Transactions with directors

Dottie

Hi

I am preparing the accounts for a Ltd company and the directors loan account is overdrawn by £15,000 (after clearing the rest through dividends). What information do I have to disclose in the notes in the accounts and what is the best way to write it?

Thanks as always...

Dottie

Monsoon

At the end of the financial year, the director Joe Smith's loan account was overdrawn by £15,000.

I have to confess I'm not sure if that's strictly right but that's what we used to use til we got software that did it for us (and I can't remember how that phrases it).

Tax implications:
If it's not paid back within 9 months of the year end the company will owe s419 tax (or rather s455 as it now is I think). As it was over £5000 he will have incurred a BIK and the company will owe class 1A Nic and he will owe income tax on the benefit (the loan interest, if he didn't pay any).

Wrenchie

The note I use is this;

During the year the Director, Joe Smith had a loan from the company which was interest free and repayable on demand. Balance at 31 October 2010 £15,000 (2009 £nil), maximum amount in the year £15,000.

As far as I can tell this ticks all the boxes on the disclosure!

Dottie

Perfect! Many thanks.

Yes, I have made the client aware of the tax implications. I just need to persuade him to stop using the company bank account as his own personal bank account. I tell him every year, but he doesn't get the message.......

jilt

Dottie wrote: »

I just need to persuade him to stop using the company bank account as his own personal bank account. I tell him every year, but he doesn't get the message.......

None of them ever do!!

Fingersan

Ditto... It's not until they get a compliance check from the Revenue that they start to think about this !

Steve Collings

Hi Dottie,

When the new Companies Act 2006 was drafted, unfortunately there was quite a catastrophic oversight on the part of the writers, so there's quite a bit more disclosure required than simply opening/closing balances and the maximum amounts overdrawn during the year.

I covered the requirements in this article which considers the disclosure requirements. The disclosure requirements are not at all welcome by the profession, but as it is in law they have to be applied. Companies Act 2006 is up for review next year and I suspect the disclosure requirements will be amended.

Kind regards
STeve

Dottie

Gosh!

As I said, the directors have been using the company bank account like their own current account, so to disclose "every transaction in the year which results in the directors loan account becoming overdrawn" is an absolute nightmare.

Dottie

Monsoon

Steve, am I right in thinking the advice is to take a common-sense approach in this (as Dottie says, disclosing every single transaction would be crazy)?

I'd actually forgotten about this, but now do remember hearing about it at a CPD lecture. I am guessing the reason I forgot about it (it being listing every transactions on the DLA) is because we were advised to be common sense about it, but can't find anything to support that....!!

Who drafted this anyway? Do they not realise how many transactions run through a DLA every months in many cases?!

Also (and I'm cringing as I'm asking this) - does it need to go on the abbreviated accounts, or just the full accounts? I know, shame on me for needing to ask!

Fingersan

Hi Monsoon

As I understood it, technically, we should make the disclosure in full (every transaction) but a common sense approach is accepted by the Revenue. No doubt Steve will confirm this but I was on a CPD course a couple of months ago and this came up then.

In the past, I have included this on the abbreviated accounts, but also, would be interested if it was not a requirement. I must admit, I thought it was.

Steve Collings

Hi,

The strict answer would be to disclose all the transactions that take the directors loan account into an overdrawn position. However, this clearly would result in extensive disclosures and some aggrieved accountants ask whether immaterial items need disclosing. The problem is materiality is not considered in the context of the Companies Act, though my suggestion would be to use materiality in determining exactly what requires disclosure.

If there is a material advance or a material repayment, then disclose these separately, but aggregate others. Whether something is material or not would all depend on professional judgement. I would take the approach that the Companies Act requires directors loans of £10,000 or more require approval by the members, so I would suggest that anything in excess of this would require disclosure. Of course, £10,000 might be material to some companies, and not to others - so use your professional judgement.

In my course notes which have addressed this issue, I have used the following disclosure:

- Opening balance
- Advances
- Private expenditure
- Repayments
- Undrawn remuneration
- Dividends
- Closing balance

If some items, in your professional judgement, require separate disclosure (e.g. the 2 months cruise around the Meditteranean costing £20,000) then disclose the individual advance (or repayment) exceeding £materiality and also disclose the maximum amounts which have been overdrawn during the year.

Monsoon raises a good point in terms of the abbreviated accounts because it is a Companies Act requirement, therefore such disclosure IS required in the abbreviated accounts (only transactions purely governed by accounting standards do not [ordinarily] require disclosure in the abbreviated) as accounting standards are to enable the accounts to give a true and fair view - abbreviated accounts are not required to give a T&F view.

However, the problem as I see it (and I am not alone in my interpretation) is that Section 413 of CA 06 requires disclosure in a note to the accounts of each advance and credit in favour of the director, including the amount, interest rate, conditions and amounts repaid. However, section 444 requires a company onlyh to file a balance sheet, which under section 472 includes the notes. The balance sheet need only be the one laid before the shareholders or it could be the one required by Schedule 4 of the Small Company Regulations. My view is that as there is no requirement to show individual balances at the end of a period, this note can hardly be a note to the balance sheet. At most it may be a note of movements in a balance sheet which does not itself require disclosure. There is no requirement to show any other notes to the accounts and no specific requirement to include the amount of advances and credits in the abbreviated accounts.

The lecturers on the CPD circuit that disagree with me and a few others on this cite Regulation 6 (Regulation 6 refers specifically to directors benefits under Sch 3 of CA 06) and as R6 does not refer to Section 413, there is no exemption. I think this is a redundant provision because this information supplements the P&L account which small companies don't need to file anyway!

The section of the Act requiring disclosures has been worded extremely badly and as you can see from my interpretations of the Act, there are some flaws in the Act.

I would suggest doing the disclosures as I have suggested above - it is more practical than producing reams and reams of disclosure which would make the accounts look like a shopping list.

Sorry for the long post, but I hope I have put some minds at rest.

Best wishes
Steve

Fingersan

Steve

Thank you kindly for this information and the time spent by you preparing this, it is extremely useful and helps with a rather grey area.

Kind regards

Chris.

Monsoon

Fingersan wrote: »

Steve

Thank you kindly for this information and the time spent by you preparing this, it is extremely useful and helps with a rather grey area.

Kind regards

Chris.

Likewise. Steve, thank you so much for your time and detailed explanation. I shall digest this later....

Dottie

Ditto, Steve.

Many thanks for taking the time to answer, it is much appreciated and very informative.

Dottie

Steve Collings

Dottie wrote: »

Ditto, Steve.

Many thanks for taking the time to answer, it is much appreciated and very informative.

Dottie

No problem. Glad it helps.

Best wishes
Steve

Wrenchie

Hi

I am unfortunately not a regular on the forum, so would like to belatedly say thanks for your help Steve, I have learnt something new!

acsacsacs

I thought that as long as the company charge the director interest on the overdrawn balance then he doesn't need to list this as a BIK?

deanshepherd

He doesn't but it is still a disclosable item on the financial statements.

acsacsacs

Yep, that's fine.