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• # 123010
• Sun 24 Nov 2024 04:27 PM

This is going to sound awful - so stay with me. 

I help a Ltd company with their books, i have literallty just started studying officially but she knows i am self taught and Have done my fathers bookkeeping for years. When the director (the sole person in the company) approached me months ago, i said i would be happy to help with the basics because she was beyond cluless. then i heard nothing for 7 months...finally a panicked call that her Xero was a mess and she needed me. 

so i sat, for days, reconcilling, chasing receipts and invoice. coreccting multiple errors. 

Over the course of the business running, her accountant set up payroll in xero to run under the threshold for taxation, but dUe to limited funds she cannot always afford to pay herself the full amount in one go so literally sends herself loads and loads of £50/£30 amounts throughout the month, categorised by her under "paye payroll"

Now when i tallied up all those little amounts, she has over paid herself around £16,000...and she still continues to do it. I have told her, she wont stop because she has zero other income and i get it...but, trying to get her to understand this is precisely why start ups are so hard and she shouold have had capital to start with is falling on deaf ears. i cannot get her to stop - every day i log in and oh, there's another £50!

do i need to go changing every single excess payment to directors loan? what are the implications of that? I truly am lost. at some point HMRC are finally going to get her many late submissions and question what is going on. 

any help or advice appreciated

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• # 123011
• Sun 24 Nov 2024 06:24 PM

Hi,

Thanks for sharing your query. Let’s break this down based on your provided information and HMRC guidelines:

Info from Query:
The director has no other source of income.
Director's salary: approximately £758.00 per month (below NI and tax thresholds).
Total withdrawals from the company: £16,000.

Workings:
Annual Salary:
£758.00 × 12 months = £9,096.00.

Director’s Loan Account (DLA):
Total withdrawals (£16,000) – Salary (£9,096) = £6,904.

Since the outstanding DLA balance is below £10,000, there are no Benefit in Kind (BIK) implications for this loan at present. However, this balance must still be repaid to the company, ideally within 9 months and 1 day after the accounting year-end to avoid further tax implications.

Points to Note:
Corporation Tax (Section 455 Charge):

If the DLA is not repaid within the deadline, the company will face a Corporation Tax charge under Section 455 of the Corporation Tax Act 2010. This is calculated at 33.75% of the outstanding balance and is payable to HMRC. This charge can later be reclaimed if and when the loan is fully repaid.

If the DLA exceeds £10,000 at any time, the following apply:

It becomes a taxable benefit and must be reported on the director's self-assessment tax return.

The company will also have to pay Class 1A National Insurance Contributions on the taxable benefit.

HMRC may charge the director for the difference between interest charged (if any) and the official HMRC rate (currently 2.25%).

Interest on Loans:

While loans below £10,000 are not taxable as a benefit, companies may still need to charge interest at HMRC's official rate. If no interest is charged, HMRC treats the difference as taxable income for the director.

Recommendations:

Ensure the DLA is fully repaid, including any interest, before the 9-month-and-1-day deadline after the year-end.

Avoid exceeding the £10,000 threshold to prevent Benefit in Kind implications.

Consider documenting and monitoring director withdrawals carefully to avoid inadvertent breaches.

For more detailed guidance, you may want to explore HMRC’s rules on Beneficial Loans, Director’s Loan Accounts, and Section 455 charges.

Hope this helps clarify your situation!

Let me know if you have further questions. 😊

Sources:

https://www.gov.uk/directors-loans/you-owe-your-company-money

https://www.unbiased.co.uk/discover/tax-business/running-a-business/directors-loans

• =====

  Sabir Elias AATQB MICB

  Accounting Professional with 15+ Years’ Experience

  Interested in collaborating? Check my email in my bio.

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• # 123020
• Sat 30 Nov 2024 12:16 PM

naturally said:

“

This is going to sound awful - so stay with me. 

 

I help a Ltd company with their books, i have literallty just started studying officially but she knows i am self taught and Have done my fathers bookkeeping for years. When the director (the sole person in the company) approached me months ago, i said i would be happy to help with the basics because she was beyond cluless. then i heard nothing for 7 months...finally a panicked call that her Xero was a mess and she needed me. 

so i sat, for days, reconcilling, chasing receipts and invoice. coreccting multiple errors. 

 

Over the course of the business running, her accountant set up payroll in xero to run under the threshold for taxation, but dUe to limited funds she cannot always afford to pay herself the full amount in one go so literally sends herself loads and loads of £50/£30 amounts throughout the month, categorised by her under "paye payroll"

Now when i tallied up all those little amounts, she has over paid herself around £16,000...and she still continues to do it. I have told her, she wont stop because she has zero other income and i get it...but, trying to get her to understand this is precisely why start ups are so hard and she shouold have had capital to start with is falling on deaf ears. i cannot get her to stop - every day i log in and oh, there's another £50!

do i need to go changing every single excess payment to directors loan? what are the implications of that? I truly am lost. at some point HMRC are finally going to get her many late submissions and question what is going on. 

 

any help or advice appreciated

”

Hi,

My view - not advice.

I has a similar experience with a well meaning youngster who needed help with CIC first year accounts. No where near as bad as your story and I was able to produce Y/E acounts.

I concluded - There is only so much you can do and at the end of the day they are responsible and accountable for their business. If you can't generate the acounts you are happy with as a BookKeeper, then best (if not duty) to let them know ASAP so they can find someone else

I partly helped with a view to taking them on as a formal client to my new practice, however. I will not be doing this :- one of the 'Tests' is whether you believe the client runs their business in a responsible way..

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