Targeting loan accounts One of the first things HMRC does when checking the accounts of an owner-managed company, is to examine the directors' loan accounts (DLA) closely.
Your accountant should do the same thing when preparing the annual accounts. If he finds you owe the company money, he will usually suggest crediting your DLA with a bonus or dividend (more tax efficient) to balance the books. By the time HMRC see the figures everything appears to be in order. But is it?
Two problems - only one fix There are two tax charges which can bite from an overdrawn DLA:
- Your company will have to pay tax amounting to 25% of the amount you owe it;
- You can be taxed on a benefit-in-kind (BiK).
You can avoid the tax on your company by simply paying a bonus or dividend to clear the amount you owe. Provided you do this within nine months of your company year end , HMRC will be happy and the company will not have to pay tax on your loan.
However, you may still have a personal tax charge on the BiK and there is yet a further potential trap.
TRAP 1 A taxable BiK arises where, you owe your company more than £5,000 even if only for just one day. Paying a post-year-end bonus or dividend will not remove the BiK charge.
TRAP 2 If you were not aware of the BiK problem, you will almost certainly have failed to declare it on your P11d form (return of benefits and expenses). This can attract a substantial penalty.
Incorrect P11D and P11D(b)returns:
Penalties are based on a percentage of tax that is due and might be uncollected as a result of the errors in the form. The percentage varies according to the circumstances and seriousness of the error:
- 0% (for a genuine mistake made having taken reasonable care to complete the form correctly)
- 30% (careless error)
- 70% (deliberate error but not concealed from HMRC)
- 100% (deliberate and concealed error).
Late submission
- Form P11D: £300 per return plus £60 per day until sent in
- Form P11D(b): £100 per 50 employees per month.
Toolkit help HMRC warn of both these traps in their Director's Loan Account Toolkit which can be found here . This hows they are aware of the problem and gives you less excuse for ignoring it. So what is the fix?
Forestalling Obviously keep close track of your loan account balance and if it's likely to go over £5,000 clear ut immediately with a bonus or dividend. Preferably, don't leave it until your year end.
Declaring
and paying dividends
A
dividend can be declared at any time by a company but will only be
valid where it is made in accordance with company law - see s.829 to
s.853 Companies Act 2006. Essentially these rules say that a dividend
should be paid only from the company’s profit accumulated at the
time the dividend is declared.
Where
you intend to declare a dividend on the first day, or soon after the
start, of an accounting period you won’t know for sure the results
of the financial year just ended, but you will probably have a good
idea. Producing regular management accounts, say quarterly, will help
you keep tabs. Even without these you may know that the company has
substantial profits built up over the years in which case declaring a
dividend at the start of a year won’t be a problem. If, however,
the level of profit is predictable you should estimate it before
working out how much dividend can be paid.
It’s
advisable to be cautious and not declare a dividend that exceeds
profits. Where this happens and the recipient is a material
shareholder, this usually means they own 5% or more of the ordinary
share capital, they will be required to repay the dividend. And if
the proper paperwork isn’t kept (see below) HMRC might argue that
the excess is taxed and subject to NI as additional salary.
Paying a dividend
Declaring
a dividend is the formal step needed before actually paying it. A
declaration is just a statement that says how much and when the
dividend will be paid. There’s no reason declaration and payment
can’t happen on the same day.
The
director/shareholders loan account can only be credited with a
dividend on the date it’s payable - and not the date of the
declaration.
Paperwork
Where
the timing of a dividend is critical this makes the need to keep
accurate documentation and records equally so. Companies should
record the date the dividend is declared. This might be in the form
of a minute of a board meeting, or for a single director company just
a note kept with the company’s statutory records (company register
etc.).
Other shareholders
A
dividend declared will be payable to every holder of the same type of
share. This can cause trouble if one shareholder wants a dividend
paid early in the financial year while another wants to wait. To get
round this problem you can issue additional classes of share for each
director/shareholder in addition to their ordinary shares. This will
allow you to declare dividends at different dates. It’s advisable
to take professional advice before going down this route.
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