Directors Loan Repayment?

System · November 2007

Morning,

I've just been asked a question and was hoping for a little advice from the extremely knowledgeable people here!

If a Director has always been paid via a directors loan repayment (therefore no tax/NI - not their choice, the choice of the other directors) but they never made a loan/payment to the business in the first place, are they going to have to pay tax or any of the loan back if they choose to leave?!

I don't know how long either the business has been going, or how long the director has been in place for. I would suggest that if the other directors are also being paid this way, they are not likely to want to raise this with HMRC should they part acrimoniously.

I still feel that I should advise the director that is considering leaving, that they should pay the tax/NI for the period that they have been a director - but this is also likely to cause an investigation with HMRC.

This director was also given 10% of the shares of the business upon joining and is now concerned that the business is going to go under. They are concerned that they will be liable (via salary/'loan repayments') for some of the debt of the business should this happen. Can they simply 'give' the shares back, even if the other directors do not want them?

I realise that this seems like a difficult situation - I'm just glad that I didn't advise them to set it up like this in the first place! :shock:

Any help is really appreciated.

S

System · November 2007

Re:Directors Loan Repayment?

Deja vu here! I swear that this isn't from me although I'm in an uncannily similar position!

My own understanding is that the director was happy to accept the initial benefits of directorship - especially since they didn't introduce any capital themselves - but cannot now simply discharge their liability once things have started to head south. Are they guilty of wrongful or unlawful trading?

I asked for advice from Steve (aka peugeot) on this tricky scenario who was very helpful even if he did simply confirm my worst fears! No doubt he will respond to your own enquiry when he reads this.

Regards,

Robert

System · November 2007

Directors Loan Repayment?

sazzled1@hotmail.com wrote:

Morning,
If a Director has always been paid via a directors loan repayment (therefore no tax/NI - not their choice, the choice of the other directors) but they never made a loan/payment to the business in the first place, are they going to have to pay tax or any of the loan back if they choose to leave?!

I don't know how long either the business has been going, or how long the director has been in place for. I would suggest that if the other directors are also being paid this way, they are not likely to want to raise this with HMRC should they part acrimoniously.

I still feel that I should advise the director that is considering leaving, that they should pay the tax/NI for the period that they have been a director - but this is also likely to cause an investigation with HMRC.

This director was also given 10% of the shares of the business upon joining and is now concerned that the business is going to go under. They are concerned that they will be liable (via salary/'loan repayments') for some of the debt of the business should this happen. Can they simply 'give' the shares back, even if the other directors do not want them?

S

Are you saying that this director has received payments which have been treated as directors loan when he did not introduce any funds in the first place? ie has an "overdrawn loan account"?

If yes then he has a loan repayable to the company unless there has been an agreement to release the debt. This will be called on by a liquidator if the company goes under.

There are the obvious S.419 ICTA implications for the company as well as potential BIK issues if the loan has been released.

System · November 2007

Re:Directors Loan Repayment?

Let me see if I have interpreted this correctly.

Director has received payment from the company which has not been processed through the payroll. This means the director has made a withdrawal for personal use from the company (this is NOT dividend).

There are 2 situations which can deal with this. PaulPSB has described one of them.

If the company has sufficient reserves available then it can vote a dividend to the director who has made the withdrawals to clear any overdrawn balance on his/her loan account. This dividend will be voted formally by way of meeting of the shareholders and dividend vouchers drawn up which will then be transcribed onto the director's personal self assessment return.

If, however, the company is on the brink of collapse and either (a) has no reserves available in the balance sheet or (b) not enough reserves to clear the full overdrawn balances, then really this is where the complexities arise. For a start, the director will have an overdrawn loan account as there is either not enough or not any funds available to credit to the loan account by way of dividend to repay the withdrawals - this is where a section 419 tax charge kicks in for the director personally as he has got an interest-free loan, in effect.

In a worst case scenario, the director could be forced to repay the balance of his loan account on subsequent winding up of the company and if he hasn't immediate liquid funds available, he could even be forced to sell his assets to repay the balance - as the director could be deemed as knowingly traded to the detriment of creditors. In other words the director is saying he is still going to take his "withdrawals" despite the fact that they may be nearing (or over) overdraft limits. This is a worst case scenario.

Directors who do this to the detriment of creditors (usually VAT and PAYE) are on very shaky ground.

Best regards
Steve

System · November 2007

Re:Directors Loan Repayment?

I thought that my initial feeling of dread was likely to be accurate! Thanks chaps for clarifying this for me.

I'll see what they come back to me with.

Thanks again for your help.

S

Directors Loan Repayment?

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