Directors Loan - going round in circles

Monsoon

Cross posted on AWeb.

I have here a Ltd Co client who does their books once a year and therefore dividends are always declared way after they are paid, and they are in a 455 tax / beneficial loan situation.


Year end: DLA o/d by £40,000

7 months later: Books in, dividend declared of £35,000 (based on profit for prior year)

Bal on DLA £5000 on which 455 tax needs paying.

BUT! In the 7 months between year end and dividend, salary has been paid (properly every month), more 'drawings' have been taken and I have no idea what the current balance on the DLA is an neither do they! so what the '9 months after year end' balance is, I just don't know. Nor the balance as at 5th April in order to calculate beneficial loan tax.

I have already advised about doing things properly, obligations under companies act etc etc to no avail. Practical suggestions about how to tackle this would be much appreciated. I have constructed a rough DLA account with an opening balance, salary credits and "drawings" debits spread equally over the year, and extrapolated that past the year end, leaving an approximated balance 9 months after the year end, and also giving me an average o/s balance for beneficial loans. In the absence of the actual numbers, with no way of getting them, is this a reasonable calculation and what do other practitioners do (don't say "have clients who do it properly all the time" - you're either very lucky, in which case I'm jealous, or it's just wishful thinking!)? It would be far easier if we could all just backdate dividends ;-) (joke!)

I am hoping the tax bill will shock them into doing things properly in the future...

Many thanks

Jmann

Dla

If you are not sure what would be the balance 9 months after the year end, then I would take year end balance and pay 25% tax on it.

You do not need to take it into account if the balance goes up, only applicable if the loan is repaid within 9 months.

BIK

I do exactly what you did, run an account on spreadsheet, try and establish the balance and report onto P11D. But sometimes, if the records are so bad as in your case, I tend to get the directors to agree pay interest to the company! So do not have to worry about P11D!.

deanshepherd

I agree with Jmann. If they want credit for the £35k dividend declared they will have to show that they have not drawn it down already in those 7 months.

As a practical point, it is not 'backdating' if the directors intention always was for their drawings to be classed as a dividend. Just draw up a board minute to confirm that is the decision of the directors and the amounts will be resolved at AGM.

Monsoon

Thanks both.

deanshepherd wrote: »

As a practical point, it is not 'backdating' if the directors intention always was for their drawings to be classed as a dividend. Just draw up a board minute to confirm that is the decision of the directors and the amounts will be resolved at AGM.

Dean - this is very interesting. From extensive reading on the subject, I have never been able to find anything to confirm this, and plenty to confirm the opposite - that it is not enough to take drawings 'that are dividends but we haven't declared them properly' but that proper minutes etc need drawing up at the time, or that they are properly credited into the books at the time, or both.

I have in the past pondered the efficacy of a board minute stating that all 'drawings' are dividends and the board vote that the accountant will draw up the necessary paperwork at intervals requested by the board - which effectively gets round it, in theory - but I have never managed to get any confirmation that this would be acceptable. VERY interesting if it would be.

Director/shareholder drawings are a total pain, especially when they just draw throughout the year.......

deanshepherd

The nature of rules and regulations are that you are usually told what you can't do as oppose to what you can do. Hence, why you are unlikely to find any official document that expressly confirms this position.

There is no legal requirement for directors to minute any of their decisions. Provided that they have made the decision for a withdrawal to be a dividend then it is a dividend. A 'once and for all' board minute is just extra weight in terms of evidence to what has already been decided by the directors (assuming they can't be bothered to do a minute each and every time) but will of course only apply to withdrawals from that date as a forward planning point.

Wholly different to directors just drawing money down and then looking back at year end and saying 'Oh, yeah. I meant those to be dividends all along'.

Monsoon

Thanks for the clarification. It is very interesting as you're the first accountant I have heard discussing this issue in those terms, and have heard many discussing it in other less favourable terms!

How can you really distinguish between "yes, we intend all 'drawings' to be dividends" and "oh yeah, they were supposed to be dividends"? I suppose the onus is on the revenue to prove it....

Food for thought.

In any event, this particular client's DLA will still be overdrawn 9 months after the year end even with dividends clearing the P&L to date, albeit less than the year end amount, and I'm going to stick with my original calculations - I'm not having them paying 25% on the 40k when there was actually less outstanding. I've gotten their turnover figure for the year to date and their net profit ratio is consistent so I can make a very good estimate of their drawings and profit to date and therefore their DLA balance.

deanshepherd

As a bit of back-up, I believe the only legislation of importance is Table A of the Companies Act (unless these are departed from in the company's own articles) extract as follows:

Procedure for declaring dividends

30.—(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.
...
(4) Unless the shareholders’ resolution to declare or directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it.
...
(6) The directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment.

Paragraph 6 suggests to me that the directors do not have to document their decision to declare a dividend every time providing they have genuinely made the decision that these regular amounts are to be dividends. By the same reasoning I believe they can make the decision that all subsequent withdrawals from the business are intended to be dividends unless stated otherwise.

Monsoon

Thanks Dean, that is very useful. I agree with your reading of the quoted text.

My understanding arises from s836-839 of CA2006 which state:

CHAPTER 2
JUSTIFICATION OF DISTRIBUTION BY REFERENCE TO ACCOUNTS
Justification of distribution by reference to accounts
836 Justification of distribution by reference to relevant accounts
(1) Whether a distribution may be made by a company without contravening this
Part is determined by reference to {...} items as stated in the relevant
accounts {profit, loss, assets, liabilites}

{...}
838 Requirements where interim accounts used
(1) Interim accounts must be accounts that enable a reasonable judgment to be
made as to the amounts of the items mentioned in section 836(1).

http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf


There's a bit there, and it all needs looking at in context but my understanding from looking at this is that distributions by their nature need to be made by reference to accounts. Unless I have totally misread this.

deanshepherd

Slightly different issue but yes, there needs to be distributable profit in order to make a dividend.

If there were sufficient reserves from the last prepared statutory accounts (and company is not running at a loss) then that is always sufficient.

If not, then directors need to be 'reasonably' sure there are sufficient distributable profits since those accounts.

There is no statutory format for management accounts so it doesn't necessarily have to be anything more than a bit of number juggling in the directors mind.

I know I don't prepare full management accounts every time I want to withdraw a dividend, I just look at the bank and think 'Yep, cash there. Allowing for tax, I must have made some profit'.