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Advances to directors
A good practical summary of the issues and ways of dealing with it. A few other thoughts:
1. It can be tricky to "template" disclosures because client circumstances vary so much so do think about the most significant aspects of what the client did.
2. The point about drawing against a loan account in credit is a good one - the transactions are not advances to directors - but they might be related party transactions and we still have to disclose names, status and details of in the full accounts, so don't just ignore them or assume that an extra line in the Creditors' note will do, because it won't;
3. If a company makes advances to a director personally and the aggregate exceeds £10k at any time there is a legal requirement for the advance that takes the total over £10k to be approved by the members' before it takes place. Most small companies won't know about that unless someone tells them but failure to follow procedure could cause problems if there is a fall out between shareholders (divorce?) or the company goes bust.
Finally, remember that clearing the overdrawn balance before the year end does not mean we can leave out the disclosure. The existence of an advance or overdrawn current account at any time during the year triggers disclosure. Practice Inspectors from all the accountancy bodies regularly find examples of accounts where this simple rule has been overlooked.
excellent article.and quite right.
but: a bit difficult to convince the client that they need to pay extra for this extra work when companies house and HMRC are quite happy to accept any old rubbish for filing, including : accounts with no comparatives, no accounting policies, normal accounting treatment not applied, and worse, some do not even balance, and thats before you discover the numbers are a complete fabrication as well.
It appears the only people concerned with these rules are our professional bodies.
Am I the only one who spends his day's argueing the correct treatment ? When the authorities are not really concerned ?
Loan accounts and directors drawings in an insolvency situation
A further problem that often arises is that loans are used to account for drawings taken by directors in lieu of salary/dividends. This can be a tax effective method of dealing with drawings where a copy reports profits and has distributable reserves. In lean times, it needs to be borne in mind by directors that drawings are usually taken regularly throughout the year whereas dividends are declared in arrears when the annual accounts are prepared. Should the company enter insolvency, this will result in the directors being personally liable for any loans that have been taken in anticipation of future dividends being declared. We have some guidelines on overdrawn directors current accounts on our website.
Kalden's point
I agree that Companies House do not check and they quote "We rely on the information being accurate". This quote came from a conversation I had informing them that they had accepted a set of accounts that should have been audited. The company is question was known to me and they had taken advise from an unqualified that Companies House do not check. How right that person was! No doubt the fees were much less. However on we plod, following all the small points to such detail, in order to keep those that make the rules in employment.
sounds about right !
another voice in the darkness !
We have also seen audit reports by unqualifieds on accounts that neither had or needed an audit.
These are the basic bits, you can just imagine what the tax advice includes or doesn't.
s414 ?
directors loan accounts discolsure issues
I have a ltd company client with husband and wife directors and sole shareholders, overdrawn dla at year end of 6,000 with no split of what is owed by each director, can you deal with this as one account or must you split it in two for disclosurer. Would you have to charge interest as it is over £5000 if there is only one account but two directors owing it? Would you have to show this as two accounts on the notes to the accounts
Unqualifieds/Qualifieds
Good points all. And you should see the amount of rubbish advice and presentation that gets churned out by quite a number of members of the professional bodies, as well - mostly timeservers, of course, who are not at all proactive when dealing with their clients.
Farrcorfe