S455 and directors loan account

Legacy_user

I am a Ltd company contractor and the company has been going for just over a year. I have been having various issues with my accountant which have now led to a complete breakdown in the relationship.

When I began last year the accountant gave me two options for cash extraction. Both were variations of tax efficient drawing methods. I said at the time that I needed more. He said best not to and we went back and forth as I genuinely need more a month than the £3,600 cash he was suggesting. It then ended with him saying just take what you want and offset against directors loan account. We will then review at year end.

I am now very close to the Company's final payroll for the year being run and he flat out denies he said that. The problem is that I need this cleared as the 18/19 tax year is coming to a close. I am desperately trying to find another accountant but no luck so far and even if I did my current accountant would be running the payroll (which at the moment looks like it will just be the usual).

So I have been doing research and as I might be leaving this open past 9 months after year end, as per S455 the company would pay 32.5% over to HMRC until I repay the loan. As long as I pay interest I can avoid BIK.

Does this sound reasonable as payroll is not an option at the moment? I'm looking at being £25k overdrawn at the moment. Also, is there a time limit on how soon the director has to pay before the 32.5% can be reclaimed or can Inrepay at any point in the future and reclaim the 32.5%?

Thanks in advance

TheCyclingProgrammer

There’s no time limit but you won’t get the s455 payment refunded until 9 months after the financial year in which it gets repaid.

That said I do think you get a partial refund if you make partial repayments. In other words each year you reduce the outstanding balance you can claim a partial repayment of the s455 tax on the corporation tax return for that year.

Blackbeard_of_Perranporth

Walcott wrote: »

I am a Ltd company contractor and the company has been going for just over a year. I have been having various issues with my accountant which have now led to a complete breakdown in the relationship.

When I began last year the accountant gave me two options for cash extraction. Both were variations of tax efficient drawing methods. I said at the time that I needed more. He said best not to and we went back and forth as I genuinely need more a month than the £3,600 cash he was suggesting. It then ended with him saying just take what you want and offset against directors loan account. We will then review at year end.

I am now very close to the Company's final payroll for the year being run and he flat out denies he said that. The problem is that I need this cleared as the 18/19 tax year is coming to a close. I am desperately trying to find another accountant but no luck so far and even if I did my current accountant would be running the payroll (which at the moment looks like it will just be the usual).

So I have been doing research and as I might be leaving this open past 9 months after year end, as per S455 the company would pay 32.5% over to HMRC until I repay the loan. As long as I pay interest I can avoid BIK.

Does this sound reasonable as payroll is not an option at the moment? I'm looking at being £25k overdrawn at the moment. Also, is there a time limit on how soon the director has to pay before the 32.5% can be reclaimed or can Inrepay at any point in the future and reclaim the 32.5%?

Thanks in advance

My concern is. You are £25,000 overdrawn. Your business is not viable. Sort this first.


As for your scam of a directors loan, you do understand that the taxman does not like this and will be chasing you. I note you have not mentioned VAT. Myself as a contractor, the companies I provide services for electronically upload my invoices to the VAT man and he collects.


I suggest that your methods you want your accountant to do are at odds, hence you broke the relationship. My accountant would not do such a things.


Not what you wanted to hear!

TheCyclingProgrammer

Blackbeard_of_Perranporth wrote: »

My concern is. You are £25,000 overdrawn. Your business is not viable. Sort this first.

As for your scam of a directors loan, you do understand that the taxman does not like this and will be chasing you

An overdrawn director's loan isn't necessarily a good idea if it means you can't pay your tax liabilities but it's not really a scam.

HMRC has rules in place to tax overdrawn director's loans - the s455 provisions mentioned by OP, so it's not like OP is ignorant of the tax implications. There will be nothing for HMRC to chase so long as OP's corporation tax is completed correctly (including any s455 charge calculations).

OP may not have mentioned VAT but they might not be VAT registered.

System

TheCyclingProgrammer wrote: »

There’s no time limit but you won’t get the s455 payment refunded until 9 months after the financial year in which it gets repaid.

That said I do think you get a partial refund if you make partial repayments. In other words each year you reduce the outstanding balance you can claim a partial repayment of the s455 tax on the corporation tax return for that year.

Thanks. Good to know regarding the partial payment. I should hopefully just be able to get this cleared as soon as the new accountant is appointed and becomes my agent for HMRC.

Blackbeard_of_Perranporth wrote: »

My concern is. You are £25,000 overdrawn. Your business is not viable. Sort this first.


As for your scam of a directors loan, you do understand that the taxman does not like this and will be chasing you. I note you have not mentioned VAT. Myself as a contractor, the companies I provide services for electronically upload my invoices to the VAT man and he collects.


I suggest that your methods you want your accountant to do are at odds, hence you broke the relationship. My accountant would not do such a things.


Not what you wanted to hear!

I take it you can't read? These are not my method. I asked him I want £6,500 cash per month. He has gone ahead and run £3,600 on the basis that I should run a bonus in payroll period 12 to clear the director's account which he now won't do. If you try and do some maths - £6,500 - £3,600 = £2,900 per month. £2,900 x 12 = £34,800. That is less than I am overdrawn. Not sure where you are getting this as a scam from. Have you read up on Section 455. Under that £25,000 x 32.5 = £8,125 cash paid plus my personal interest expense. Under PAYE the higher rate PAYE is offset by corporation tax saving leading a much lower cash payment than S455.

Not sure where you got that my business is not viable. The cash to pay the bonus is there right now. What has VAT got to do with my accountant not running my requested bonus through payroll this month? I am VAT registered because I breach the threshold. Not sure how you have come to associate that with my payroll issue.

TheCyclingProgrammer

I'm not sure why your accountant is recommending paying yourself a higher salary to pay off the director's loan. You would be much better off repaying the loan by declaring a dividend as and when you have sufficient profit to declare a dividend.

A dividend will be more tax efficient as you will only be paying corporation tax, whereas a higher salary will incur income tax, employee and employer NIC.

System

Would I not end up in the same position, as using the dividend would just mean I pay more in PAYE on the monthly cash required from the business?

00ec25

Blackbeard_of_Perranporth wrote: »

My concern is. You are £25,000 overdrawn. Your business is not viable. Sort this first.

As for your scam of a directors loan,

I suggest you have no idea what you are talking about

00ec25

Walcott wrote: »

Does this sound reasonable as payroll is not an option at the moment? I'm looking at being £25k overdrawn at the moment. Also, is there a time limit on how soon the director has to pay before the 32.5% can be reclaimed or can Inrepay at any point in the future and reclaim the 32.5%?

there are 4 ways to take money out of a company and into your own personal account

1. salary - from which PAYE is deducted
2. as a dividend - upon which tax will be paid as part of your annual personal tax return
3. as reimbursement of valid company expenses which you paid for personally on behalf of the company

and

4. everything else - ie as a payment from the director loan account

so you have a 25k DLA overdraft. Key question: how much retained earnings/reserves ("profit") does the company have on its balance sheet for the accounting year end related to that 25k balance?

the simplest way to clear a DLA is by declaring a (paper) dividend in the accounting year (ie backdated) to clear all or part of the DLA balance
if the company has insufficient retained reserves to allow that then you have no option but to either pay the s455 tax or to clear the DLA balance by repaying before the 9 month deadline

if you repay the balance after 9 months, or you part pay the balance after 9 months the company will have to pay the 32.5% S455 tax on the amount outstanding 9 months after then end if the company accounting year
you can indeed claim part refunds for part repayments, but please note the 9 month timescale already mentioned. For example, suppose your year end is 31 Dec 18, 9 mths would be 30 sept 18 . Suppose you part repay on 1 Feb 19, your s455 refund would be repaid on 31 Dec 19 + 9 months, ie 9 months after the end of the accounting period in which you made the repayment




hence often much easier to declare a dividend and preclude the s455 in the first place.

00ec25

Walcott wrote: »

Would I not end up in the same position, as using the dividend would just mean I pay more in PAYE on the monthly cash required from the business?

you cannot expect to take cash out of a company tax free


however, no, a dividend is taxed as part of your annual personal tax return, it is not subject to PAYE.


that is why taking a low salary and high dividends is more tax efficient that the other way around since the dividend tax rate is lower

TheCyclingProgrammer

Walcott wrote: »

Would I not end up in the same position, as using the dividend would just mean I pay more in PAYE on the monthly cash required from the business?

Dividends incur income tax (and have an additional zero rate band of £2k) but no NIC. Salary above the NIC thresholds incurs income tax, employee NIC and employer's NIC.

The most tax efficient way of extracting money from a company is to take a basic salary up to the NIC lower earnings limit, pay yourself any tax deductible expenses then pay yourself dividends making full use of the basic rate band whenever possible (retained profit levels permitting).

If the company has sufficient profit's you can declare a dividend, credited directly to the director's loan account, to repay or partially repay some of that amount.