Need Accountant - Will HMRC investigate me if my drawings increase significantly?

SeagullFTB

I own a small business but I've been up a substantial capital reserve of around £90,000 by simply not withdrawing all of my profits each year for a long time.
When I started the business, I borrowed some money from a family to get started. £50,000 to be exact. It was a long term, interest free loan with no repayments. However, I now need to pay them back.
I usually make around £45,000 profit and draw about £30,000 per year. My profit is estimated to be around £40,000 this year and I'd need to draw about £80,000 in order to pay the loan back and take my usual drawings.
These are my questions:
- Will my sudden increase in drawings cause HMRC to look at me? 
- Will the fact that my drawings this year hugely outweigh my profit cause HMRC to look at me?
- A lot of my business assets are debtors owed to me and at the moment, it's harder than ever to get people to pay. Assuming I get approved, could I take a business loan of £50,000 out to repay the loan? I wouldn't get a personal loan this size.

oldbikebloke

I know you use the word drawings, but can we just make sure "you" are a sole trader, not a Ltd company?

SeagullFTB

Yes, I am a sole trader. All profits have been declared and taxed accordingly. This is simply a case of getting a loan and being able to withdraw the funds from my capital account to repay a family member.

Pennywise

Considering a balance sheet isn't even compulsory to be included on the tax return, you don't even need to disclose drawings nor the reduction in bank balance.  

SeagullFTB

Pennywise said:

Considering a balance sheet isn't even compulsory to be included on the tax return, you don't even need to disclose drawings nor the reduction in bank balance.  

I do have a balance sheet though. And I'm more concerned that the bank might monitor the situation and realise the funds were transferred to my personal account and deem that as a breach of terms?
It says I can use the loan to cover my personal expenses, but is that capped at all or just as long as I don't overdraw my capital.

tacpot12

Your bank will not deem a payment to your personal account to be a breach of terms as you already withdraw money and pay it to the personal account - they are not responsible for accounting for tax on the money - you are responsible for this. 

Again, this is a matter of terminology but you are not drawing out money (in the way that owner of a business would normally draw out profit from the business) if you are repaying a loan to the business. As a sole trader, you are the business and vice versa, so you are not drawing out "profit" if you are repaying a business loan. It would be as well to have a loan agreement in place though in case HMRC want to question whether the loan was real. It can be post-dated if you both agree the loan agreement exactly documents the terms of the loan.

Get a bank statement showing the capital payment from the family member arriving in your account at the start of the loan, and a bank statement showing the date the repayment was made. Your profit this year might well actually a loss, and you might be entitled to some tax back or to carry the loss forward to avoid paying tax next year. but you may need an accountant to help with this as I don't know how you have been doing your books so far.

Sandtree

If you are a sole trader, which I must admit wouldnt have been by assumption based on your original description, then legally there is only you and so there is no "drawing out" as all the money is yours from the outset and HMRC will have already taxed you on it all. The need for a "business" and "personal" account for a sole trader is only by virtue of banks T&Cs and both are yours.

If you were operating as a limited company as matters would be different as the company has its own property, money, bank account etc. In which case you then have the company and your personal tax position to consider and money has to be withdrawn as salary or dividends etc. Were that the case then you'd be talking about repaying a directors loan but as we aren't then no need to explore that.

bris

It may be flagged for money laundering reasons rather than anything else. Getting 50k business loan (if you could which would be difficult) would be silly if you have the money to pay the loan. If there is nothing to hide then just draw it out and pay back the family member.

Grumpy_chap

SeagullFTB said:

capital reserve of around £90,000.
When I started the business, I borrowed some money from a family to get started. £50,000 to be exact. It was a long term, interest free loan with no repayments. However, I now need to pay them back.
could I take a business loan of £50,000 out to repay the loan? I wouldn't get a personal loan this size.

Why do you want to take a business loan of £50k to repay the family loan of £50k?
Why not simply repay the family loan from the £90k reserves, leaving £40k reserves, which is equivalent to around a whole year of business so a suitable operating buffer?
Taking a loan on which you pay interest just to hold that money on deposit not earning interest does not seem logical.

At a practical level, it may be worth talking to the local branch before making the transfer as, if you suddenly make an online transfer of £50k to the account of a private individual, this may look like you are being scammed and the bank may freeze account temporaily.

SeagullFTB

Grumpy_chap said:

SeagullFTB said:

capital reserve of around £90,000.
When I started the business, I borrowed some money from a family to get started. £50,000 to be exact. It was a long term, interest free loan with no repayments. However, I now need to pay them back.
could I take a business loan of £50,000 out to repay the loan? I wouldn't get a personal loan this size.

Why do you want to take a business loan of £50k to repay the family loan of £50k?
Why not simply repay the family loan from the £90k reserves, leaving £40k reserves, which is equivalent to around a whole year of business so a suitable operating buffer?
Taking a loan on which you pay interest just to hold that money on deposit not earning interest does not seem logical.

At a practical level, it may be worth talking to the local branch before making the transfer as, if you suddenly make an online transfer of £50k to the account of a private individual, this may look like you are being scammed and the bank may freeze account temporaily.

Unfortunately the 90k capital reserves isn't liquid. Only 10k is. The rest is tied up in debtors and fixed assets. I need the business loan to get some liquid cash to repay the family member.

Grumpy_chap

SeagullFTB said:

Unfortunately the 90k capital reserves isn't liquid. Only 10k is. The rest is tied up in debtors and fixed assets.

So, you don't have 

SeagullFTB said:

a substantial capital reserve of around £90,000 by simply not withdrawing all of my profits each year for a long time.

You have some fixed assets plus £10k working capital plus trade debtors.