Treatment of Loans - categories are greyed-out

NinaT

Hi, I’m looking for advice on how a loan I made to the Ltd business account to fund the purchase of a property purchased at auction.
- I made a loan to my friends business account, a Ltd company in England. My friend is the only active director in the company. I am not a director or an employee of the company I loaned the money to.
- The loan was needed to fund the purchase of a property outright at auction so quick cash was needed.
- It is an interest-free loan repayable in full back from the business account it was paid into and we have a signed written agreement. The previous accountant offset the interest against some other debt anyway.
- The company accountants have treated the loan as a personal loan to the director rather than to the company. My loan is being used to offset against an overdrawn loan amount of the director which has reduced the amount that is repayable to me. The director has not drawn any funds out of the business either by means of a loan or a salary.
- Has the treatment of the loan as a directors loan created tax liabilities to the director?
- The accountants say that in order for my loan to be repaid back in full to me, the director has to repay the overdrawn directors loan amount back to the company, which he hasn’t taken any money out of the business, and that will create a tax charge of 33.75% to be paid to HMRC.
- Should the loan have been treated as an ordinary loan to the business rather than a loan to the director? Thanks

douglasstroud

If you have a signed written agreement showing that the money you lent was to the Company and not to your friend then that is who owes you the money, if your friend owes the Company money then that is between your friend as Director and the Company.
How is there an overdrawn DLA if the Director has not taken anything out the Company?

NinaT

Hello thank you for your reply. That is what is confusing all of us. The only explanation we can think of is by posting the loan to the DLA, this has triggered taxes for the director which are showing as an overdrawn amount on the DLA which is being reduced by offsetting against my loan?

douglasstroud

If the Director has not withdrawn anything from the Company how is the DLA overdrawn?
You say your loan was used to purchase a property so was there any money left after the purchase?

NinaT

Hi again, no there was no money left, it all covered the cost of the auction plus fees. Would I be right in thinking that because the accountants have treated the loan as a directors loan, this has incurred taxes as a “personal loan to him” which is the amount showing in the overdrawn DLA?

douglasstroud

If you have lent the Company money and that money was all spent on the purchase of a property that now belongs to the Company where does the Directors Loan come into it?
From what you are saying say the property cost £100k for example, Company now has an asset in the property worth £100k and owes you a liability of £100k, is that not the case?

NinaT

Absolutely yes that’s right. But to give you an example that the accountant has given me: “if I loaned the business say £20k, but the director withdrew £5k for himself (which he hasn’t), then the loan balances show as £15k owing from the business to me. The other £5k is owing to me personally from the director. If I want the loan to read the full £20k, then the director needs to either repay the £5k he has extracted (which he hasn’t), or have a salary or dividend to cover it. What can’t be done, is to say that the director doesn’t owe the company anything, but I am still due my full £20k back.” “At present the netting off that has been done is the overdrawn loan amount of the director totalling say £50k, has been set against money owed by the company, namely my loan, this can be undone however it will result in a tax charge of 33.75% of the outstanding loans owed by the director to be paid to HMRC. Once the director has repaid the loan, the corporation tax will be repaid by HMRC”. Thanks

douglasstroud

So the Director does owe the Company money then?
You said your loan was used to purchase a property and there was nothing left so what has this got to do with the DLA, it doesn’t make sense what the accountant is saying.
The loan must read the full 20k as that is what you lent the Company and what the Company owes you, even if the Director had used some of the loan money you will still be owed 20k which is what should show on the Balance Sheet

NinaT

That’s the issue, I’m having a hard time with the accountant trying to get this sorted. To be fair, current accountant has taken over the practice from previous accountant who treated it this way. Problem is he won’t make any corrections until he’s spoken with him. But I feel like I’m getting nowhere with it and it’s causing unnecessary delays and concern particularly re the tax charge. The director doesn’t owe the company money so that can only have been generated by treating this as a personal loan to him triggering a tax liability. It’s an obvious mistake which I’m trying to challenge with not much progress so far. What options do I have? Thanks

douglasstroud

What is your relationship to the Company apart from being owed for the loan?
If it is as you say that you are just a friend of the Director then really the accountant should not be dealing with you, the Director needs to sort this out with the accountant.
But as I said this situation does not make sense, it would not matter if the Director took all your money and stuck it on a horse that lost, the Company would still owe the money to you.
The property that was purchased was in the Company name as well as all the relevant auction expenses?

NinaT

Hi I actually do work for the company now, but didn’t at the time of the loan, I manage the accounts. This has all come to light now due to a shareholder dispute and the loan was not appearing as a debt to deduct from any shareholder settlement. So the other director & shareholder, the sister who incidentally has never been involved in the business, is non-active, is claiming for her full 1/3rd share without deductions and that the loan should be paid by her brother, the director who has 2/3rd share so is the majority shareholder, rather than it be repaid by the company thereby reducing her share. Thanks really appreciate your advice.

NinaT

Oh and yes the purchase of the property was paid by the company, my loan went into the business account to cover the cost plus fees and the business made the transfer to the solicitors I believe.

douglasstroud

I still can’t see that there is an argument if you have a written agreement to show that your loan was with the Company, this was a proper loan agreement signed and witnessed?
The accountant needs to make sure that the loan is recognised correctly in the accounts and then if the shareholders still disagree then it may well become a legal issue not an accounting one.

NinaT

Ok that’s great thanks very much for your advice really appreciated