Managing on £7225

JJH1969

If directors are paying themselves a salary of the Primary National Insurance threshold when they first start out - how do you advise them to manage financially until any dividends are declared?

PGM

directors loan account?

burg

by signing an initial meeting declaring that any withdrawals taken can be considered as dividends and paperwork will be drawn up officially later.

jamesm96

HMRC seem to like to argue that if you're paying a dividend you must declare it all properly at the time of payment; this is not the case, though.

Your client is quite at liberty to draw the amounts he requires from his Director's Loan Account and cover it with one single dividend at the end of the year.

If the profits at the end of the year aren't sufficient to cover his DLA, the balance can actually be written off by the company - it's not a tax deductible expense for the company but then, neither is a dividend. On the director's personal tax return, the balance that has been written off is then treated in exactly the same way as a dividend (see SAIM5200).

This is potentially much better than declaring a bonus to cover the amount, though it's worth doing a quick comparison first.

deanshepherd

jamesm96 wrote: »

Your client is quite at liberty to draw the amounts he requires from his Director's Loan Account and cover it with one single dividend at the end of the year.

Although doing so is likely to leave you with an overdrawn loan account for most of the year so you will have benefit in kind issues of an interest-free loan or have the director pay the company interest which will then be taxed.

If the profits at the end of the year aren't sufficient to cover his DLA, the balance can actually be written off by the company - it's not a tax deductible expense for the company but then, neither is a dividend. On the director's personal tax return, the balance that has been written off is then treated in exactly the same way as a dividend (see SAIM5200).

But not for NI purposes..

jamesm96

deanshepherd wrote: »

Although doing so is likely to leave you with an overdrawn loan account for most of the year so you will have benefit in kind issues of an interest-free loan or have the director pay the company interest which will then be taxed.

But in this situation would you not just backdate the paperwork if it was ever requested? That said, whenever an inspector has asked for a list of DLA transactions for our clients, as long as the year-end dividend covers the balance, we've not had an instance where the inspector has then calculated beneficial interest between the date of the drawing and the date of the dividend.

deanshepherd wrote: »

But not for NI purposes..

That's interesting. The article I read that discussed write-offs said that the NI is saved too. But you're completely right, HMRC's guidance is that a write-off which is treated as a dividend distribution is still subject to NI... methinks a litle more investigation is required on my part!

burg

Backdating of paperwork as I understand it would be illegal. You may have ust been fortunate in these circumstances and HMRC could argue the point. The meeting minutes helps with getting around this and the paperwork is drawn up once the profits are known.

jamesm96

burg wrote: »

Backdating of paperwork as I understand it would be illegal. You may have ust been fortunate in these circumstances and HMRC could argue the point. The meeting minutes helps with getting around this and the paperwork is drawn up once the profits are known.

Well to be fair we don't get that many inspections. My understanding is that HMRC realise that it's not practical for small owner managed businesses to be drawing up monthly management accounts to establish the profitability and having monthly board meetings to officially and properly declare dividends. If the dividend for the year covers the drawings then they're happy.

As regards backdating your probably right. I've never done it, I'd hasten to add! Though in reality, are the minutes in a 'one man band' style business ever really true anyway? They state the date, time and location of the 'meeting', they show the running order of the meeting and that John Smith was elected chairman and that he called the meeting to order and that a resolution was passed... etc, but none of it ever happened.

deanshepherd

jamesm96 wrote: »

Well to be fair we don't get that many inspections.

So your understanding that HMRC thinks if the dividend for the year covers the drawings then they're happy comes from where? Their website? From calling them up and asking?

As regards backdating your probably right. I've never done it, I'd hasten to add!

We believe you. No, honestly we do.

Though in reality, are the minutes in a 'one man band' style business ever really true anyway?

In my experience, these 'meetings' do happen all the time. Usually over the breakfast table. The issue is that they are not always properly documented which is where we come in.

They state the date, time and location of the 'meeting'

Agreed.

they show the running order of the meeting and that John Smith was elected chairman and that he called the meeting to order and that a resolution was passed... etc

Mine don't.

but none of it ever happened.

Then you should ask yourself why you are drawing up false minutes and backdating them for your clients..

Monsoon

@Dean

The bottom line is, have paperwork in place that will back up what actually happened and that is acceptable for HMRC and will avoid s455 and beneficial loan taxes.

As Ian says, if something is in place that says all payments are dividends and paperwork will be drawn up in due course, and then the paperwork is drawn up in due course (i.e. later), then it's not backdated, it's done when it was intended to be done .... i.e. by the accountant, much later on!

This is very different to the client who says "I've taken £30,000 in salary but haven't done any paperwork, can you help?" Restating that as £6000 salary and £24000 dividends would be backdating and arguably fraud.

jamesm96

deanshepherd wrote: »

So your understanding that HMRC thinks if the dividend for the year covers the drawings then they're happy comes from where? Their website? From calling them up and asking?

Lol... fair point! We've had two PAYE inspections of clients where the inspector was shown a list of drawings on a DLA with a dividend credited at the end with no negative consequence, but I also remember an article in 'Tax Tips and Advice' which discussed it... I'll see if I can find it again.

Monsoon

jamesm96 wrote: »

'Tax Tips and Advice'

I don't trust that publication after this:

http://www.accountingweb.co.uk/anyanswers/tax-tips-just-lie

jamesm96

Monsoon wrote: »

I don't trust that publication after this:

http://www.accountingweb.co.uk/anyanswers/tax-tips-just-lie

Blimey. Thanks for the link. The senior partner at my employer loves that journal so I've always (blindly, it seems!) gone with it... that does explain a couple of confusions I've had on a couple of articles!

In which case (back on the topic of this thread) I'll disregard the 'tips' given in that article and withdraw my earlier comments accordingly!

jamesm96

So... latest issue of Tax Tips and Advice just landed on our doorstep and I couldn't get to this forum quick enough! Lol.

Page 3: The Importance of Dividend Timing.

I quote: "A taxable BiK arises where, at any point, you owe your company more than £5,000, even for a single day. Where a post year-end dividend or bonus reduces the debt below this, the BiK tax charge isn't cancelled...

If you're unaware of the BiK charge you'll inevitably fall into another trap. Namely, you won't declare it on your P11D (benefits and expenses return). This can land you with a hefty penalty."

Assuming this advice isn't as shaky as some previous advice is alleged to have been (libel case nicely side-stepped!), it looks pretty black and white.

Monsoon

jamesm96 wrote: »

Page 3: The Importance of Dividend Timing.

I quote: "A taxable BiK arises where, at any point, you owe your company more than £5,000, even for a single day. Where a post year-end dividend or bonus reduces the debt below this, the BiK tax charge isn't cancelled...

If you're unaware of the BiK charge you'll inevitably fall into another trap. Namely, you won't declare it on your P11D (benefits and expenses return). This can land you with a hefty penalty."

I agree with this.

Dean

Agree too.

What's being referred to here is the 'strict method'. The Revenue can insist on this method is the 'averaging method' produces an obserred result.

By this I am talking about the tax treatment not dividend policy.

Regards

Dean

KenS

Does this help? See the section within the hashtags, points to balance at end of accounting period. Taken from Directors Loan Toolkit on HMRC website. (All the toolkits are very useful, without wanting to teach my grannies to suck eggs.........)

Ken



Section 455 tax
6. If a director’s or participator’s loan account is overdrawn, has the company paid tax under S455 Corporation Tax Act 2010 where appropriate?
Risk
Where a close company makes a loan or advance to an individual who is a participator in the company or an associate of a participator (normally the directors and their relatives), the close company is due to pay tax under S455 Corporation Tax Act 2010. If S455 tax is not paid on the overdrawn amount this can result in an underpayment of tax.
Exceptions from S455 are detailed in S456 Corporation Tax Act 2010.
Mitigation
######Once all appropriate adjustments have been made to the directors' or participators' loan accounts, review the loan account balances at the end of the accounting period. If the loan accounts are overdrawn at the end of the accounting period calculate the S455 tax due and include the amount due with any Corporation Tax payable. ##########S455 tax is due nine months and one day after the end of the accounting period in which the liability arises. See S455(3) Corporation Tax Act 2010.
However where the whole or part of a loan or advance is repaid, released or written off, the company is entitled to relief from the tax chargeable under S455 or a proportionate part of it. Where the loan is repaid, released or written off within nine months of the end of the accounting period relief is due immediately. The S455 tax and relevant S458 relief should be included and claimed on the relevant Company Tax Return. See Q7 regarding the date relief is otherwise due.
Explanation
Loans made on beneficial terms to a participator, or an associate of a participator, who is a director or an employee, may also give rise to liability on the individual under the earnings from employment provisions in addition to any charge on the company under S455. See Q5.
For further guidance see EIM26101.
For further guidance on associates of participators see CTM60150.