Overdrawn Directors Loan Account

[lcbjcomc]

Hi

I have been an IT contractor for the last 7 years and at the beginning of July I took on a permanent job. I have decided after 3 weeks that it isn't for me and have been offered another contract back where I left.

To the end of my last company year I had an outstanding directors Loan of £9k. This is mainly due to taking more money out of the business than I was entitled to when I was off having my baby. All taxes are up to date and I have a plan personally to pay my corporation tax bill of £5k by January 2012. The plan was to then shut my company down

I would assume that the amount of the Directors loan should equal the outstanding liabilities? I don't understand what I am missing as to why there is a £4k difference (this could quite possibly be my being naive when it comes to taxes & accountancy). I have asked this question of my accountant so will await his reply on Monday but wandered if there was any advice here.

Thanks

[Robot]

Hi

I have been an IT contractor for the last 7 years and at the beginning of July I took on a permanent job. I have decided after 3 weeks that it isn't for me and have been offered another contract back where I left.

To the end of my last company year I had an outstanding directors Loan of £9k. This is mainly due to taking more money out of the business than I was entitled to when I was off having my baby. All taxes are up to date and I have a plan personally to pay my corporation tax bill of £5k by January 2012. The plan was to then shut my company down

I would assume that the amount of the Directors loan should equal the outstanding liabilities? I don't understand what I am missing as to why there is a £4k difference (this could quite possibly be my being naive when it comes to taxes & accountancy). I have asked this question of my accountant so will await his reply on Monday but wandered if there was any advice here.

Thanks

Profit or retained profit, you have taken £9k, you know you have £5k of CT, leaving £4k of profits. Don't look for the money as you have taken it as a directors loan...

You have to declare a dividend of £4k, to repaid the DLA, note this is a paper transaction at this stage.

Just my guess.

Robot

[lcbjcomc]

Thanks for your reply. My accountant says I need to declare a £9k dividend to clear the DLA. For me to do this doesn't leave me with enough money to live on. He says though that if I was to close my company down and I become personally responsible for the £5k CT bill that is all I would need to pay. I am wondering if I am better to do this and work under an umbrella until I have this straightened out.

[Sockpuppet]

Thanks for your reply. My accountant says I need to declare a £9k dividend to clear the DLA. For me to do this doesn't leave me with enough money to live on. He says though that if I was to close my company down and I become personally responsible for the £5k CT bill that is all I would need to pay. I am wondering if I am better to do this and work under an umbrella until I have this straightened out.

You're confusing actual money with wooden dollars. Either way the money has to be accounted for. Either as a dividend or a directors loan account. If you close the company there will still be this question of the money you owe the company and if not sorted out you'll have to declare that on your personal tax return as income and pay the tax on it. You could look as possibly claiming entrepreneurs relief to get any remaining money out.

As I don't know what your accounts are like you need to speak to your accountant.

[Greg@CapitalCity]

I would assume that the amount of the Directors loan should equal the outstanding liabilities? I don't understand what I am missing as to why there is a £4k difference (this could quite possibly be my being naive when it comes to taxes & accountancy). I have asked this question of my accountant so will await his reply on Monday but wandered if there was any advice here.
Thanks

If your business bank account balance is standing at £0, and all tax liabilities are up to date (except for the £5k Corp Tax liability), then having a loan balance of £9k means you took more in loans overall than you needed to - £4k of it could have been taken as dividends. That is why your loan balance does not reflect your company liabilities.

Then there are the usual conditions of taking a loan that you need to follow;
(1) Since it exceeds £5k you need to pay interest back to your business to avoid an HMRC benefit in kind charge;
(2) If the loan balance is still outstanding more than 9 months after your company year end, 25% of the loan balance must be paid through your Corporation Tax return as a form of temporary tax. If you are closing down your business in a timely way this most likely won't apply.

[jmo21]

Thanks for your reply. My accountant says I need to declare a £9k dividend to clear the DLA. For me to do this doesn't leave me with enough money to live on. He says though that if I was to close my company down and I become personally responsible for the £5k CT bill that is all I would need to pay. I am wondering if I am better to do this and work under an umbrella until I have this straightened out.

This won't help your situation, but this type of thing is why people need to pay attention to THEIR limited co's accounts, and not just pull money out of it willy nilly.

It also suggests buiding up a large warchest would be a sensible thing to do now you are contracting again and not just spending everything that your company earns.