Large Directors Loan Account Debit Balance

Katie2014Katie2014 New MemberMAAT, AAT Licensed Accountant Posts: 28
Dear All

This is my first time dealing with a large debit balance on a directors loan account and I just wanted to make sure that I haven't missed anything..

My client is a sole director/shareholder limited company who didn't find out that they were caught under IR35 until just after their accounting year end. I had been chasing them to have an IR35 contract review all year as I strongly suspected IR35. I have dealt with all of the PAYE/NI obligations under IR35, however they also owe the company just over £20,000 to the directors loan account.

Basically, they had been withdrawing cash and spending money through the company bank account all year. They now owe over 20k to HMRC for the PAYE/NI liabilities that should have been paid throughout the year if they had found out about IR35 earlier.

My client has now been made redundant from the end client and wishes to close the ltd co. I have been advised by HMRC that they will object to the company being closed with a large PAYE bill outstanding so for now the company is dormant.

In regards to the directors loan outstanding to the company, I just want to check that the following points will cover everything that needs to take place as the loan will not be repaid:

- Show the loan amount owing on CT600A when I file the CT600
- 32.5% of the loan outstanding will be due as corporation tax to HMRC 9 months and 1 day after the accounting y/e
- Interest was not charged to the director, so interest at HMRC's official rate (currently 3%) on the loan amount outstanding should have been entered onto a p11d for the 2016/17 tax year as a BIK. This will now have to be filed late.
- The ltd co will owe Class 1A at 13.8% on the BIK amount
- The director will have a tax liabliity on the BIK amount at 40% as he is a higher rate taxpayer

From the research I have done I believe that this is everything that needs to take place. Please do let me know if you think I have missed anything?

Does the fact that the ltd co is now dormant affect any of the above?

I did consider the option of writing off the loan, however if income tax is charged on the balance outstanding then this would mean that my client would owe more tax than the option above. I am also unsure whether there are rules in regards to the write off of loans if a company is now dormant, which is why I felt the option above would be the best way forward.

Please correct me if I am wrong with any of the above!

Thank you in advance for taking the time to read and comment :)

Comments

  • MickdundeeMickdundee LondonRegistered Posts: 172
    How does the shareholder / director intend to proceed with the company if it is now insolvent?
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,036
    Indeed how much money, if any, is left in the company?
    As an aside, make sure you get paid in advance for the work!
  • TaxManagerTaxManager Registered Posts: 10
    I think there is a very high probability of a better tax outcome with a different approach. That said; without seeing some numbers, it's not possible to be certain.
  • Katie2014Katie2014 New Member MAAT, AAT Licensed Accountant Posts: 28
    Thank you for your comments. The plan was to strike the company off with companies house, however due to the PAYE liability owing, the company is to remain dormant until the PAYE liability has been paid. It could take quite a while to repay it. However the plan is to close the company whenever he can as he doesn't need it to be kept running.

    There is no money left in the company now as all income was caught under IR35 and taken as salary.

    I have thankfully been paid upfront for the work!

    The amount outstanding on the directors loan account at the end of the accounting period was approx £20,800.

    Therefore, £6,760 owed for s455 charge as corporation tax at 32.5%. The BIK will be £624. Class 1A of £86.11 will be due from the company. The director/shareholder will have a tax liability of £249.60 on the BIK. Total of £7095.71.

    Please let me know if you need any further info before you can advise on a better approach?

    Thank you for your help.
  • MickdundeeMickdundee LondonRegistered Posts: 172
    If the company is successfully struck off because HMRC don't oppose the striking off, the debt will die with company.

    However, the company can't (shouldn't) be struck off because it has realisable assets in the form of the directors loan account. Can the director afford to repay the company, who in turn can pay HMRC?

    It might be that the director faces insolvency issues as well as the company?

    The tax issues seem to be a moot point at this stage. I think your client should be seeking advice from an insolvency practitioner.
  • TaxManagerTaxManager Registered Posts: 10
    edited July 17
    So the balance sheet is:

    Debtors: 27,560 [20,800 + 6,760]
    Creditors: (6,846) [6,760 + 86]
    Net assets: 20,714

    Reserves: 20,714

    What's the PAYE liability?
  • Katie2014Katie2014 New Member MAAT, AAT Licensed Accountant Posts: 28
    No the director can't afford to pay the company back.

    Yes those will be the balance sheet figures if its decided to go ahead with the route I outlined above. The PAYE liability at the 30th April accounting y/e was £28,931.61. It currently stands at £17,653.52.

    I am happy to seek the advice of an insolvency practitioner I know if that is going to be the best way forward?
  • MickdundeeMickdundee LondonRegistered Posts: 172
    Well the company is insolvent so your client ought to speak to an insolvency practitioner in the first instance.

    Your client may get away going through with the Spingebob plan. But that's for them to decide, not you.
  • Richard2017Richard2017 Registered Posts: 1
    The Company appears to be insolvent and HMRC are owed £24,413 (£17,653 + £6,760). HMRC will block any attempt at striking off by Companies House if there are outstanding accounts and CT Returns. If the debt is not settled then compulsory liquidation will follow and the Liquidator will demand repayment of the Directors Overdrawn Account. If any part of the loan remains outstanding when the company is finally removed from the register there will be tax implications. It is equivalent to a write off of the directors loan
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