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Overdrawn Directors Loan account

Directors loan balance currently £450k!

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Hi all

I was wondering if someone could advise before I reach out to HMRC, as I admit I haven't had a client this messy in a long time.

My client has had income of around £500k into a personal Company over the last 3 years. This income was largely taken out of the Company account but no salary or dividends were declared, hence being classified as a loan - currently at around £450k! We are now in the process of cleaning up the accounts and i understand there would be the following charges (which will incur penalties and interest):

1. S.455 Corporation tax charge for the Company

2. Class 1a NIC for the Company

3. A benefit in kind charge for the client personally

My query is that how does one register and declare charges 2 and 3 above, without the Company ever having being registered as an employer? Is this something that should be registered with a back date and then declared? Any previous experience in a similar issue would be much appreciated!

Kind regards

Replies (27)

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By SWAccountant
04th Aug 2021 16:40

Have you confirmed with your client that they want this loan to be released or written off?

I'd be inclined to leave the loan in place and just have them suffer the s455 (which probably should have been charged in each of the last 3 years).

If its a service company, are there nay IR35 issues to contend with?

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Replying to SWAccountant:
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By Wanderer
04th Aug 2021 17:11

Can't see the OP referring to a release / write off? Think they are referrring to the BIK of a beneficial loan. Might be wrong so needs clairification.

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Replying to Wanderer:
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By DKB-Sheffield
04th Aug 2021 17:21

I took it to mean the same as you. Clarification required.

Also, OP refers to "personal company". Does this mean PSC? If so, potential IR35? Were client's Public Sector or Private Sector (pre April 2021)? If the latter, IR35 may be a bigger issue tgan P11D beneficial loan interest!

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Replying to DKB-Sheffield:
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By TeeHassan
04th Aug 2021 17:26

Hello

Sorry. To clarify, it's a personal company in the sense that it is a 1 shareholder 1 director Company with multiple private clients.

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Replying to DKB-Sheffield:
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By SWAccountant
05th Aug 2021 15:55

That is a very good point. I saw mention of NIC and my head went to a write-off for some reason.

OP has now clarified.

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Replying to Wanderer:
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By TeeHassan
04th Aug 2021 17:28

Yes for the years passed it would be the BIK on the beneficial loan (as no interest has been documented or paid). The ideal scenario would be to write the loan off in the current year and suffer the interest on the unpaid S455 CT - as the client hasn't got the money to pay the S.455.

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Replying to TeeHassan:
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By Arcadia
04th Aug 2021 18:19

If the loan is written off, then the director will have a distribution in his own hands, charged to income tax as if it were a dividend.

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By Paul Crowley
04th Aug 2021 17:29

Interest could be paid by shareholder, added to the loan to deal this the benefit issue.
Company declares the interest receivable

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Replying to Paul Crowley:
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By DKB-Sheffield
04th Aug 2021 17:55

Part of me would agree but I have this nagging doubt in the back of my mind saying HMRC have questionned this approach in the past insofar as a credit to the DLA/ DCA is not a payment of interest. I may have just imagined it.

However, that aside a key question is whether the liability is "good". From the OP's comments it sounds as though the client is unable to pay the s455 so one can assume, the CT liability payment is also in doubt. Whilst the DLA (and hence the s455 balance) can be reduced (in time) through salary and dividends, the fact is they are facing a potential tax liability of (up to) 60% of company profits.

Only the OP knows their client, and their client's business but, I suspect insolvency is a high possibility. If the HMRC/ CH solicitor/ liquidator gets involved, any effort to write off the loan will be futile (may even be seen as avoidance), the director will face disqualification, and they will likely face personal insolvency proceedings due to the director's liability to the company.

If the client is certain/ adamant they can turn this around - within the next couple of years - that is for the client and the OP to discuss. If not, I'd be recommending a friendly chat with an IP to discuss options.

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Replying to Paul Crowley:
Psycho
By Wilson Philips
04th Aug 2021 18:38

Two problems with that approach -

Adding interest to an overdrawn directors loan account is not payment of interest.

Even if it were, you would have to demonstrate that there was an obligation to pay interest for the year(s) in question. I suspect that no such obligation exists in this case.

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Replying to Wilson Philips:
7om
By Tom 7000
09th Aug 2021 11:14

This.. and thats why you do a plld and why are you advising the company to write it off which will incurr NIC and not just declaring a dividend and clearing it out...

loan agreement and interest for next time.

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By More unearned luck
04th Aug 2021 18:16

Firstly I don't recommend that you 'reach out to' HMRC, it's not safe to do so - the pandemic isn't over, steer clear of physical contact. Stick to writing letters, making telephone calls and electronic submissions of returns etc. No meetings.

Secondly if your client (the human being) has paid his income into another of your clients (the limited company) and this second client has treated the first client's income as its income and if as a corollary the first client has not declared his income on his tax returns then your first client needs to consider making a WDS. At least, correcting the duff entries in the second client's books will make the s455, BIK and NIC problems go away.

If I have misunderstood what you said and you are confident that contracts with your client's clients is with the second client and not the first client, then please ignore me.

BTW what is the second client's company house compliance history like? And your first client's SA compliance and what about VAT compliance?

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By bernard michael
05th Aug 2021 10:06

Has the company distributable reserves ??

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By hyper10
09th Aug 2021 09:50

I'm not in the Accountancy business but do follow threads here, something in this thread resonated with me. I have no objective evident but at £450K, the director must be thinking albeit naively, of dumping the company, that's not going to happen and anyone who thinks a Liquidator will just bury it is sorely mistaken.
The numbers here are pretty tasty and the failures re S455 are going to add to that.
My only advice would be for the poster to ensure that their client gets specialist advice because HMRC are going to be rubbing their hands over this.
I have a DLA not correctly recorded for £25k many years ago and they couldn't contain their delight at having a legitimate and easy route to create havoc, at approx £200k plus fines, this will be worth their while

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Replying to hyper10:
Maytuna
By DJKL
09th Aug 2021 16:12

What liquidator?

If he loots it properly so no cash remains to pay a liquidator will a liquidator even be appointed in the first place, what liquidator will take the gig? We all know that if no money in company , no accounts submitted so HMRC is not even aware of quantums of anything, that the chances of any liquidator actually being appointed by someone interested are pretty slim.

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By bassanclan
09th Aug 2021 10:53

I bet HMRC have no idea there is £450k overdrawn.
I imagine the owner will dissolve the company without fully calculating the liability and therefore without informing HMRC.

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Replying to bassanclan:
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By djn
09th Aug 2021 12:14

bassanclan wrote:

I bet HMRC have no idea there is £450k overdrawn.
I imagine the owner will dissolve the company without fully calculating the liability and therefore without informing HMRC.


I would guess this could be the case.
Although, a MLR would have to be made if this were the case and you would think that Hmrc would object given the numbers.
I wonder how quickly hmrc would move after a report is made- anyone know?
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Replying to bassanclan:
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By djn
09th Aug 2021 12:14

bassanclan wrote:

I bet HMRC have no idea there is £450k overdrawn.
I imagine the owner will dissolve the company without fully calculating the liability and therefore without informing HMRC.


I would guess this could be the case.
Although, a MLR would have to be made if this were the case and you would think that Hmrc would object given the numbers.
I wonder how quickly hmrc would move after a report is made- anyone know?
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By RayM55
09th Aug 2021 10:56

Is it any wonder HMRC get hacked off?

That there is no declaration of dividend is fair enough I expect, it would be incredible if there were. That the company did not register as an employer will not on its own prevent HMRC from asserting that what was paid should be subject to tax and NIC. Treating the payments as a loan account (it does not sound like there is any evidence to support that either) would bring potential liabilities in several different ways.

My advice, get paid up front! Then persuade the client to make a voluntary disclosure to HMRC. If HMRC agree a loan account treatment the client may have to bite the bullet and pay it back gradually so paying the S455 charge and associated penalties and late payment interest along with the benefits charges with annual dividends to clear.

Don’t forget the AML requirements if it is a longer standing client.

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By Hugo Fair
09th Aug 2021 12:34

For once, I can't see why everyone is pussyfooting around this!

I don't care how naïve the client may be, no-one (and certainly not HMRC) is going to believe that he extracted £150k p.a. each year for 3 years without it crossing his mind that some tax might be due.

Full disclosure is the only way forward ... all the ways in which things might have been better handled previously are now irrelevant. And, btw, what do the Accounts actually show with regard to the 'expenditure' of £450k? Your client either has to face the music or flee the country (and the latter is not a recommendation you can make), so personally I'd disengage rapidly (unless you were the accountant for the last 3 years - in which case facing the music applies to you as well).

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Replying to Hugo Fair:
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By RayM55
09th Aug 2021 13:57

What he said and don’t forget PCRT!

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By raycad
09th Aug 2021 12:50

As ever with these sort of cases the devil is always in the detail. Much will depend on what was shown in the company's accounts and what the accounting date is. A loan can be discharged in whole or in part by declaring (rather belatedly in this case) a dividend or bonus and/or writing off all or part of the £450k.

Of course one cannot back-date these things and sec455 relief may not be "instantaneous". If the repayment is made within 9 months of the accounting date it is as though the loan had never happened. Otherwise one must wait 12 months after the end of accounting year in which the repayment is made before the sec455 tax can be repaid; hence the importance of the accounting date.

Any of these three courses of action will result in a personal tax liability in the tax year that it happens - presumably 2021/22. It wouldn't be good tax planning, though, to have the entire £450k come into charge in a single tax year; but one would need to know the other income (and any possible reliefs) before saying for sure.

An added complication is that, once HMRC become aware of what has happened, they may take the view that the drawings were "on account of remuneration". This would certainly trigger an NIC charge (both E'ers and E'ees) and HMRC might well seek to levy PAYE tax too, although in my view that could be open to challenge, especially if (as I imagine) there were no Board minutes and so forth.

You don't really want to be left with a scenario where the £450k is treated as earnings for NIC purposes but as a loan for tax purposes. That said, if the client had no other income in the earlier years, any "deemed" remuneration will likely end up getting less lightly taxed than a CY charge; albeit with the addition of interest and penalties - for the pre-20/21 years, anyway.

All of these things need to be weighed up before deciding how best to proceed, which will probably by using the HMRC Online Disclosure Facility. The ODF has the option to tick the boxes for personal tax liability, business tax liability or employer liability; or multiples thereof.

Thanks (2)
Replying to raycad:
Psycho
By Wilson Philips
09th Aug 2021 13:17

One minor correction

" Otherwise one must wait 12 months after the end of accounting year in which the repayment is made before the sec455 tax can be repaid"

For 12 months substitute "9 months"

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Replying to Wilson Philips:
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By raycad
09th Aug 2021 15:48

Of course: fingers engaged prior to brain!

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Replying to Wilson Philips:
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By Alf
11th Aug 2021 09:06

I believe that, in practice, people often simply offset the s455 reclaim against the CT liability for the year in which the repayment was made, explaining this to HMRC in a cover letter.

See https://www.accountingweb.co.uk/any-answers/quick-question-on-understand...

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Replying to Alf:
Psycho
By Wilson Philips
11th Aug 2021 10:26

Agreed - but as I pointed out in that thread there is the risk of interest charges.

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Replying to Wilson Philips:
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By Alf
11th Aug 2021 10:38

Agreed

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