Jesmin Rahman is an experienced, Ex HMRC Tax Investigation Specialist with over 20 years in her field. Last month, Tax Resolute hosted an interactive webinar highlighting the “blind spots” that many company directors and accountants so often face, including the ins and outs of director’s loan accounts and bounce back loans.
Within the tax world, a Director’s Loan Account may seem like a basic concept – but for company owners, much of the language that we use can often leave you feeling a little bit in the dark.
In order to truly understand the purpose of this account, directors need to identify in real time whether they are:
Or
What is a Director's Loan Account?
First of all, the Director’s Loan or Current Account is NOT a bank account. It is however a record in the company’s books of all transactions made between the Director and the company, e.g., salaries, PAYE tax and National Insurance, dividends, drawings, and funds introduced.
We’ll be taking you through the journey of when the director’s loan account is set up including what you can put in it, what happens when you have a tax investigation, when HMRC asks questions about the possibility of one and ultimately what happens when the company is liquidated along with the fate of the account.
It’s important to know your blind spots – that’s why we’re here to help guide you through them.
The balance on the Directors Loan Account represents money owed:
Consequence of Overdrawn Account:
In the same way that if your bank account is overdrawn, there will be consequences if your Directors Account is overdrawn.
For Company
1. Must pay 32.5% corporation tax (CT) on the o/d balance (called S455)
2. Can reclaim the S455 CT when the loan is repaid by Director
3. If S455 is paid late then the company must pay interest from there on
For Director
1. The director will have a Benefit in Kind charge unless paying official interest rate on the loan (2% since 6th April 2021)
2. If the company becomes insolvent, any balance owed by the director (i.e., overdrawn loan account) will be claimed by
the liquidator from the director personally. This can result in bankruptcy if the debit is significant.
Our message to all company directors and non-accountants:
After creating multiple polls online asking our clients and network whether they had knowledge of what a Directors Loan Account is, we discovered that near enough 66% of users had no clue as to what one meant.
It is crucial that you are made aware of what a director’s loan account is, and ultimately ensure that you have a good excuse as to why it’s in credit at all times.
If HMRC does discover that they are understated, or that the tax liability has been understated, then HMRC are perfectly in their rights to ask where the money has gone. If it can’t be justified as to why the money has been spent or incurred on purchases or expenses, particularly if there’s no audit trail. HMRC will assume that the director has pocketed the money and have taken it for their own use and living expenses. However, the difficulty with compliance checks or tax investigations is that they tend to take place in a particular period of time.
Any vast amount of money that is spent irresponsibly is not classed as reasonable nor genuine living expenses. One example of frowned upon behaviour is when a director is taking money out, yet not paying the wages for his staff correctly. From the evidence of their lifestyle, it is clear that they are simply using the money for personal use such as purchasing properties, cars and other goods that are not a part of essential every-day living. As a whole, you have to investigate these circumstances and behaviours before thinking of transferring the liability in the director’s name.
The worst-case scenario can result in things like charging orders being taken against personal properties or even bankruptcy petitions being served.
Let’s break it down
As Tax Specialists ourselves, we’re more than familiar with what is expected of company directors, however this still remains a grey area for some.
The fact of the matter is, as a director, you must keep track of the money coming in and out of the account – otherwise it can become quite serious. You will have to pay S455 tax at 32.5% to HMRC or this may become a torment. As long as you can repay the company, you can always reclaim the S455 tax. You must keep track.
Any money that’s borrowed from the company, the appointed practitioner will have a duty to realise the company’s assets for the benefit of the creditors. Any overdrawn loan account sits as a company asset on the balance sheet and therefore the appointed practitioner has a statutory duty. There will be some commercial aspect to whether or not pursuit is worthwhile in the interest of the creditors.
Unfortunately for creditors, there are certain significant powers within the insolvency legislation that enables the appointed liquidator administrator to pursue the individual.
Increase in Dividend Tax April 2022
The prime minister has announced a 1.25% increase to dividend tax rates from April 2022 as part of a package of measures to fund the costs of social care and the NHS.
What is Dividend Tax?
What you need to know:
It has been announced that…
Because the section 445 tax is tied in, the dividend tax has increased as a result. This has had a knock-on effect, along with an increase in National Insurance.
What is a Bounce Back Loan?
A Bounce Back Loan was designed to enable businesses to access finance more quickly during the coronavirus outbreak. What is typically anticipated as an issue within Bounce Back Loans is the sheer number of applications received. Over 2 million people applied for the loan, with the collective value of all of the facilities that were approved at around the £45 billion mark.
Banks are seeking repayment of the loan where the borrower is under suspicion of over-inflated the turnover of the company for the application to increase their chances of being accepted. National Investigation Service (NATIS) and the National Crime Agency (NCA) are criminally pursuing these Bounce Back Loans that have been wrongfully misused.
Bounce Back Loans and the Impact of COVID:19
Directors have struggled throughout the course of the pandemic. Sales have gone down, trade is not performing well, and with very little assistance, this has caused many to end up in desperate situations and live off of Bounce Back Loans. This is partially due to the fact that they haven’t been given access to services such as Universal Credit or any other grant provided to help businesses stay afloat.
As Tax Investigators, we have to ask ourselves why this company is in the situation that it’s in and why it may still be trading in the first place. If the answer to that question quite glaringly is that the director has taken the funds out of the account for their own personal use, then the risk upon the director of the business’ failure is much greater. There has to be accountability.
Providing Evidence of Expenses
What we would normally suggest is for the individual to comprise their accountants or prepare a bundle of information monthly – sometimes quarterly – but a monthly presentation would be better. Sending this information via email will also keep record of time stamps and dates to provide evidence of credibility. Ultimately, you must make sure that you have everything that is expected of you in the context of being a director of a limited company.
Want to know more?
We care about your case and will do everything we can to support you. We are approachable, non-judgemental, and honest. We can provide 1-1 meetings and professional advice whenever you need it. As Ex HMRC employees, we understand the stress that HMRC enquiries can bring to you and your business – so get in touch with us today and we’ll tackle it with you.
This blog was written by Jesminara Rahman who is the Director of Tax Resolute. For further enquiries on HMRC call us on 0750 803 4311. Alternatively, fill in our contact form on our contact page.
You can also find a rewatch of our most recent webinar that goes into more detail about Directors Loan Accounts on our YouTube channel. Watch Now.
