Directors loan

[Mrsmouse71]

Small limited company, boss/owner puts all personal expenses through the business which go onto directors loan, how long will it take before HMRC wants the tax on it? What if any consequences if it’s not paid?

It used to be a loophole and how my XH avoided paying CMS because apparently he didn't earn a wage. Not sure if that's still the case.

That’s an interesting question and I’m following for the answer.

The first set of accounts will show its owed and a high punative level of tax is due on it if its not been repaid within (I think) 9 months of that year end.

If the loan is never repaid then that tax will never be recovered.

If it is repaid later than the 9 months then the tax is recoverable but it takes a while to get it back.

You need to ask your accountants advice on this as they will know all.the specifics of your business and may be able to help you plan better - for example with dividends etc

Be careful.other errors aren't being made like claiming VAT back on private stuff etc

No doubt consequences if the company goes into liquidation too with it owed.

I googled and HMRC say it should be treated as benefit in kind / declared on self assessment. So many small firms open / close without books being submitted so I wonder if a lot of this disappears into the ether.

As @Feelingstrange2 said. In addition, if the loan is above £10k it is a p11d benefit on the director personally

I just work there, wondering how long it will take before he hits bankruptcy! He has no way to repay it…. Owes the tax man approx £250k as it is. Agreed a plan to pay it but he’s already broken the agreement

Sounds like it's more complicated than the first question.

This is always the problem with tax. Rules are rules but how a situation pans out depends on the whole story

I’m a litigator and deal with this issue frequently. If a director’s loan is not repaid at the end of the year, the company has to pay tax on it. That is unfairly prejudicial to the interests of other shareholders. Alternatively, the director should treat it as additional income and pay income tax and NICs on it. If neither of these happens, then HMRC will apply fines and interest, which if the company pays, is further unfair prejudice to the other shareholders.

Usually directors’ loans are repaid at the end of the year from the dividend paid to the director (if they are a shareholder). However, dividends can only be repaid from distributable profit reserves, so if the company has a bad year then either the director must find other funds to repay it or the tax must be paid.

A director’s loan also has to be approved by shareholders (under Companies Act 2006 requirements) but in small companies this is often ignored. Failure to follow the correct procedure may also be unfairly prejudicial to other shareholders. Where unfairly prejudicial conduct occurs, the other shareholders may petition the court for relief, which is usually an order that the company buy their shares at market value (that value usually assessed as at the date before the unfairly prejudicial conduct occurred so that the other shareholders’ interests are not prejudiced by the unfairly prejudicial conduct), but they can also seek an order that they buy the shares of the wrongdoer. The court has a broad discretion as to the appropriate remedy.

There are no shareholders, he owns the business but he’s using the company bank account as if it’s his own, also transfers money to himself for anything he doesn’t want us to see

I’d be job hunting tbh. I suspect the company wil go into liquidation soon.

If he owns the business then he’s the majority shareholder. All businesses have shareholders, even if there is only one shareholder

That's a bigger issue than the directors loan. Hmrc can be very aggressive at chasing outstanding tax especially if it's paye (you don't mention that it is).

personally I'd be looking at getting a new job

They don’t seem to be being aggressive at chasing at all. It’s a mixture of quarterly VAT returns and paye stuff, they write and say he’s been fined (again) but that’s it, when he made the initial agreement with them (last year) they assessed that there was nothing in the business to take in lieu of payment. He’s not been in the office for over 3 weeks so doesn’t see the letters, the staff run the business for him

If it's paye id get out of there sharp. He's not paying over the tax he withholds from your pay. That's not sustainable and Hmrc will chase that aggressively as its to do with employees.

we get calls from Hmrc these days if a client is even marginally late paying tax. Much more agressive than they have been in the past. They will be chasing him as director though so you might be unaware if they have contacted him directly.

they also are less happy when a previously agreed time to pay arrangement hasn't been honored.

start looking for another job as he's a shitty employer

I’ll start looking. I did think they’d be more aggressive about it than they are being though