Director Loans

lebowski1980

Good morning all

Long time lurker but thought I'd like to get more active in the community
I have a question on behalf of a friend regarding tax on director loans.
I should state that i am a qualified accountant but work mainly in industry, not practice; and am trying to help a friend. I would like to move in to practice but not fully fledged as of yet!

Her previous accountant never took an interest during her 1st year of trading and her return is due in the next few weeks.
She has taken drawings each month (she used to be a sole trader and was never told about the different dynamic of a ltd relationship) but was just told they would be declared as dividends.

She was never advised to setup PAYE which in my opinion she should do for at least NI purposes/tax savings. She has no other income other than her ltd company.

I've prepared her year end accounts month by month to look at retained earnings and how much of her drawings qualify as dividends. The rest i presume remain as director loans. Seeing as we are nearly 9 months after the year end date, she either has a choice to clear the remaining director loan balance or pay tax on the balance to be reclaimed when it has been repaid.

The tax on the loan will be payable along with corp tax on profits.

I know it's brief but have i missed anything obvious here? She asked if paye can be backdated and from my research it appears not as she was/is not registered currently.

I feel bad for her as she never got the right advice so just trying to help out now.

Regarding any other tax saving, she is a service provider with no capex investments and is under the VAT threshold with little input to claim anyway.

Thanks for reading and i appreciate any advice.

silvercar

She was never advised to setup PAYE which in my opinion she should do for at least NI purposes/tax savings. She has no other income other than her ltd company.

Agreed. Why didn't the previous accountant advise this? The magic number is £702 a month - below the tax and employer/ employee NI rates but above the LEL so qualifies for credit towards pension. Not sure on whether you are too late for 2017/18 (where the magic number was £680), but could do it for 2018/2019.

lebowski1980

Thanks silvercar. I'll give HMRC a call regarding PAYE. As she is not registered no RTI's have been sent. I am aware that you can backdate sometimes but I'm guessing it's not without penalty?
Also, the other problem is that the drawings are not consistent each month. One month may have 3 or 4 drawings for random amounts which would not tie back to payroll submissions anyway.
I agree that as of this month she should register for PAYE and at least get it running for the remainder of the year

chrismac1

How this should be done:


1. PAYE is done as you go. At the very least a scheme should now be in place for 2018-19. She should get monthly payslips so she knows exactly what assumptions are being made, and what is being sent to HMRC.


2. She should get proper dividend vouchers. My own default here is to do them quarterly, I am halfway through the September quarter ones now. These are minuted.


3. In terms of the director's account, each payslip and voucher is a credit to that, her drawings are debits. If it never runs any worse than £10,000 overdrawn there is no tax issue. Above that there is potentially a taxable benefit in kind on the interest, and worst case scenario is extra corporation tax.


All of the above in my view is "box standard" and any accountant not doing that needs to be asking what the point is in the client paying the fees. Granted 95% of the time not doing it properly turns out fine, but the other 5% of the time the client just goes through hell with HMRC, banks (mortgage applications), Companies House etc.


My message to all "accountants" is if you can't be bothered doing this stuff properly, don't bother doing it at all.

Pennywise

chrismac1 wrote: »

My message to all "accountants" is if you can't be bothered doing this stuff properly, don't bother doing it at all.

Whilst I agree, there is also the matter of what the client is willing to pay for. If the accountant is offering a "full service", then of course, they should be providing all the advice etc needed to optimise the tax alongside complying with the laws etc. However, a lot of clients are very fee averse and basically just want "year end accounts", often only contacting you towards or after the year end, and are clearly shopping around for the cheapest deal, usually saying something like "I'm doing everything else, I just want the accounts and tax return doing". Personally, from 30+ years of experience, I don't accept that kind of client anymore - for me these days, it's all or nothing, i.e. I offer the full service only and quote accordingly and then go on to do a top quality job so my clients don't have this kind of issue - payroll, dividends, etc are all set up properly from the day of appointment and reviewed quarterly. I've wasted too much time and effort on "scope creep" clients - too long in the tooth for that game now. (Not saying that is the case with the OP, just responding to your previous post!).

chrismac1

I also don't accept that sort of client Pennywise. The worst aspect there is when you read up various tax cases and read between the lines, it is clear the client wanted and got a "bottom dollar" service.


But of course when this goes wrong and HMRC are saying "You didn't do a dividend because none of the paperwork was done and you can't evidence any of this. So here is a bill for the PAYE and NI because we think it was salary" there is really nowhere for the accountant to run.

lebowski1980

Thanks for your responses.

To be honest, having had to prepare a years worth of books in a few days and then retrospectively look at this has been a headache and one that could have been avoided with better advice. And i feel for the client now having to pay much more tax than she should have to.

Can i ask, when you started out, were you so picky about clients or did you have to ween the good from the bad? With thinking about a practice career myself, i wonder if start ups have the luxury of being this choosy vs getting a business and income stream going?

Personally, I'd much prefer to deal with all the books and tax affairs in one go to as come year end i would expect everything to be in order.

Pennywise

lebowski1980 wrote: »

Can i ask, when you started out, were you so picky about clients or did you have to ween the good from the bad? With thinking about a practice career myself, i wonder if start ups have the luxury of being this choosy vs getting a business and income stream going?

Hard to say as I don't think the limited company environment was the same back then. People generally didn't start a limited company in the first instance due to it being harder, more expensive, etc., and there wasn't the same impetus to use a limited company as there weren't the same tax savings back then. Your typical small business start up would be a sole trader or partnership and only move up to being a limited company after several years of successful trading as it grew.

As the years have passed and limited companies have become far more popular the numbers of people setting them up without proper advice seems to be increasing exponentially, as has the number of people getting themselves into trouble with them.

Now it's the "norm", I actually find it easier to get new clients to sign up for the full package, simply because there are so many accountancy firms offering that service now, so when people start googling for accountants, they're constantly seeing the same kind of "full package" being offered, so it's usually what they expect when they contact me. Especially as online accounting is also now the "norm", so the usual "full package" includes the subscription to an online accounting system, which means there isn't much "year end" work at all - there's work happening throughout the year meaning just an hour or two for the year end.

tacpot12

Your client needs better advice than she got from her first accountant. Are you sure that she is not subject to the IR35 rules? Could her limited company be a Personal Service Company? If so, she will have to pay PAYE and NI on all the income.

Has she considered whether the company should making the pension contributions on her behalf?

chrismac1

In the beginning I took all comers so long as they signed up for monthly standing orders, so were clearly not slow pay or no pay types. I think that is still the way to go for a new accountant providing you take on business you know you can do a proper job for.


I now take on the following sorts of clients with wariness i.e it is likely I will offer a quote they find too high unless they've been able to convince me they'll be much better than average:


1. Clients on the cloud doing their own book-keeping having seen the flashy TV ads. I have one simple question here - does your bank balance in the cloud agree to the one on your statement? 80% of the time the answer is very much no, so it is "next please."


2. Limited company contractors taking a punt on DIY company accounting with no heed to IR35 risk.


3. People who already have tax enquiries under way.


4. Remotely based clients who seem to me that they really need a nearby accountant they can meet up with often.


I wanted a practice with high client satisfaction and high retention. You can only get that if you make really sure that each new client is a very good fit with you before they sign up.


So in the last 30 months I have had to write 2 handover letters to new accountants, which I don't think is bad for a practice with nearly 150 clients. In the early days I quite often lost clients because my up-front vetting was less thorough.

lebowski1980

Thanks for the insights to your business. I would certainly verge towards a monthly fee for all services too.
Do most of your clients now use online software? I recognise the need especially if they are VAT registered with MTD (if it comes in as they say it will)
For some smaller clients like start ups with minimal turnover i thought of offering VT Transaction as a more cost effective solution. Do you still use that or is all Xero, Sage etc...?

Tacpot, i checked the IR35 and as she has over 20 different clients, works from home and can substitute if required i felt she was well outside of IR35 but did say that she could check with someone more in the know for peace of mind.