Hello,
I've asked my accountant this one but he's been a bit vague and I'm not really sure what is best so I am seeking a second opinion. I am the joint director of a tuition company which over time now owes the directors around £28,000 in director's loans. I expect it to make a net profit of around £10k or so this year and would like to keep it going. We are starting a new mobile catering business and I initially had thought it would be better to run this under the current limited company. We would need to extend the director's loan by £20,000 for startup costs. My thought was that if I ran it through the existing company then it would allow me to hopefully withdraw the director's loan more quickly and tax free.
My accountant seems to accept this but has also said that as they are very different I should consider opening a new company. This way I could concentrate on increasing profitability in both which would be good if I wanted to sell at any point. He has also said that if I did this then the original company could charge the new company a management charge to shift profits and cash to it to make it healthier. Having looked a bit at management charges I'm not really clear what amount could be charged here.
Any views would be much appreciated.
Thanks
Replies (17)
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Because you will never be able to sell the company without moving one of the businesses out of it.
Having two businesses in two different companies has no effect for better or worse on your ability to use their cashflow to repay your existing loan.
What you need to transfer to the current company to enable it to repay your loan is cash, not profits.
By all means consider management charges at a later stage as a way of repaying the inter-company loan, if you want to.
He has also said that if I did this then the original company could charge the new company a management charge to shift profits and cash to it to make it healthier.
I think the technical term for that is b****cks.
Get yourself another accountant..
Don't rely on 'professional advice' that comes free from anonymous people you have never met and who know next to nothing about your and your circumstances.
The problem you have that you need to address is not the one in your post, it's that for whatever reason you don't trust your accountant.
Either trust their guidance or get a new accountant, don't keep paying for advice you don't intend to use.
To which I would add... everyone so far has talked about the legitimacy of the transactions - which is what the OP asked for, after all. It's hardly complete and rounded advice; it's just an answer to an (incomplete) question.
OP, don't act based on what you have been told here, other than to run it past your accountant. Whether that is you current or your next accountant is your choice.
Actually I take that back (in part). The OP has asked about tax; it's the answers that don't mention it.
I stand by my comment (in fact, that observation underscores my comment) about not acting on advice obtained from Aweb.
Not that you would anyway, given to the disclaimers you saw when you registered.
Point 1) If you use free-for-all internet forums, you may have no idea who is answering, professional or otherwise.
Point 2) Professionals have different specialisms and will answer accordingly.
Point 3) Professionals (such as your current accountant) that know something about you will use that knowledge in providing advice. Professionals (and others) that know nothing about you will rely only on what you say, which, with respect, is open to interpretation. Some will also make some working assumptions that they may or may not tell you.
Having said all that, the range of answers above is quite narrow. The general consensus seems to be that you are likely to be best served starting a second company. However, following changes to tax law a couple of years ago, I am not convinced that I agree with the old logic – it’s certainly not automatic, based on the limited information you have supplied.
And if you are proposing moving money between two companies, whether by loan or payment, there are very likely further tax considerations, none of which has yet been discussed.
Decent advice on such issues will not cost that much. Failing to take that advice could cost a lot more.
It seems that it may get caught by s455 if a loan is made to the company and then this is used to reimburse a director in an associated company.
Rubbish.
Never heard such nonsense.
Rubbish.
Never heard such nonsense.
I'm really not going to be drawn into the tax discussion. Although the OP believes his/her circumstance to be commonplace, I for one don't act for any joint directors of tuition companies owing the directors £28,000, but which are expected to make a net profit of £10k or so this year and who are starting a new mobile catering business with the help of further director funding of £20,000.
The OP needs an advisor s/he can trust, end of.
But Lion, for your own good, you should read up on the rules referred to.