say, and this is just me, but by NOT backdating the dividend in this situation the accounts presented are not true and fair.

In situation 1 - client draws his regular Saturday shops from the company. At year end he's £50k overdrawn. Dividend to clear, but done 9 months later so at year end there is a debtor of £50k shown in the company books.
In situation 2 - same, but a backdated dividend - ignore the 'legality' of this or not.

In situation 1, a set of accounts are produced showing the company has net assets of £55k! Fantastic! Brilliant set of books. This company is going places... Plenty of assets.
In situation 2, the same set is produced showing net assets of £5k.

They are the same company, with the same transactions except one. A backdated dividend.
Situation 1 shows a healthy company with lots of reserves.
Situation 2.... less so.

Final thought - define an asset - "future economic benefits accruing to the company" or some such b*llocks. Is the company EVER going to get a £50k cheque? No they're not..... never, ever, ever.....

I hate to say it, but situation 2 is true and fair. Situation 1 is not.

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By Tax Dragon
21st Jun 2021 06:57

You must be looking forward to full MTD.

GD

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Replying to Tax Dragon:
ALISK
By atleastisoundknowledgable...
21st Jun 2021 10:37

:) aren't we all!

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Replying to Tax Dragon:
Flag of the Soviet Union
By thevaliant
21st Jun 2021 11:10

I suspect this reason (backdating dividends) is one of the reasons full MTD is being pushed back and back.

If you arrive at a point where dividends declared are supposed to be submitted electronically within a short deadline, I know a number of our clients are going to be in for a rude surprise.

But if I was a betting man, I suspect it'll never happen.

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RLI
By lionofludesch
17th Jun 2021 10:27

I generally point out that the company is not the director and that they would themselves be keen to point that out to any creditor who popped round to take possession of their house (or other assorted assets).

And I make sure that they know that there'll be a tax bill associated with this money at some point down the line. It's not free money.

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By adam.arca
17th Jun 2021 12:42

Point them in the direction of Salomon v Salomon

Veil of incorporation is a legal concept decided by the courts and therefore ranks much more highly than what any individual (clueless) client may think

Not their money to spend just like they couldn't spend the money of whatever utility company it is they have shares in, and the fact they might be sole shareholder is a complete red herring

If it was as easy as spending company money on yourself without consequence, then every moron would be doing it and not having salary / dividend etc: clearly UK plc wouldn't be able to finance itself if directors' loans weren't tracked and taxable

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ALISK
By atleastisoundknowledgable...
19th Jun 2021 13:58

I’ve one at the minute who was using a personal account as she didn’t set one up for the co. No matter how many times and from how many different angles I try to explain, she just sticks with ‘but I’ve not taken a loan from the company, I leant money TO the company’.

She understands that she and the co are different, so I thought that saying “pretend the transactions weren’t with you, but instead in the bank account of ALISK Accounting. We receive £100 sales and pay out £30 for expenses. Would you say ALISK Accounting has taken a loan from the company? No, but the co is going to want the remaining £70 back from ALISK Accounting isn’t it?” She said yes she understood, then went away to think about it and returned to her original viewpoint.

I thought that I was onto a winner with that analogy, but alas.

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Replying to atleastisoundknowledgable...:
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By Tax Dragon
21st Jun 2021 06:53

You sure she's not a sole trader that happens to own a dormant company?

GD

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Replying to Tax Dragon:
ALISK
By atleastisoundknowledgable...
21st Jun 2021 10:50

I tried taking that approach, but she was adamant ... :(

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