Beware costly tax implications for Director loans
October 2, 2019
Specialist accountants at Mapus-Smith & Lemmon say company directors might be unaware of the potential tax on director loans, which can be as high as 32.5 per cent. As such, they say it is crucial to keep records of all cash and non-cash transactions and to have some understanding of the related tax implications.
Helen Peak, chartered certified accountant at the Wisbech office, says: “Obviously we are here to help our clients comply with all rules and statutory provisions and to alleviate tax wherever possible, but directors of limited companies can be taken aback when we tell them about the potential for a 32.5 per cent tax bill on loan accounts if they are not managed in a timely fashion.”
A loan account records transactions between a company and its directors. These can be cash withdrawals and other money not used wholly for business purposes. If the loan account remains overdrawn from the company’s financial year-end to the time when corporation tax is due, then the company will pay 32.5% tax on the outstanding amount. Once it is cleared, HMRC will refund the tax but only nine months and one day after the end of the tax year in which the loan is repaid.
“This scenario could play havoc with cash flow,” says Helen Peak. “The most efficient way to avoid this is to regularly review management accounts and ensure cash borrowings are not too onerous from the outset. It is important to remember until a dividend is voted or salary drawn, the money legally belongs to the company not the directors. Directors should always make sure that there is enough profit in the company to enable a dividend to be paid out to directors. However, every case is different and should be considered on an individual basis.”
For help regarding these complexities and any other accounting queries, please contact Helen Peak on 01945 427050.